Fortune Brands Home & Security
Fortune Brands Home & Security, Inc. (Form: DEF 14A, Received: 03/07/2017 16:53:36)
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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  ☐

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  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

Fortune Brands Home & Security, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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LOGO

520 Lake Cook Road, Deerfield, Illinois 60015

NOTICE OF ANNUAL MEETING

AND PROXY STATEMENT

March 7, 2017

Dear Fellow Stockholders:

We are pleased to invite you to the 2017 Annual Meeting of Stockholders (“Annual Meeting”) of Fortune Brands Home & Security, Inc. on Tuesday, May 2, 2017 at 8:00 a.m. (CDT) at the Renaissance Chicago North Shore Hotel, 933 Skokie Boulevard, Northbrook, Illinois. The following matters will be considered at the Annual Meeting:

 

Proposal 1:    The election of the three director nominees identified in this Proxy Statement for a three year term expiring at the 2020 Annual Meeting of Stockholders (see pages 5 to 8);
Proposal 2:    The ratification of the appointment by the Company’s Audit Committee of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2017 (see page 44);
Proposal 3:    An advisory vote on the compensation paid to the Company’s named executive officers (see page 45); and

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

Stockholders of record at the close of business on March 3, 2017, the record date for the Annual Meeting, are entitled to vote. Stockholders who wish to attend the Annual Meeting in person should review the instructions beginning on page 1.

YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SUBMIT YOUR PROXY OR VOTING INSTRUCTIONS AS SOON AS POSSIBLE. See pages 1-4 for voting instructions.

This Proxy Statement and accompanying proxy are first being distributed on or about March 14, 2017.

 

LOGO

Robert K. Biggart
Senior Vice President, General Counsel and Secretary

Important Notice Regarding the Availability of Proxy Materials

for the 2017 Annual Meeting of Stockholders to be Held on Tuesday, May 2, 2017.

This Notice of Annual Meeting and Proxy Statement and the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“Form 10-K”) are available at www.proxyvote.com .


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T ABLE OF C ONTENTS

FREQUENTLY ASKED QUESTIONS

     1  

PROPOSAL 1 – ELECTION OF DIRECTORS

     5  

CORPORATE GOVERNANCE

     9  

Corporate Governance Principles

     9  

Director Independence

     9  

Policies with Respect to Transactions with Related Persons

     9  

Certain Relationships and Related Transactions

     10  

Director Nomination Process

     10  

Communication with the Board

     10  

Board Leadership Structure

     11  

Executive Sessions

     11  

Meeting Attendance

     11  

Risk Management

     11  

Compensation Risks

     12  

Board Committees

     13  

Audit Committee

     13  

Compensation Committee

     13  

Compensation Committee Interlocks & Insider Participation

     13  

Compensation Committee Procedures

     14  

Compensation Committee Consultant

     14  

Executive Committee

     14  

Nominating and Corporate Governance Committee

     15  

Other Corporate Governance Resources

     15  

DIRECTOR COMPENSATION

     16  

2016 Compensation Changes

     16  

Cash Fees

     16  

Stock Awards

     16  

Director Stock Ownership Guidelines

     16  

Anti-Hedging and Anti-Pledging

     16  

2016 Director Compensation Table

     17  

COMPENSATION DISCUSSION AND ANALYSIS

     18  

Executive Summary

     18  

2016 Business & Financial Highlights

     18  

2016 Compensation Highlights

     21  

Results of the 2016 Say-on-Pay Vote

     22  

Philosophy and Process for Awarding NEO Compensation

     23  

Types and Amounts of NEO Compensation Awarded in 2016

     26  

Compensation Committee Report

     33  

2016 EXECUTIVE COMPENSATION

     34  

2016 Summary Compensation Table

     34  

2016 Grants of Plan-Based Awards

     35  

Outstanding Equity Awards at 2016 Fiscal Year-End

     36  

2016 Option Exercises and Stock Vested

     37  

Retirement and Post-Retirement Benefits

     38  

2016 Nonqualified Deferred Compensation

     39  

Potential Payments Upon Termination or Change in Control

     40  

Equity Compensation Plan Information

     42  

AUDIT COMMITTEE MATTERS

     43  

Report of the Audit Committee

     43  

Fees of Independent Registered Public Accounting Firm

     44  

Approval of Audit and Non-Audit Services

     44  

PROPOSAL 2 – RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     44  

PROPOSAL 3 – ADVISORY VOTE ON NAMED EXECUTIVE OFFICER COMPENSATION

     45  

CERTAIN INFORMATION REGARDING SECURITY HOLDINGS

     46  

Section 16(a) Beneficial Ownership Reporting Compliance

     47  

APPENDIX A – RECONCILIATIONS

     A-1  


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F REQUENTLY A SKED Q UESTIONS

Why did I receive these materials?

These materials were provided to you in connection with the solicitation by the Board of Directors (the “Board”) of Fortune Brands Home & Security, Inc. (“Fortune Brands” or the “Company”), of proxies to be voted at our Annual Meeting and at any adjournment or postponement of the Annual Meeting. The Annual Meeting will take place on May 2, 2017 at 8:00 a.m. (CDT) at the Renaissance Chicago North Shore Hotel, 933 Skokie Boulevard, Northbrook, Illinois. This Proxy Statement describes the matters on which you, as a stockholder, are entitled to vote and gives you the information that you need to make an informed decision on these matters.

Why did I receive a “Notice of Internet Availability of Proxy Materials” instead of printed proxy materials?

Companies are permitted to provide stockholders with access to proxy materials over the Internet instead of mailing a printed copy. We mailed a Notice of Internet Availability of Proxy Materials (the “Notice”) to most stockholders. The Notice contains instructions on how to access the proxy materials on the Internet, how to vote and how to request a printed set of proxy materials. This approach reduces the environmental impact and our costs of printing and distributing the proxy materials, while providing a convenient method of accessing the materials and voting.

The Company will make its Annual Report on Form 10-K for the last fiscal year, including any financial statements or schedules, available to stockholders without charge, upon written request to the Secretary, Fortune Brands Home & Security, Inc., 520 Lake Cook Road, Deerfield, Illinois 60015. The Company will furnish exhibits to Form 10-K to each stockholder requesting them upon payment of a $.10 per page fee to cover the Company’s cost.

Can I get electronic access to the proxy materials if I received printed materials?

Yes. If you received printed proxy materials, you can also access them online at www.proxyvote.com before voting your shares. The Company’s proxy materials are also available on our website at http://ir.fbhs.com/annuals-proxies.cfm . Stockholders are encouraged to elect to receive future proxy materials electronically. If you opt to receive our future proxy materials electronically, you will receive an email next year with instructions containing a link to view those proxy materials and a link to the proxy voting website. Your election to receive proxy materials by email will remain in effect until you terminate it or for as long as the email address provided by you is valid. Stockholders of record who wish to participate can enroll at http://enroll.icsdelivery.com/fbhs . If your shares are held in an account by a bank, broker or other nominees, you should check with your bank, broker or other nominee regarding the availability of this service.

What is the difference between being a stockholder of record and a beneficial owner?

If your shares are registered directly in your name with Wells Fargo Shareowner Services, the Company’s transfer agent, you are the “stockholder of record.” If your shares are held in an account by a bank, broker or other nominee, you hold your shares in “street name” and are a “beneficial owner” of those shares. The majority of stockholders are beneficial owners. For such shares, a bank, broker or other nominee is considered the stockholder of record for purposes of voting at the Annual Meeting. Beneficial owners have the right to direct their bank, broker or other nominee on how to vote the shares held in their account by using the voting instructions provided by the bank, broker or other nominee.

Who is entitled to vote?

Only stockholders who owned the Company’s common stock of record at the close of business on March 3, 2017 (the “Record Date”) are entitled to vote. Each holder of common stock is entitled to one vote per share. There were 153,504,413 shares of common stock outstanding on the Record Date.

 

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F REQUENTLY A SKED Q UESTIONS (C ONTINUED )

 

Who can attend the Annual Meeting?

Only stockholders who owned Fortune Brands’ common stock as of the close of business on the Record Date, or their authorized representatives, may attend the Annual Meeting. At the entrance to the meeting, stockholders will be asked to present valid photo identification to determine if you owned common stock on the Record Date. If you are acting as a proxy, you will need to submit a valid written legal proxy signed by the owner of the common stock. You must bring such evidence with you to be admitted to the Annual Meeting.

Stockholders who own their shares in “street name” will be required to submit proof of ownership at the entrance to the meeting. Either your voting instruction card or brokerage statement reflecting your stock ownership as of the Record Date may be used as proof of ownership.

What matters will be voted on at the Annual Meeting?

Three matters will be considered at the Annual Meeting, which are:

 

   

the election of three Class III directors identified in this Proxy Statement ( Proposal 1 );

 

   

the ratification of the appointment of our independent registered public accounting firm (Proposal 2) ; and

 

   

the advisory vote on the compensation paid to the Company’s named executive officers (Proposal 3) .

How do I vote?

If you received a Notice in the mail, you can either vote by (i) Internet ( www.proxyvote.com ) or (ii) in person at the Annual Meeting. Voting instructions are provided on the Notice. You may also request to receive printed proxy materials in the mail.

Stockholders who received printed proxy materials in the mail can vote by (i) filling out the proxy card and returning it in the postage paid return envelope, (ii) telephone (800-690-6903), (iii) Internet ( www.proxyvote.com ), or (iv) in person at the Annual Meeting. Voting instructions are provided on the proxy card.

Stockholders who received proxy materials electronically can vote by (i) Internet ( www.proxyvote.com ), (ii) telephone (800-690-6903), or (iii) in person at the Annual Meeting.

If you are not the stockholder of record, but are a beneficial owner of our shares, you must vote by giving instructions to your bank, broker or other nominee. You should follow the voting instructions on the form that you receive from your bank, broker or other nominee, which will include details on available voting methods. To be able to vote in person at the Annual Meeting, you must obtain a legal proxy from your bank, broker or other nominee in advance and present it to the Inspector of Election with your completed ballot at the Annual Meeting.

How will my proxy be voted?

Your proxy card, when properly signed and returned to us, or processed by telephone or via the Internet, and not revoked, will be voted in accordance with your instructions. If any matter is properly presented other than the three proposals described above, the Proxy Committee (the persons named in the enclosed proxy card or, if applicable, their substitutes), will have discretion to vote your shares in their best judgment.

What if I don’t mark the boxes on my proxy or voting instruction card?

Unless you give other instructions on your proxy card or your voting instruction card, or unless you give other instructions when you cast your vote by telephone or the Internet, the Proxy Committee will vote your shares in accordance with the recommendations of the Board, which are FOR Proposals 1, 2 and 3.

 

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F REQUENTLY A SKED Q UESTIONS (C ONTINUED )

 

If you hold shares beneficially and you have not provided voting instructions, your bank, broker or other nominee is only permitted to use its discretion and vote your shares on certain routine matters (Proposal 2). If you have not provided voting instructions to your bank, broker or other nominee on non-routine matters (Proposals 1 and 3), your bank, broker or other nominee is not permitted to use discretion and vote your shares. Therefore, we urge you to give voting instructions to your bank, broker or other nominee on all three proposals. Shares that are not permitted to be voted by your bank, broker or other nominee with respect to any matter are called “broker non-votes.” Broker non-votes are not considered votes for or against a proposal and will have no direct impact.

How many votes are needed to approve a proposal?

The nominees for director, in non-contested elections, must receive a majority of the votes cast at the Annual Meeting, in person or by proxy, to be elected. A proxy card marked to abstain on the election of a director and any broker non-votes will not be counted as a vote cast with respect to that director.

Under the Company’s majority vote Bylaw provision relating to the election of directors, if the number of votes cast “for” a director nominee does not exceed the number of votes cast “against” the director nominee, then the director must tender his or her resignation from the Board promptly after the certification of the stockholder vote. The Board (excluding the nominee in question) will decide within 90 days of that certification, through a process managed by the Nominating and Corporate Governance Committee, whether to accept the resignation. The Board’s explanation of its decision will be promptly disclosed in a filing with the Securities and Exchange Commission (“SEC”).

The affirmative vote of shares representing a majority in voting power of the common stock, present in person or represented by proxy at the Annual Meeting, and entitled to vote is necessary for the approval of Proposals 2 and 3. Proxy cards marked to abstain on Proposals 2 and 3 will have the effect of a negative vote. Broker non-votes are not applicable to Proposal 2 because your bank, broker or other nominee will be permitted to use discretion to vote your shares on this proposal. Broker non-votes will have no impact on Proposals 1 and 3.

How can I revoke my proxy or change my vote?

You may revoke your proxy by giving written notice to the Secretary of the Company or by delivering a later dated proxy at any time before it is actually voted. If you voted on the Internet or by telephone, you may change your vote by voting again. Your last vote is the vote that will be counted. Attendance at the Annual Meeting does not revoke your proxy unless you vote at the Annual Meeting.

Will my vote be public?

As a matter of policy, proxies, ballots and tabulations that identify individual stockholders are not publicly disclosed, but are available to the independent Inspector of Election, the proxy solicitation firm and certain employees of the Company.

What constitutes a quorum?

The presence at the Annual Meeting, in person or by proxy, of the holders of a majority in voting power of the issued and outstanding shares of common stock entitled to vote will constitute a quorum. Proxies received but marked as abstentions or without any voting instructions will be included in the calculation of the number of shares considered to be present at the Annual Meeting.

Our Board is soliciting this proxy. The Company will bear the expense of soliciting proxies for this Annual Meeting, including mailing costs. To assure that there is sufficient representation at the Annual Meeting, our proxy solicitor or our employees may solicit proxies by telephone, facsimile or in person. We have retained Innisfree M&A Incorporated as our proxy solicitor for a fee, estimated at $15,000, plus reasonable out-of-pocket expenses, to aid in soliciting proxies. Our total expenses will depend upon the volume of shares represented by the proxies received in response to the Notice and Proxy Statement.

 

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What if I am a participant in the Fortune Brands Home & Security Retirement Savings Plan or the Fortune Brands Home & Security Hourly Employee Retirement Savings Plan?

We are mailing a printed copy of the proxy materials to participants in the Fortune Brands Home & Security Retirement Savings Plan and the Fortune Brands Home & Security Hourly Employee Retirement Savings Plan (collectively, the “Savings Plans”) who invest in the Fortune Brands Stock Fund through the Savings Plans. The Trustee of the Savings Plans, as record holder of the Fortune Brands common stock held in the Savings Plans, will vote whole shares attributable to your interest in the Fortune Brands Stock Fund in accordance with your directions. If you invest in the Fortune Brands Stock Fund under the Savings Plans and you sign and return the enclosed proxy card, we will forward it to the Trustee of the Savings Plans. The proxy card will serve as instruction to the Trustee to vote the whole shares attributable to your interest in the manner you indicate on the card. If the Trustee does not receive timely direction with respect to the voting of your shares held in the Fortune Brands Stock Fund, the Trustee will vote such shares in the same manner and in the same proportion as the shares for which the Trustee received voting instructions.

How can I eliminate multiple mailings to the same address?

If you and other residents at your mailing address are registered stockholders and you receive more than one copy of the Notice, but you wish to eliminate the duplicate mailings, you must submit a written request to the Company’s transfer agent, Wells Fargo. To request the elimination of duplicate copies, please write to Wells Fargo Shareowner Services, 1110 Centre Pointe Curve, Suite 101, MAC N9173-010, Mendota Heights, Minnesota 55120.

If you and other residents at your mailing address own shares in street name, your broker, bank or other nominee may have sent you a notice that your household will receive only one Notice or one set of proxy materials for each company in which you hold stock through that broker, bank or other nominee. This practice, known as “householding,” is designed to reduce our printing and postage costs. If you did not respond, the bank, broker or other nominee will assume that you have consented, and will send only one copy of the Notice to your address. You may revoke your consent to householding at any time by sending your name, the name of your brokerage firm, and your account number to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. The revocation of your consent to householding will be effective 30 days following its receipt. In any event, if you did not receive an individual copy of the Notice, or if you wish to receive individual copies of the Notice or our proxy materials for future meetings, we will send a copy to you if you call Shareholder Services at (847) 484-4538, or write to the Secretary of Fortune Brands Home & Security, Inc., 520 Lake Cook Road, Deerfield, Illinois 60015.

How can I submit a stockholder proposal or nomination next year?

Our Bylaws provide that in order for a stockholder to (i) nominate a candidate for election to our Board at the 2018 Annual Meeting of Stockholders, or (ii) propose business for consideration at the 2018 Annual Meeting of Stockholders, written notice containing the information required by the Bylaws must be delivered to the Secretary of the Company no less than 90 days nor more than 120 days before the anniversary of the prior year’s Annual Meeting, that is, after January 2, 2018 but no later than February 1, 2018 for the 2018 Annual Meeting.

Under SEC rules, if a stockholder wishes to submit a proposal for possible inclusion in the Company’s 2018 proxy statement pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), we must receive it on or before November 14, 2017.

The person presiding at the Annual Meeting is authorized to determine if a proposed matter is properly brought before the Annual Meeting or if a nomination is properly made.

Copies of our Restated Certificate of Incorporation and Bylaws are available upon written request to the Secretary, Fortune Brands Home & Security, Inc., 520 Lake Cook Road, Deerfield, Illinois 60015.

 

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P ROPOSAL   1 – E LECTION OF D IRECTORS

Summary of Qualification of Directors

The Board believes that all directors must possess a considerable amount of education and business management experience (such as experience as a chief executive, chief operating, chief financial officer or other relevant experience). The Board also believes that it is necessary for each of the Company’s directors to possess many qualities and skills. The Board believes that there are certain general requirements which are mandatory for service on the Company’s Board, while there are other skills and experiences that should be represented on the Board as a whole, but not necessarily by each individual director.

General requirements for all directors:

 

   

Extensive executive leadership experience

   

Excellent business judgment

   

High level of integrity and ethics

   

Original thinking

   

Strong commitment to the Company’s goal of maximizing stockholder value

Specific experiences, qualifications, and backgrounds to be represented on the Board as a whole:

 

   

Financial and/or accounting expertise

   

Consumer products expertise

   

Knowledge of international markets

   

Chief executive officer/chief operating officer/chief financial officer experience

   

Extensive board experience

   

Diversity of skill, background and viewpoint

The process used by the Nominating and Corporate Governance Committee in recommending qualified director candidates is described below under Corporate Governance – Director Nomination Process (see page 10 of this Proxy Statement).

Election of Class III Directors

The Board consists of eight members and is divided into three classes, each having three year terms that expire in successive years. The term of the Class III directors expires at the 2017 Annual Meeting of Stockholders. The Board has nominated Mr. A. D. David Mackay, Mr. David M. Thomas and Mr. Norman H. Wesley, each of whom is currently serving as a Class III director, for re-election for a new term of three years expiring at the 2020 Annual Meeting of Stockholders and until their successors are duly elected and qualified. Proxies cannot be voted for more than the number of nominees proposed for re-election.

Each of the nominees has consented to be named as a nominee and to serve as a director, if elected. If any of them should become unavailable to serve as a director (which is not now expected), the Board may designate a substitute nominee. In that case, the Proxy Committee will vote for the substitute nominee designated by the Board.

The names of the nominees and the current Class I and Class II directors, along with their present positions, their principal occupations and directorships held with other public corporations during the past five years, their ages and the year first elected as a director of the Company, are set forth below. Individual qualifications and experiences of our directors that contribute to the Board’s effectiveness as a whole are also described in the following paragraphs.

 

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P ROPOSAL  1 E LECTION OF D IRECTORS (C ONTINUED )

 

 

Name

  

Present positions and offices

with the Company, principal

occupations during the past five years

and other directorships

       Age          Year
first
elected
         director        
 
NOMINEES FOR DIRECTOR – CLASS III DIRECTORS – TERM EXPIRING 2020  

LOGO

 

A.D. David Mackay

   Retired since January 2011; President and Chief Executive Officer of Kellogg Company, a packaged foods manufacturer, prior thereto. Currently also a director of The Clorox Company. Formerly a director of Keurig Green Mountain, Inc., McGrath Limited, Woolworths Limited, Beam Inc. and Kellogg Company.      61        2011    
Mr. Mackay held various key executive positions with Kellogg Company including Chief Executive Officer and Chief Operating Officer, bringing to our Board the perspective of a leader who faced a similar set of external economic, social and governance issues to those that face our Company. Mr. Mackay also has significant international business experience, as well as extensive board experience.  

LOGO

 

David M. Thomas

   Retired since March 2006; Chairman of the Board and Chief Executive Officer of IMS Health Incorporated, a provider of information services to the pharmaceutical and healthcare industries, prior thereto. Currently also a director of The Interpublic Group of Companies, Inc. and a member of the Fidelity Investments Board of Trustees.      67        2011    
Mr. Thomas’ experience as a Chief Executive Officer of IMS Health Incorporated and his management experience at premier global technology companies, including as Senior Vice President and Group Executive of IBM, helps the Board address the challenges the Company faces due to rapid changes in IT capabilities and communications and global distribution strategies. Mr. Thomas also has extensive board experience.  

LOGO

 

Norman H. Wesley

   Retired since October 2008; Chairman of the Board and Chief Executive Officer of Fortune Brands, Inc. prior thereto. Currently also a director of Acuity Brands, Inc. and Achusnet Holdings Corp. Formerly a director of Keurig Green Mountain, Inc. and ACCO Brands, Inc.      67        2011    
Mr. Wesley’s experience as Chief Executive Officer of a consumer products conglomerate gives him unique insights into the Company’s challenges, opportunities and operations. Mr. Wesley also has extensive board experience.  

The Board of Directors recommends that you vote FOR the election of each nominee named above.

 

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P ROPOSA 1 – E LECTION OF D IRECTORS (C ONTINUED )

 

Name

  

Present positions and offices

with the Company, principal

occupations during the past five years

and other directorships

       Age          Year
first
elected
         director        
 
CLASS I DIRECTORS – TERM EXPIRING 2018  

LOGO

 

Ann F. Hackett

  

Partner and co-founder of Personal Pathways, LLC, a company providing web-based enterprise collaboration platforms, since 2015. Prior to that, President of Horizon Consulting Group, LLC, a strategic and human resource consulting firm, founded by Ms. Hackett in 1996. Currently also a director of Capital One Financial Corporation.

Formerly a director of Beam Inc.

     63        2011    
Ms. Hackett has extensive experience in leading companies that provide strategic, organizational and human resource consulting services to boards of directors and senior management teams. She has experience leading change initiatives, risk management, talent management and succession planning and in creating performance-based compensation programs, as well as significant international experience and technology experience. Ms. Hackett also has extensive board experience and currently serves as the lead independent director of Capital One Financial Corporation.  

LOGO

 

John G. Morikis

   President and Chief Executive Officer of The Sherwin-Williams Company, a manufacturer of paint and coating products, since January 2016 and also Chairman of the Board since January 2017; President and Chief Operating Officer from 2006 to January 2016. Currently a director of The Sherwin-Williams Company.      53        2011    
Mr. Morikis’ experience as a Chief Executive Officer and as a Chief Operating Officer of The Sherwin-Williams Company, and his more than 30 years of experience with a consumer home products company, brings to our Board the perspective of a leader who faces similar external economic issues that face our Company.  

LOGO

 

Ronald V. Waters, III

   Retired since May 2010; President and Chief Executive Officer of LoJack Corporation, a provider of tracking and recovery systems, from January 2009 to May 2010. Currently also a director of HNI Corporation and Paylocity Holding Corporation. Formerly a director of Chiquita Brands International, Inc.      64        2011    
Mr. Waters has considerable executive leadership and financial management experience. He served as Chief Executive Officer and Chief Operating Officer at LoJack Corporation, a premier technology company, and as Chief Operating Officer and Chief Financial Officer at Wm. Wrigley Jr. Company, a leading confectionary manufacturing company. Mr. Waters also has extensive board experience.  

 

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P ROPOSAL   1 – E LECTION OF D IRECTORS (C ONTINUED )

 

Name

  

Present positions and offices

with the Company, principal

occupations during the past five years

and other directorships

       Age          Year
first
elected
         director        
 
CLASS II DIRECTORS – TERM EXPIRING 2019  

LOGO

 

Susan S. Kilsby

   Retired since May 2014; Senior Advisor at Credit Suisse AG, an investment banking firm, from 2009 to May 2014; Managing Director of European Mergers and Acquisitions of Credit Suisse prior thereto. Currently also a director of Shire Plc, BBA Aviation PLC and Goldman Sachs International. Formerly a director of Keurig Green Mountain, Inc., L’Occitane International S.A. and Coca-Cola HBC AG.      58        2015    
Ms. Kilsby has a distinguished global career in investment banking and brings extensive mergers and acquisitions and international business experience to the Board. In addition to her experience at Credit Suisse, she held a variety of senior positions with The First Boston Corporation, Bankers Trust and Barclays de Zoete Wedd. Ms. Kilsby also has extensive board experience and currently serves as the non-executive Chair of Shire Plc.  

LOGO

 

Christopher J. Klein

   Chief Executive Officer of the Company since January 2010. President and Chief Operating Officer prior thereto.      53        2010    
Mr. Klein’s leadership as Chief Executive Officer of the Company and his vast corporate strategy, business development and operational experience provide him with intimate knowledge of our operations and the challenges faced by the Company. Mr. Klein led the Company through the spin-off from Fortune Brands, Inc. in 2011. Prior to the Company’s spin-off, he held several leadership positions at Fortune Brands, Inc., helping to reshape the business through acquisitions and divestitures. Prior to joining Fortune Brands, Mr. Klein held key strategy and operating positions at Bank One Corporation and also served as a partner at McKinsey & Company, a global management consulting firm.  

 

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C ORPORATE G OVERNANCE

Fortune Brands is committed to maintaining strong corporate governance practices that are good for our stockholders and our business. We are dedicated to maintaining these practices and upholding high standards of conduct.

Corporate Governance Principles

The Board adopted a set of Corporate Governance Principles which describe our corporate governance practices and address corporate governance issues such as Board composition and responsibilities, Board meeting procedures, the establishment of Board committees, management succession planning process and review of risks. The Corporate Governance Principles are available at http://ir.fbhs.com/corporate-governance.cfm .

Director Independence

The Company’s Corporate Governance Principles provide that a majority of the members of the Board shall be independent directors. New York Stock Exchange requirements, as well as the Company’s committee charters, require each member of the Audit, Compensation and Nominating and Corporate Governance Committees to be independent. The Board applies the definition of independence found in the New York Stock Exchange Listed Company Manual in determining which directors are independent. When determining each director’s independence, the Board also considered charitable contributions made by the Company to organizations with which each director is affiliated.

Applying that definition, Messrs. Mackay, Morikis, Thomas, Wesley and Waters and Mses.

Hackett and Kilsby were affirmatively determined by the Board to be independent. Due to Mr. Klein’s employment with the Company, he is not considered independent.

None of the non-employee directors has any material relationship with the Company other than being a director and stockholder. Also, none of the non-employee directors have participated in any transaction or arrangement that interferes with such director’s independence.

Policies with Respect to Transactions with Related Persons

The Board has adopted a Code of Business Conduct & Ethics which sets forth various policies and procedures intended to promote the ethical behavior of all of the Company’s employees, officers and directors (the “Code of Conduct”). The Code of Conduct describes the Company’s policy on conflicts of interest. The Board has established a Compliance Committee (comprised of management) which is responsible for administering and monitoring compliance with the Code of Conduct. The Compliance Committee periodically reports on the Company’s compliance efforts to the Audit Committee and to the Board.

The Board has also established a Conflicts of Interest Committee (comprised of management) which is responsible for administering, interpreting and applying the Company’s Conflicts of Interest Policy, which describes the types of relationships that may constitute a conflict of interest with the Company. Under the Conflicts of Interest Policy, directors and executive officers are responsible for reporting any potential related person transaction (as defined in Item 404 of Regulation S-K) to the Conflicts of Interest Committee in advance of commencing a potential transaction. The Conflicts of Interest Committee will present to the Audit Committee any potential related party transaction. The Audit Committee will evaluate the transaction, determine whether the interest of the related person is material and approve or ratify, as the case may be, the transaction. In addition, the Company’s executive officers and directors annually complete a questionnaire on which they are required to disclose any related person transactions and potential conflicts of interest. The General Counsel reviews the responses to the questionnaires and, if a related person transaction is reported by a director or executive officer, submits the transaction for review by the Audit Committee. The Conflicts of Interest Committee also reviews potential conflicts of interest and reports findings involving any director of the Company to the Nominating and Corporate Governance Committee (the “Nominating Committee”). The Nominating Committee will review any potential conflict of interest involving a member of the Board to determine whether such potential conflict would affect that director’s independence.

 

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Certain Relationships and Related Transactions

Since January 1, 2016, the Company did not participate in any transactions in which any of its directors, executive officers, any immediate family member of a director or executive officer or any beneficial owner of more than 5% of the Company’s common stock had a direct or indirect material interest.

Director Nomination Process

The Nominating Committee is responsible for, among other things, screening potential director candidates, recommending qualified candidates to the Board for nomination and assessing director independence.

When identifying director candidates, the Nominating Committee determines whether there are any evolving needs that require an expert in a particular field or other specific skills or experiences. When evaluating director candidates, the Nominating Committee first considers a candidate’s management experience and then considers issues of judgment, background, stature, conflicts of interest, integrity, ethics and commitment to the goal of maximizing stockholder value. The Nominating Committee also focuses on issues of diversity, such as diversity of gender, race and national origin, education, professional experience and differences in viewpoints and skills. The Nominating Committee does not have a formal policy with respect to diversity; however, the Board and the Nominating Committee believe that it is essential that the Board members represent diverse viewpoints. In considering candidates for the Board, the Nominating Committee considers the entirety of each candidate’s credentials in the context of these standards. With respect to the nomination of continuing directors for re-election, the individual’s contributions to the Board are also considered. For the purpose of this Annual Meeting, the Nominating Committee recommended the nomination of Messrs. Mackay, Thomas and Wesley as Class III directors.

In connection with future director elections, or at any time there is a vacancy on the Board, the Nominating Committee may retain a third-party search firm to assist in locating qualified candidates that meet the needs of the Board at that time.

It is the Nominating Committee’s policy to consider director candidates recommended by stockholders, if such recommendations are properly submitted to the Company. Stockholders that wish to recommend an individual as a director candidate for consideration by the Nominating Committee can do so by writing to the Secretary of Fortune Brands Home & Security, Inc. at 520 Lake Cook Road, Deerfield, Illinois 60015.

Recommendations must include the proposed nominee’s name, biographical data and qualifications, as well as other information that would be required if the stockholder were actually nominating the recommended candidate pursuant to the procedures for such nominations provided in our Bylaws. The Nominating Committee will consider the candidate and the candidate’s qualifications in the same manner in which it evaluates nominees identified by the Nominating Committee. The Nominating Committee may contact the stockholder making the nomination to discuss the qualifications of the candidate and the stockholder’s reasons for making the nomination. Members of the Nominating Committee may then interview the candidate if the committee deems the candidate to be appropriate. The Nominating Committee may use the services of a third-party search firm to provide additional information about the candidate prior to making a recommendation to the Board.

The Nominating Committee’s nomination process is designed to ensure that the Nominating Committee fulfills its responsibility to recommend candidates that are properly qualified to serve the Company for the benefit of all of its stockholders, consistent with the standards established under the Company’s Corporate Governance Principles.

Communication with the Board

The Board and management encourage communication from the Company’s stockholders. Stockholders who wish to communicate with the Company’s management should direct their communication to the Chief Executive Officer or the Secretary of Fortune Brands Home & Security, Inc. at 520 Lake Cook Road, Deerfield, Illinois 60015. Stockholders, or other interested parties, who wish to communicate with the non-management

 

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directors or any individual director should direct their communication c/o the Secretary at the address above. The Secretary will forward communications intended for the Board to the Chairman of the Board, or, if intended for an individual director, to that director. If multiple communications are received on a similar topic, the Secretary may, in his or her discretion, forward only representative correspondence. Any communications that are abusive, in bad taste or present safety or security concerns may be handled differently.

Board Leadership Structure

Mr. Thomas serves as the Company’s non-executive, independent Chairman. The Board determined that having an independent director serve as Chairman of the Board is in the best interests of our stockholders at this time. This leadership structure aids the Board’s oversight of management and allows our Chief Executive Officer to focus primarily on his management responsibilities. The non-executive Chairman has the responsibility of presiding at all meetings of the Board, consulting with the Chief Executive Officer on Board meeting agendas, acting as a liaison between management and the non-management directors, including maintaining frequent contact with the Chief Executive Officer and advising him or her on the efficiency of the Board meetings, facilitating teamwork and communication between the non-management directors and management, as well as additional responsibilities that are more fully described in the Company’s Corporate Governance Principles. In addition, the Company’s non-executive Chairman facilitates the Board’s annual performance assessment of the Chief Executive Officer.

The Board does not believe that a single leadership structure is right at all times, so the Board periodically reviews its leadership structure to determine, based on the circumstances at the time, whether other leadership structures might be appropriate for the Company. The Board has been and remains committed to maintaining strong corporate governance and appropriate independent oversight of management. Given that each of the members of the Board, other than Mr. Klein, is independent we believe that the leadership structure currently utilized by the Board provides effective independent Board leadership and oversight.

Executive Sessions

Pursuant to the Company’s Corporate Governance Principles, non-management directors of the Board are required to meet on a regularly scheduled basis without the presence of management. The non-executive Chairman of the Board leads these sessions.

Meeting Attendance

The Board of Directors met five times in 2016. Each director attended at least 75% of the total meetings of the Board and committees of the Board of which the director was a member during 2016. Pursuant to the Company’s Corporate Governance Principles, all directors are encouraged and expected to attend the Annual Meeting. All of the directors attended the Company’s 2016 Annual Meeting of Stockholders.

Risk Management

The responsibility for the day-to-day management of risks lies with the Company’s management team; however, the Board has an active role, as a whole and also at the committee level, in overseeing the strategy and process for managing the Company’s risks. The Board regularly reviews information regarding the Company’s business strategy, leadership development, resource allocation, succession planning, credit, liquidity and operations, as well as the risks associated with each. The Company’s overall risk management program consists of periodic management discussions analyzing and mitigating risks, an annual review of risks associated with each of the Company’s operating businesses and an annual review of risks related to the Company’s compensation programs and practices.

Annually, management identifies both external risks (i.e., economic) and internal risks (i.e., strategic, operational, financial and compliance), assesses the impact of these risks and determines how to mitigate such

 

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risks. The Audit Committee manages the Company’s risk management program and reviews the results of the annual assessment. Management also provides the Audit Committee with quarterly updates on the Company’s risks. In addition, the Audit Committee oversees management of the Company’s financial risks.

The Company’s Compensation Committee is responsible for overseeing the management of risks relating to the compensation paid to the Company’s executives and the Company’s executive compensation plans and programs. Annually, the Compensation Committee’s independent compensation consultant conducts an assessment of the risks associated with the Company’s executive compensation practices and programs. The compensation consultant conducts a more extensive review of all of the Company’s broad-based compensation incentive arrangements every three years. For more information about that assessment see “Compensation Risks” below.

The Nominating Committee manages risks associated with the independence of the Board, potential conflicts of interest of Board members, and the Company’s corporate governance structure, as well as management of risks associated with the environment, health and safety, diversity, philanthropy, global citizenship and sustainability.

While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board is regularly informed through committee reports about all of the risks described above. The Board’s assignment of responsibility for the oversight of specific risks to its committees enables the entire Board, under the leadership of the non-executive Chairman and the Chief Executive Officer, to better monitor the risks of the Company and more effectively develop strategic direction, taking into account the various risks facing the Company, including the magnitude of such risks.

Compensation Risks

The Compensation Committee’s compensation consultant conducts an annual assessment of the risks associated with the compensation policies and practices used to compensate the Company’s executives and reports on the assessment to the Compensation Committee. In 2016, the Compensation Committee, with assistance from its independent compensation consultant, reviewed the elements of executive compensation to determine whether any portion of executive compensation encouraged excessive risk taking and concluded that they do not. In general, the executive compensation arrangements are consistent with the structure and design of other companies of similar size and industry sector, and the following risk-mitigating design features have been incorporated into the Company’s programs:

 

   

The Company utilizes multiple long-term incentive vehicles with overlapping three year performance cycles;

 

   

The Company uses multiple and diverse performance metrics in incentive plans;

 

   

The upside on payout potential is capped for both short-term and long-term incentives;

 

   

The majority of an individual’s total compensation mix is not derived from a single component of compensation; and

 

   

The Company maintains stock ownership guidelines, a policy prohibiting hedging and pledging and a formal clawback policy.

As described in our Compensation Discussion and Analysis, compensation decisions are made using a combination of objective and subjective considerations designed to mitigate excessive risk taking by executives.

 

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Board Committees

The Board established an Audit Committee, a Compensation Committee, an Executive Committee and a Nominating and Corporate Governance Committee. A list of current Committee memberships may be found on the Company’s website at http://ir.fbhs.com/committees.cfm . The Committee memberships as of the date of this Proxy Statement are set forth below:

 

   Name   Audit   Compensation   Executive    Nominating and
Corporate Governance

Ann F. Hackett

      C   X    X

Susan S. Kilsby

      X        X

Christopher J. Klein

          X     

A. D. David Mackay

  X   X         

John G. Morikis

  X   X         

David M. Thomas

  X       C    C

Ronald V. Waters, III

  C       X    X

Norman H. Wesley

  X   X         

An “X” indicates membership on the committee.

A “C” indicates that the director serves as the chair of the committee.

Audit Committee

The Audit Committee’s primary function is to assist the Board in overseeing the (i) integrity of the Company’s financial statements and the financial reporting process; (ii) Company’s compliance with legal and regulatory requirements; (iii) independence and qualifications of the Company’s external auditors; and (iv) performance of the Company’s external and internal auditors.

Each member of the Audit Committee (Messrs. Mackay, Morikis, Thomas, Waters and Wesley), is financially literate. Each of Messrs. Mackay, Thomas, Waters and Wesley has accounting or financial management expertise and is an audit committee financial expert as defined in Item 407(d)(5)(ii) and (iii) of Regulation S-K under the Exchange Act. As required by its charter, each Audit Committee member has also been determined by our Board to be independent as such term is defined in the Exchange Act and the New York Stock Exchange Listed Company Manual. The Audit Committee met eleven times in 2016.

Compensation Committee

The Compensation Committee’s primary functions are to (i) develop and critically review the Company’s executive pay philosophy and practices so that they are aligned with the Company’s business strategy; and (ii) set the compensation of the Company’s executive officers, which includes the presidents of the Company’s principal operating companies, in a manner that is consistent with competitive practices and individual and Company performance.

As required by its charter, each member of the Compensation Committee (Messrs. Mackay, Morikis and Wesley and Mses. Hackett and Kilsby) has been determined by our Board to be independent as such term is defined in the New York Stock Exchange Listed Company Manual and pursuant to SEC regulations. The Committee has created a Subcommittee comprised of Mses. Hackett and Kilsby and Messrs. Mackay and Morikis that is responsible for approving all performance standards and payments for any pay program intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code (the “Code”). The Compensation Committee met five times in 2016.

Compensation Committee Interlocks and Insider Participation

Since January 1, 2016, none of the members of the Compensation Committee (i) served as one of the Company’s officers or employees; or (ii) had a relationship requiring disclosure under Item 404 of Regulation S-K.

 

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Compensation Committee Procedures

The Compensation Committee directs management to prepare financial data to be used by the Compensation Committee in determining executive compensation. In addition, members of the Company’s human resources department assist in the preparation of executive compensation tally sheets and historical information describing compensation paid to executives and the Compensation Committee’s independent consultant provides market data for use in determining executive compensation. The Compensation Committee is presented with recommendations from management and from the Committee’s independent compensation consultant as to the level and type of compensation to provide to the Company’s executive officers. Members of the Company’s legal department provide the Compensation Committee with general advice on laws applicable to executive compensation and the directors’ fiduciary duties in setting compensation.

The Chief Executive Officer attends meetings of the Compensation Committee. The Chief Executive Officer’s feedback about each officer’s performance is essential in the Compensation Committee’s determination of the officer’s salary and target incentive compensation determinations. See pages 18 through 33 of this Proxy Statement for more information about how the Compensation Committee determined the executive officers’ compensation in 2016.

Compensation Committee Consultant

The Compensation Committee engages an outside compensation consultant. Meridian Compensation Partners, LLC (“Meridian”) was retained directly by and reports directly to the Compensation Committee. In 2016, Meridian provided the following services and information to the Compensation Committee:

 

   

Made recommendations as to best practices for structuring executive pay arrangements and executive compensation (including the amount and form of compensation) consistent with the Company’s business needs, pay philosophy, market trends and latest legal and regulatory considerations;

 

   

Performed an assessment of the Company’s compensation peers and recommended changes;

 

   

Provided market data (including compiling compensation data and related performance data) as background for decisions regarding the compensation of the Chief Executive Officer and other executive officers;

 

   

Performed an assessment of risks associated with the Company’s executive compensation structure and design; and

 

   

Attended Compensation Committee meetings (including executive sessions without the presence of management) and summarized alternatives for compensation arrangements that may have been considered in formulating final recommendations, as well as the consultant’s rationale for supporting or opposing management’s proposals.

The Compensation Committee has authorized Meridian to interact with management in connection with advising the Compensation Committee. Meridian is included in discussions with management on matters being brought to the Compensation Committee for consideration. Meridian is prohibited from performing any services for management outside of services needed in connection with advising the Compensation Committee. The Compensation Committee has assessed Meridian’s independence and concluded that Meridian’s work for the Compensation Committee does not raise any conflict of interest.

Executive Committee

The Executive Committee did not meet in 2016. The Executive Committee has all the authority of the full Board, except for specific powers that are required by law to be exercised by the full Board. The Executive Committee may not amend the Company’s charter, adopt an agreement of merger, recommend actions for stockholder approval, amend or repeal the Bylaws, elect or appoint any director or remove an officer or director, amend or repeal any resolutions of the Board, fix the Board’s compensation, and unless expressly authorized by the Board, declare a dividend, authorize the issuance of stock or adopt a certificate of merger.

 

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Nominating and Corporate Governance Committee

The Nominating Committee’s primary functions are to (i) provide recommendations to the Board with respect to the organization and function of the Board and its committees; (ii) recruit, identify and recommend potential director candidates and nominees; (iii) develop a set of corporate governance principles; (iv) oversee the process of the evaluation of the Board and management; and (v) review and advise management on matters relating to the Company’s responsibilities to its employees and the community. The Nominating Committee also makes recommendations to the Board regarding the level and composition of compensation for non-employee directors.

As required by its charter, each member of the Nominating Committee (Messrs. Thomas and Waters and Mses. Hackett and Kilsby) has been determined by our Board to be independent as such term is defined in the New York Stock Exchange Listed Company Manual. The Nominating Committee met four times in 2016.

Other Corporate Governance Resources

The Company’s Corporate Governance Principles, the Company’s Code of Business Conduct and Ethics and the Company’s Code of Ethics for Senior Financial Officers are available on the Company’s website at http://ir.fbhs.com/corporate-governance.cfm . The charters of each committee are also available on the Company’s website at http://ir.fbhs.com/committees.cfm .

 

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D IRECTOR C OMPENSATION

2016 Compensation Changes

In 2016, the Nominating Committee reviewed an analysis of outside director compensation prepared by Meridian. After reviewing the analysis, the Nominating Committee recommended and the Board approved an increase in the non-employee director annual cash fees from $80,000 to $90,000 and an increase in the value of the annual stock grant from $115,000 to $135,000. In addition, the Nominating Committee amended the Director Stock Ownership Guidelines to increase the multiple of the ownership requirement from 3 to 5 times the annual cash fee.

Cash Fees

Beginning in July 2016, the annual cash fee for services as a non-employee director of the Company was increased from $80,000 to $90,000. The members of the Audit Committee (Messrs. Mackay, Morikis, Thomas, Waters and Wesley) and the Compensation Committee (Mses. Hackett and Kilsby and Messrs. Mackay, Morikis and Wesley) receive an additional annual cash fee of $7,500 for their service on these committees. In addition, the chairperson of each of the Audit, Compensation and Nominating Committees receives an additional annual cash fee of $15,000 for such service (Mr. Waters, Ms. Hackett and Mr. Thomas, respectively). Mr. Thomas receives an additional annual cash fee of $200,000 for his service as non-executive Chairman of the Board. Directors may elect to receive payment of their cash fees in Company common stock rather than cash.

Stock Awards

In April 2016, each non-employee director received an annual stock grant that was based on a set dollar value of $135,000. The number of shares granted was determined by dividing the dollar value of the annual stock grant ($135,000) by the closing price of the Company’s common stock on the grant date ($57.37), rounded to the nearest share. Accordingly, 2,353 shares of Company common stock were granted to each of the then-serving non-employee directors. Directors may elect to defer receipt of their annual stock awards until the January following the year in which the individual ceases serving as a director of the Company.

Director Stock Ownership Guidelines

To further align the Board’s interests with those of stockholders, the Board established Stock Ownership Guidelines for non-employee directors. In 2016, the guidelines were amended to encourage non-employee directors to own Company common stock with a fair market value equal to five times their annual cash fee ($450,000 based on the annual fee of currently set at $90,000). The guidelines allow directors five years from the date of the director’s election to the Board to meet the guidelines. Directors with less than one year of service at the time of the increase of the multiple were given five years from the date of the amendment to meet the increased guidelines. All of our directors, other than Ms. Kilsby, currently meet the Stock Ownership Guidelines. Ms. Kilsby has five years from the date of the amendment to meet the guidelines. For information about the beneficial ownership of the Company’s securities held by directors and executive officers, see “Certain Information Regarding Security Holdings” on pages 46 and 47.

Anti-Hedging and Anti-Pledging

The Company has a policy prohibiting directors (as well as senior management) from hedging the risk of owning Company common stock and from pledging or otherwise encumbering shares of Company common stock as collateral for indebtedness in any manner including, but not limited to, holding shares in a margin account.

 

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2016 DIRECTOR COMPENSATION*

 

 
   Name    Fees
Earned
or Paid
in
Cash
($)
     Stock
Awards
($)(1)
     Option
Awards
($)
    

Non-Equity
Incentive

Plan

Compensation
($)

    

Change in
Pension

Value and
Nonqualified
Deferred

Compensation
Earnings ($)

     All Other
Compensation
($)(2)
    

Total

($)

 

Richard A. Goldstein 3

   $ 28,125       $ 0         n/a         n/a         n/a       $ 1,460       $ 29,585   

Ann F. Hackett

   $ 107,500       $ 135,000         n/a         n/a         n/a       $ 1,646       $ 244,146   

Susan S. Kilsby

   $ 92,500       $ 135,000         n/a         n/a         n/a       $ 6,163       $ 233,663   

A.D. David Mackay

   $ 100,000       $ 135,000         n/a         n/a         n/a       $ 1,646       $ 236,646   

John G. Morikis

   $ 100,000       $ 135,000         n/a         n/a         n/a       $ 867       $ 235,867   

David M. Thomas

   $ 307,500       $ 135,000         n/a         n/a         n/a       $ 7,633       $ 450,133   

Ronald V. Waters, III

   $ 107,500       $ 135,000         n/a         n/a         n/a       $ 6,646       $ 249,146   

Norman H. Wesley

   $ 100,000       $ 135,000         n/a         n/a         n/a       $ 7,633       $ 242,633   

 * Although Mr. Klein currently serves as a member of the Board, he does not receive any additional compensation for such service.

 

  (1) The amounts in this column represent the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (“FASB ASC Topic 718”). The grant date fair value was $57.37 per share. Ms. Hackett elected to defer receipt of her stock award until the January following the year in which she ceases serving as a director pursuant to the Company’s Non-Employee Director Deferred Compensation Plan (as amended and restated January 1, 2013). As of December 31, 2016, Ms. Hackett and Messrs. Morikis and Thomas had the following number of deferred shares outstanding: 24,885, 5,742 and 2,914, respectively.

 

  (2) Included in this column are premiums paid for group life insurance coverage and the Company’s match on gifts paid by the director to charitable organizations, both of which are generally available to Company employees and directors, and costs associated with the Company’s executive health program. Under the Company’s matching gift program, the Company makes a 100% match of gifts totaling up to $5,000 annually made by the director to an eligible charitable institution.

 

  (3) Mr. Goldstein retired from the Board of Directors in April 2016, immediately following the Annual Meeting of Stockholders.

 

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C OMPENSATION D ISCUSSION AND A NALYSIS

This Compensation Discussion and Analysis (“CD&A”) describes the Company’s executive compensation program and explains how the Compensation Committee made compensation decisions for the following Named Executive Officers (the “NEOs”) in 2016:

 

Named Executive Officer

  

Position with the Company During 2016

Christopher J. Klein    Chief Executive Officer, Fortune Brands
E. Lee Wyatt, Jr.    Senior Vice President and Chief Financial Officer, Fortune Brands
Nicholas I. Fink    President, Global Plumbing Group
David M. Randich    President, MasterBrand Cabinets
Robert K. Biggart    Senior Vice President, General Counsel and Secretary, Fortune Brands

This CD&A is divided into the following main sections:

 

   

an Executive Summary;

 

   

the Results of the 2016 Say-on-Pay Vote;

 

   

a discussion of the Compensation Committee’s Philosophy and Process for Awarding NEO Compensation; and

 

   

a description of the Types and Amounts of NEO Compensation Awarded in 2016.

EXECUTIVE SUMMARY

2016 Business & Financial Highlights 1

 

   

Delivered increases on multiple key financial and efficiency measures in 2016 versus the prior year. The measures marked with an * below are those that were linked to 2016 executive compensation.

 

   

Net Sales increased 9% to $5.0 billion

 

   

Operating Income (OI*) increased 22% to $657.8 million

 

   

Earnings per share (EPS*) increased 33% to $2.75

 

   

Return on Invested Capital (ROIC*) increased 200 basis points to 13.3%

 

   

Operating Margin (OM*) increased 140 basis points to 13.2%

 

   

Net Income (NI) increased 28% to $434 million

 

   

Created the Global Plumbing Group (GPG), a new structure that paves the way for additional acquisitions and joint ventures supported by our global supply chain and strong distribution.

 

   

Completed the first two acquisitions under GPG by purchasing Riobel, a premium Canadian showroom brand and ROHL, a California-based luxury brand.

 

   

Joined the S&P 500 Index in June 2016.

The following charts show how Fortune Brands grew total shareholder return (TSR), net sales, operating income, earnings per share, return on invested capital, operating margin and net income in 2016. The Company has delivered substantial growth in these metrics since becoming an independent company in 2011. The Compensation Committee believes that the compensation earned by the NEOs in 2016 reflected the Company’s strong financial performance and continued execution against many of the metrics tied to increased shareholder value.

 

  

 

1   All data presented in this CD&A is from continuing operations and all references to OI, EPS, ROIC, NI and OM are unaudited and on a before charges/gains basis. See Appendix A of this Proxy Statement for definitions and a description of the methodology of these non-GAAP measures.

 

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TOTAL SHAREHOLDER RETURN

(TSR %)

 

LOGO

The chart above reflects the Company’s long-term stock price performance vs. publicly-traded companies in the Company’s Peer Group 2 (see a list on page 23) since the Company’s spin-off from Fortune Brands, Inc. in 2011.

Total shareholder return (TSR) has consistently exceeded relevant peer and S&P 500 index performance over the long-term.

 

2   Chart data from Bloomberg. 2011 data measured from Oct 3, 2011 (date of FBHS spin-off) through Dec 30, 2016. Peer Index includes average of individual performance of A.O. Smith Corp., Armstrong World Industries Inc., Fastenal Company, Leggett & Platt, Inc., Lennox International Inc., Masco Corp., Mohawk Industries, Inc., Newell Brands Inc., Nortek Inc., Owens Corning Inc., RPM International Inc., Stanley Black & Decker, Inc., The Sherwin-Williams Company, USG Corporation and The Valspar Corp.

 

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LOGO    LOGO

 

LOGO    LOGO

 

LOGO    LOGO

 

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2016 Compensation Highlights

We use our compensation program to attract, motivate and retain the executives who lead our Company. The Compensation Committee has established programs and practices that are designed to pay for performance and to align management’s interests with those of the Company’s stockholders. We believe that our compensation program helps drive Company performance by providing a significant amount of compensation in the form of equity, by utilizing both short-term and long-term incentives that are tied to Company performance, and by making efforts to balance fixed (base salary) and variable (annual cash and equity incentives) compensation. The 2016 executive compensation program was guided by the following principles:

Equity-based compensation aligns executives’ interests with stockholders, drives performance and facilitates retention of superior talent. We believe that equity-based compensation aligns the executives’ interests with those of our stockholders. In 2016, the annual equity grant made up 66% of Mr. Klein’s annual total target compensation and 54% (on average) of the other NEOs’ annual total target compensation. The Compensation Committee approved the following equity-based compensation, as part of the 2016 annual equity grants:

 

   

Annual equity awards consisted of performance share awards (PSAs), restricted stock units (RSUs) and stock options.

 

   

PSAs will be settled in Company stock only if the performance goals set for the cumulative three- year performance period are met. In 2016, the goals were based on EPS (weighted 75%) and ROIC (weighted 25%) for the period January 1, 2016 through December 31, 2018;

 

   

The RSUs granted in 2016 are time-vested awards that will be settled in Company stock, in three equal annual installments, assuming the NEO remains employed through each vesting date; and

 

   

Stock options allow the NEOs to purchase Company stock at the market price set on the grant date. The stock options granted in 2016 will vest in three equal annual installments, assuming the NEO remains employed through each vesting date, and expire ten years from the grant date.

Incentive compensation drives increasing profits and returns . The Compensation Committee continues to believe that linking compensation to certain performance metrics results in increased profits and stronger returns, which supports improving stockholder returns. The vast majority of compensation awarded to NEOs is dependent upon Company performance. In 2016, the Compensation Committee modified the goals used for determining annual incentive awards and set challenging performance goals in connection with the annual incentive awards and PSAs:

 

   

The Compensation Committee modified the annual incentive award goals by adding a third goal that focused on the Company’s strategic initiatives to increase operating efficiency, margins and sales (see pages 28-29 for further information about these changes). The 2016 annual incentive awards were based on the following metrics:

 

   

EPS, ROIC and Working Capital Efficiency (WCE) were metrics used for Messrs. Klein, Wyatt, Biggart and, for a portion of the year, Fink;

 

   

MasterBrand Cabinets’ Operating Income (OI), Operating Margin (OM) and WCE were metrics used for Mr. Randich; and

 

   

Moen’s OI, Sales Above Market and WCE were metrics used for the portion of the year for Mr. Fink when he began serving as President of that business unit.

 

   

The metrics for three year PSAs were EPS and ROIC for all NEOs.

 

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Base salary represents the smallest portion of total target compensation. The Compensation Committee continuously makes efforts to appropriately balance fixed (base salary) and variable (annual cash and equity incentives) compensation for each NEO.

 

   

In 2016, fixed compensation represented 15% and variable compensation represented 85% of Mr. Klein’s annual total target compensation; and

 

   

In 2016, fixed compensation represented 27% (on average) and variable compensation represented 73% (on average) of the remaining NEOs’ annual total target compensation.

The following chart summarizes annual total target compensation awarded to each NEO in 2016:

 

      Summary of 2016 NEO Annual Target Compensation        
 
Named Executive
Officer
 

2016 Annual

Base Salary (1)

   

2016 Annual

Incentive

Target Value

   

2016 Long-

Term Incentive

Award Target

Value(2)

    2016 Total Target
Compensation
 

Christopher J. Klein

 

    $1,100,000        $1,430,000           $5,000,000        $7,530,000  

E. Lee Wyatt, Jr.

 

    $775,000        $658,750           $1,900,000        $3,333,750  

David M. Randich

 

    $590,000        $413,000           $1,250,000        $2,253,000  

Nicholas I. Fink

 

    $510,000        $331,500           $1,050,000        $1,891,500  

Robert K. Biggart

 

    $485,000        $315,250             $900,000          $1,700,250    

 

  (1) The amounts listed in this column reflect annual base salary effective March 1, 2016 for all NEOs.

 

  (2) Includes the value of the annual target incentive equity awards, expressed as the aggregate grant date value of PSAs (at target), stock options and RSUs, as determined using the assumptions found in note 13 to the consolidated financial statement contained in the Company’s Form 10-K for the year ended December 31, 2016.

The Board believes that this approach to our compensation program, along with our leading market positions and structural competitive advantages, has allowed our Company to continue to outperform the market for our products in the continued housing market recovery.

RESULTS OF THE 2016 SAY-ON-PAY VOTE

In 2016, we sought an advisory vote from our stockholders on NEO compensation (commonly referred to as “Say-on-Pay”). More than 97% of the votes cast for the Say-on-Pay vote were in support of the Company’s executive compensation program. Even with this strong endorsement of the Company’s pay practices, the Compensation Committee believes that it is essential to regularly review the executive compensation program. In 2016, the Compensation Committee concluded that the compensation program provides rewards that it believes motivate our NEOs to maximize long-term stockholder value and encourage long-term retention. Accordingly, the Compensation Committee did not make any changes to the design of the Company’s executive compensation program in response to the 2016 Say-on-Pay vote. However, the Compensation Committee regularly evaluates the Company’s executive compensation programs and makes adjustments as it deems appropriate.

In 2016, the Compensation Committee changed the performance metrics used to determine 2016 annual cash incentive awards (see pages 28-29 for information about this change) and approved changes to the Company’s peer group to be used when evaluating 2017 executive compensation decisions (see pages 23-24 for information about this change).

In addition, at the end of 2016, the pension program, which Mr. Klein participated in, was frozen. In early 2017, the Compensation Committee also evaluated the metrics used in the Company’s short-term and long-term incentive programs and changed the metrics for 2017-2019 PSAs which eliminated any duplication between the short-term and long-term performance metrics (see page 30 for information about this change).

 

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PHILOSOPHY AND PROCESS FOR AWARDING NEO COMPENSATION

Philosophy of the Executive Compensation Program

We strongly believe that executive compensation should be closely tied to Company performance. Our executive compensation programs are designed to reward NEOs for the achievement of both short-term and long- term strategic and operational goals that lead to the creation of long-term stockholder value, while at the same time avoid incentives that encourage unnecessary or excessive risk taking. To accomplish this, the Compensation Committee has designed an executive compensation program that it believes:

 

   

Creates and reinforces a pay-for-performance culture;

 

   

Aligns management’s interests with those of the Company’s stockholders;

 

   

Attracts, retains and motivates superior talent through competitive compensation;

 

   

Provides incentive compensation that promotes performance without encouraging excessive risk taking; and

 

   

Recognizes the cyclical nature of our business.

Maintaining a Competitive Compensation Program

Peer Groups and Market Data

When setting annual NEO compensation, the Compensation Committee uses compensation data from a group of similarly sized peer companies to evaluate compensation arrangements against those of the Company (the “Peer Group”). Annually, the Compensation Committee reviews and assesses the appropriateness of the Peer Group. The Compensation Committee did not make any modifications to the composition of the Peer Group used for evaluating 2016 executive compensation decisions. The Peer Group consisted of 19 consumer or housing product companies with a median 2015 revenue of $4.16 billion and median 2015 market capitalization for publicly-traded peers of $6.21 billion which aligns with the Company’s 2015 revenue of $4.58 billion and 2015 market capitalization of $8.89 billion. The Peer Group consisted of the following companies:

 

Andersen Corporation

   Lennox International Inc.    Pella Corporation

A.O. Smith Corporation

   Masco Corporation    RPM International Inc.

Armstrong World Industries, Inc.

   Mohawk Industries, Inc.    Stanley Black & Decker, Inc.

Fastenal Company

   Newell Rubbermaid Inc.    The Sherwin-Williams Company

Jarden Corporation

   Nortek, Inc.    USG Corporation

Kohler Co.

   Owens Corning Inc.    The Valspar Corporation

Leggett & Platt, Incorporated

     

Meridian provided the Compensation Committee with competitive data utilizing the Peer Group proxy data and Aon Hewitt provides revenue size-adjusted competitive data from its general industry database. For Messrs. Klein and Wyatt, the Peer Group was the primary market data source for evaluating 2016 base salary, annual cash incentive awards and long-term incentive awards, given the availability of chief executive officer and chief financial officer compensation data in public filings, with the compensation survey data providing a supplemental viewpoint. For our other NEOs, the Compensation Committee reviewed both the Peer Group proxy data, when available, and compensation survey data when evaluating the 2016 base salary, annual cash incentive awards and long-term incentive awards. Throughout the CD&A, the compensation data used by the Compensation Committee is referred to as “market data.”

 

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The Compensation Committee believes that compensation decisions are complex and require a deliberate review of Company performance, peer compensation levels, experience of individual executives, and individual performance. In determining executive compensation, the Committee considers all forms of compensation and benefits, and uses appropriate tools – such as tally sheets and market data – to review the value delivered by each component of compensation to each executive. Accordingly, the Compensation Committee may determine that with respect to any individual it is appropriate for total target compensation or any particular element of compensation to meet, exceed or fall below the 50th percentile of the market data. The factors that might influence the amount of compensation awarded include market competition for a particular position, retention considerations, an individual’s performance, possession of a unique skill or knowledge set, proven leadership capabilities or other business experience, tenure with the Company and internal pay equity.

Fortune Brands was added to the S&P 500 Index in June 2016. Due to this change and the Company’s continued revenue growth and increased market capitalization, the Compensation Committee engaged Meridian to re-evaluate the Company’s Peer Group to be used when evaluating 2017 executive compensation decisions. Based on Meridian’s recommendations, the Committee made modifications to the composition of the Peer Group by excluding Fastenal Company (due to the different nature of its business), companies that are not publicly-traded (Andersen Corporation, Kohler Co. and Pella Corporation) and companies that were recently acquired or pending acquisition (Jarden Corporation, Nortek, Inc. and Valspar Corporation). Eight new S&P 500 companies were added to the group based on their classification as cyclical companies with revenue (median 2015 revenue $6.18 billion) and market capitalization (median 2015 market capitalization $10.1 billion) more aligned to the Company. The 2017 Peer Group consisted of the following companies:

 

Armstrong World Industries, Inc.

   Leggett & Platt, Incorporated    Pentair plc

Allegion plc

   Lennox International Inc.    RPM International Inc.

A.O. Smith Corporation

   Masco Corporation    The Sherwin-Williams Company

Ball Corp.

   Mohawk Industries, Inc.    Snap-On Inc.

Borgwarner Inc.

   Newell Brands Inc.    Stanley Black & Decker, Inc.

Dover Corp.

   Owens Corning Inc.    USG Corporation

Ingersoll-Rand Plc

   Parker-Hannifin Corp.   

Evaluating NEO Performance

At the end of each year, the Compensation Committee, in conjunction with the non-management members of the Board, conducts a formal evaluation of the Company’s Chief Executive Officer (the “CEO”) to analyze his performance against strategic, financial and operational goals established at the beginning of the year. The Compensation Committee then sets the CEO’s total target compensation. The CEO reviews and evaluates each of the other NEOs relative to their performance against strategic, financial and operational goals established at the beginning of the year and then presents his evaluations to the Compensation Committee. The Compensation Committee evaluates the CEO’s recommendations and then independently sets each of the other NEO’s total target compensation.

 

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Maintaining Best Practices Regarding Executive Compensation

The Compensation Committee maintains policies and procedures for itself and for certain of the Company’s executives, including the NEOs, many of which it believes represent best practices in corporate governance.

 

What We Do

         Pay-for-Performance A significant portion of NEO annual total target compensation is tied to Company performance. In 2016, 85% of Mr. Klein’s and 73% (on average) of all other NEOs’ annual total target compensation was pay-at-risk.

  

         ClawbackPolicy The Company may recover all or part of annual cash incentives and equity incentive compensation under certain circumstances.

         AnnualAssessment and Mitigation of Risks The Compensation Committee annually assesses whether our compensation programs, plans and awards are designed and working in a way that discourages excessive risk taking.

  

         Double-Triggerin Change in Control Severance benefits are payable upon a change in control only if there is also a qualifying termination of employment. Our equity award agreements also include double-trigger provisions.

          MaximumPayouts on Incentives Annual cash incentive awards
and PSAs are capped at 200%.

  

         TallySheets Tally sheets and wealth accumulation analyses are reviewed annually before making compensation decisions.

✓          StockOwnership Guidelines We maintain rigorous stock ownership guidelines for NEOs. Multiple of base salary required:

CEO = 6

CFO = 4

Other NEOs = 3

 

Executives are required to hold 50% of net shares from the vesting
of PSAs and RSUs until the ownership requirement is met.

  

         IndependentCompensation Consultant Meridian advises the Compensation Committee on executive compensation matters. Meridian is prohibited from performing services for management.

  
What We Don’t Do

×           No Employment Contracts NEOs and other executive officers are employees “at will.” The Company does not have employment contracts with any of its NEOs or other executive officers.

  

×           No Hedging or Pledging Directors, NEOs and other officers are prohibited from hedging, pledging or otherwise encumbering shares of the Company’s common stock, including holding shares in a margin account.

×           No Tax Gross Ups NEOs and other executive officers are not entitled to tax gross ups in the event of a change in control and related termination or for perquisites (other than relocation expenses).

  

×           No Backdating or Repricing of Stock Options Stock options are never backdated or issued with below-market prices. Repricing of underwater stock options without stockholder approval is prohibited (except in the event of certain extraordinary corporate events).

×           No Excessive Perquisites Perquisites are limited to the executive health program, which includes an annual physical, and other benefits generally available to employees, such as company product purchase programs. The CEO and CFO have limited personal use of Company aircraft, however, each must reimburse the Company for such use.

    

 

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TYPES AND AMOUNTS OF NEO COMPENSATION AWARDED IN 2016

Summary of Executive Compensation Elements

As part of the 2016 annual target compensation, the Company provided both fixed (base salary) and variable (annual cash and equity incentives) compensation to the NEOs. The vast majority of compensation is at risk to each NEO because the compensation that is actually paid may vary from the target compensation that was awarded by the Compensation Committee and the payment is dependent upon Company (or individual operating company) performance or stock price performance. The amount of target total compensation at risk was significantly more than the amount of base salary for each NEO. Also, the majority of target total compensation awarded in 2016 to each NEO was in the form of equity. The following charts show each element of 2016 annual target compensation, including the mix of short-term and long- term incentives, as well as the amount of pay-at-risk for the CEO and for the other NEOs (on average). Retention awards are excluded from the chart.

 

 

 

LOGO

 

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The following chart summarizes the material elements of the Company’s 2016 executive compensation program. Further details regarding each of the elements are provided in the discussion that follows the chart.

 

Executive Compensation Program

 

     

Element

 

 

Key Characteristics

 

 

Why We Pay This
Element

 

 

How We Determine
Amount

 

 

2016 Decisions

 

Fixed   Base Salary   Fixed cash compensation.   To attract, retain and motivate superior talent.  

Starts with market data. Adjusted based on individual performance, proven leadership capabilities, other business experience, possession of a unique skill or knowledge set, internal pay equity, tenure or retention.

 

  Salary increases ranged from 3.2-5.4%.
Pay-At-Risk   Annual Incentive Awards (Bonus)  

Variable cash compensation.

 

Percentage of base salary based on the achievement of annual performance goals.

  To align overall Company and operating company performance directly with cash compensation.  

The target percentage of base salary is determined based on job scope, market data and internal pay equity.

 

Actual payouts based on the achievement of performance goals and can range from 0% to 200%.

 

5% increase in target bonus for Messrs. Klein, Randich and Biggart.

 

 

EPS, ROIC and WCE performance goals resulted in a 113.9% payout for Messrs. Klein, Wyatt, Biggart and Fink (for a portion of the year).

 

MasterBrand Cabinets OI, OM and WCE performance goals resulted in a 91.3% payout for Mr. Randich.

 

Moen OI, Sales above Market and WCE performance goals resulted in a 98.9% payout for Mr. Fink (for a portion of the year).

 

   

Performance

Share Awards (PSAs)

 

Equity compensation.

 

Number of shares paid based on achievement of three year cumulative performance goals.

 

Value of PSAs is variable based on long- term stock price growth.

 

 

To focus management on long-term Company performance and results.

 

To align management’s interest with stockholders’ interests.

 

Long-term incentives support our business strategy.

 

 

Based on job scope, market data and individual performance.

 

Actual payouts based on the achievement of three year performance goals and can range from 0% to 200%.

 

One-third of the value of the total equity award was granted in the form of PSAs.

 

Based on cumulative EPS and average ROIC for the period January 1, 2016-December 31,

2018.

    Stock Options  

Equity compensation.

 

Time-vested over three years (assuming continued employment)

 

Value of stock options is variable based on long-term stock price growth.

 

Expire in ten years.

 

 

To focus management on long-term stock price growth.

 

To align management’s interests with stockholders’ interests.

 

Long-term incentives support our business strategy.

  Based on job scope, market data and individual performance.   One-third of the value of the total equity award was granted in the form of stock options.
    Restricted Stock Units (RSUs)  

Equity compensation.

 

Time-vested over three years, except for the retention award made to Mr. Wyatt, which is time-vested through December 2017.

 

Value of RSUs is variable based on long- term stock price growth.

 

 

To encourage retention and focus management on long-term stock price growth.

 

To align management’s interests with stockholders’ interests.

 

Long-term incentives support our business strategy.

  Based on job scope, market data and individual performance.  

One-third of the value of the total equity award was granted in the form of RSUs.

 

Retention award granted to Mr. Wyatt.

 

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Compensation Provided to NEOs in 2016

Base Salary

In setting 2016 base salary levels, the Compensation Committee (together with Mr. Klein for the NEOs other than himself) considered market data, the individual performance and the competitiveness of total direct compensation of each NEO. In 2016, each of the NEOs received an annual base salary increase ranging from 3.2-5.4%.

 

NEO Base Salary  
Named Executive Officer   2016     2015     % Increase  

Christopher J. Klein

    $1,100,000        $1,060,000        3.8%   

E. Lee Wyatt, Jr.

    $775,000        $747,000        3.7%   

David M. Randich

    $590,000        $560,000        5.4%   

Nicholas I. Fink

    $510,000        $485,000        5.2%   

Robert K. Biggart

    $485,000        $470,000        3.2%   

Annual Cash Incentive

The Compensation Committee believes that annual cash incentive awards reinforce a pay-for-performance culture because the payment is based on the Company’s financial results. Annually, the Compensation Committee sets the percentage of base salary used to determine each NEO’s cash incentive, as well as target, minimum and maximum performance goals for the Company and each operating company. The annual incentive payouts are based on the achievement of performance goals set at the beginning of the year and can range from 0% to 200%.

In 2016, the Compensation Committee considered market data and the individual performance of each of the NEOs and decided to increase the percentage of base salary used to determine Mr. Klein’s annual cash incentive award from 125% to 130%, Mr. Randich’s annual cash incentive award from 65% to 70% and Mr. Biggart’s annual cash incentive award from 60% to 65%. These increases were made to better align the annual cash incentive awards to the market data for similar positions and were made in recognition of the NEO’s performance. The Compensation Committee did not make any other increases in the percentages used to determine the annual cash incentive awards for the other NEOs. The Compensation Committee believes that the percentage of base salary levels were competitive compared to the market data. The percentage of base salary for each NEO for 2016 was:

 

Named Executive Officer

  

Percentage of
Base Salary

Christopher J. Klein

   130%

E. Lee Wyatt, Jr.

   85%

David M. Randich

   70%

Nicholas I. Fink

   65%

Robert K. Biggart

   65%

In 2016, the Compensation Committee decided to alter the performance goals used to determine annual cash incentive awards. The Compensation Committee decided to increase the number of performance metrics from two to three and refined the goals to increase focus on the Company’s strategic initiatives to increase operating efficiency, margins and sales. As a result, the 2016 performance goals used to determine annual incentive awards were set as follows:

 

   

For Messrs. Klein, Wyatt, Biggart and for a portion of the year, Mr. Fink, Fortune Brands’ EPS (weighted 60%), ROIC (weighted 20%) and company-wide WCE (weighted 20%), as compared to the 2015 performance goals of EPS (weighted 75%) and ROIC (weighted 25%).

 

   

For Mr. Randich, MasterBrand Cabinets’ OI (weighted 60%), OM (weighted 20%) and WCE (weighted 20%), as compared to the 2015 performance goals of OI (weighted 75%) and WCE (weighted 25%).

 

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For Mr. Fink, Moen’s OI (weighted 60%), Sales Above Market (weighted 20%) and WCE (weighted 20%) for the portion of the year that he served as President of Global Plumbing Group, as compared to Moen’s 2015 performance metrics of OI (weighted 75%) and RONTA (weighted 25%).

The Compensation Committee believed that including a WCE goal reflects the importance of increasing efficiency and inventory control throughout the Company, using an OM goal for MasterBrand Cabinets focuses executives on increasing our businesses operating efficiency and pricing strategies and using a Sales Above Market goal (Sales) for Moen reflects the importance of increasing sales of our most profitable business. The Compensation Committee believes that these metrics focus executives on maximizing long-term stockholder value (EPS), operational efficiency (ROIC, OM and WCE) and profitability (OI, OM and Sales).

The Compensation Committee set minimum, target and maximum annual performance goals used to determine each NEO’s annual cash incentive award. To establish challenging performance goals under the annual incentive program, the Compensation Committee reviewed the target performance goals and actual results for awards paid in 2015 and considered its 2016 expected growth rate in the home products market as well as key assumptions relating to share gains, pricing, material inflation and productivity. The performance goals, at the minimum, target and maximum payout levels, were intended to be challenging and required superior performance. The following table sets forth the target performance measures, the actual performance results, the percentage payout and the amounts paid to each NEO for the 2016 annual cash incentive awards:

 

2016 Annual Cash Incentive Performance Goals and Results  
    

Performance Measures

and Goals(1)

     Results and Award  
Named Executive Officer   

Performance

Measures

  

Target

Performance

Measure

    

Actual

Performance(2)

    

% of Payout

    

Amount

Paid

 

Christopher J. Klein

   EPS      $2.46        $2.60        113.9    $ 1,628,770  
   ROIC

WCE

    

12.3%

15.2%

 

 

    

12.5%

15.0%

 

 

                 

E. Lee Wyatt, Jr.

   EPS      $2.46        $2.60        113.9      $750,316  
   ROIC

WCE

    

12.3%

15.2%

 

 

    

12.5%

15.0%

 

 

                 

David M. Randich(3)

   OI      $283        $260.3        91.3    $ 377,069  
   OM

WCE

    

11.2%

12.1%

 

 

    

10.9%

11.9%

 

 

                 

Nicholas I. Fink(4)

   EPS      $2.46        $2.60        113.9    $ 355,841  
   ROIC

WCE

    

12.3%

15.2%

 

 

    

12.5%

15.0%

 

 

             
     OI

Sales(5)

WCE

    

$314.1

1.5%

16.9%

 

 

 

    

$332.1

0%

16.3%

 

 

 

     98.9         

Robert K. Biggart

   EPS

ROIC

WCE

    

$2.46

12.3%

15.2%

 

 

 

    

$2.60

12.5%

15.0%

 

 

 

     113.9    $ 359,070  
  (1) OI target performance measures and actual performance results are shown in millions.

 

  (2) EPS, ROIC, OI and OM actual performance were adjusted to exclude the effect of currency fluctuations. EPS and ROIC actual performance were adjusted to exclude the effect of the adoption of FASB ASU 2016-09.

 

  (3) Mr. Randich’s goals related to MasterBrand Cabinet’s performance.

 

  (4) Mr. Fink’s award was pro-rated based on Fortune Brands’ company-wide performance metrics for the period January to July and Moen’s performance metrics for the remainder of the year.

 

  (5) Sales Above Market was determined by calculating the percentage change in Moen’s annual sales in excess of the percentage 2016 sales growth in the plumbing market.

 

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Long-Term Incentive Awards

The Compensation Committee believes that equity awards both align management’s interests with those of stockholders and reinforce a pay-for-performance culture. The 2016 target equity-based compensation represented 66% of Mr. Klein’s and 54% (on average) of the other NEOs’ annual total target compensation.

In setting 2016 target long-term incentive awards, the Compensation Committee (together with Mr. Klein for NEOs other than himself) considered market data, the individual performance and the competitiveness of total direct compensation of each of the NEOs. In addition, Messrs. Klein’s and Randich’s target value were increased to reward their individual performance and better align their long-term incentive compensation to the market data for similar positions. The target long-term incentive award value of each NEO’s 2016 equity-based awards was as follows and was comprised equally of PSAs (with the PSAs valued assuming achievement of the target performance level), RSUs and stock options:

 

Named Executive Officer  

2016 Equity

Award Value

   

2015 Equity

Award Value

    % Increase  

Christopher J. Klein

    $5,000,000       $4,615,000       8.3%  

E. Lee Wyatt, Jr.

    $1,900,000       $1,850,000       2.7%  

David M. Randich

    $1,250,000       $1,100,000       13.6%  

Nicholas I. Fink

    $1,050,000       $1,000,000       5%  

Robert K. Biggart

    $900,000       $850,000       5.9%  

Performance Share Awards: In 2016, one-third of the total target long-term incentive award value granted to the NEOs was made in the form of PSAs. The PSAs will be settled in shares of the Company’s common stock only if the Company achieves specified EPS (weighted 75%) and ROIC (weighted 25%) goals during the cumulative performance period from January 1, 2016 through December 31, 2018, with vesting ranging from 0% to 200% of the target award based on performance. No shares will be paid unless the minimum established performance goals are achieved and payout, if any, will not occur until early in 2019, following completion of the performance period and certification of the performance results by the Compensation Committee.

The EPS and ROIC goals were intended to be challenging and require superior performance at the minimum, target and maximum payout levels. The Compensation Committee believes that awarding PSAs with a cumulative three year performance goal drives long-term sustained growth and, as a result, management is rewarded if the long-term growth goals are met or exceeded. In establishing performance goals for PSAs, the Compensation Committee considered the Company’s strategic operating plan, the expected 3-year compound market growth rate, as well as key assumptions relating to share gains, pricing, material inflation and productivity. The Compensation Committee based the performance goals on EPS and ROIC because it believes that these metrics are core drivers of the Company’s performance and align the interests of management with the interest of our stockholders. While EPS and ROIC are utilized in both short-term and long-term incentive awards, the short-term incentive awards include an additional operational metric (Working Capital Efficiency). The short-term incentive awards were based 60% on EPS, 20% on ROIC and 20% on WCE over a one year period. The long-term incentive awards were based on 75% on EPS and 25% ROIC over a cumulative three year period. The Compensation Committee based the performance goals on EPS and ROIC because it believed that the combined use of these metrics reflect sustainable growth and stronger returns.

The Compensation Committee annually evaluates and approves the metrics used in the Company’s short-term and long-term incentive compensation programs. In February 2017, the Compensation Committee evaluated the metrics used by the Company and its peers and decided to change the performance metrics used to determine the long-term incentive awards granted in 2017 to be based on EBITDA (earnings before interest, tax, depreciation and amortization) weighted 75% and RONTA (return on net tangible assets) weighted 25%, each over a cumulative three year period. This change in long term goals eliminated any duplication that existed in prior awards between the short-term and long-term performance metrics.

 

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RSUs and Stock Options: One-third of the total target long-term incentive award value granted to the NEOs in 2016 was made in the form of RSUs and one-third was made in the form of stock options. The Compensation Committee believes that both RSUs and stock options further focus management on increasing stockholder returns and align the interests of management with stockholders.

RSUs awarded as part of the 2016 annual equity grant, vest in three equal annual installments, assuming the NEO remains employed through each annual vesting date. RSUs serve as a long-term retention device in a cyclical business, as an executive must remain employed with the Company through each of the three annual vesting dates to receive all of the shares. The Compensation Committee also believes that the value of RSUs is at risk to the NEOs because the value of RSUs will fluctuate based on the Company’s stock price and only grows when the Company’s long-term stock price increases.

Stock options granted in 2016 vest in three equal annual installments, assuming the NEO remains employed through each annual vesting date, and expire ten years from the date of grant. The Compensation Committee believes that stock options are performance-based because the value of stock options grows when the Company’s long-term stock price increases. The value of stock options is at risk to the NEOs as they only realize a value if the Company’s stock price increases after the grant date.

Retention Equity Award

In March 2016, the Compensation Committee granted 40,000 RSUs (with a grant date value of $2,047,000) to Mr. Wyatt as a retention device. The Compensation Committee believes that this equity award will serve to retain Mr. Wyatt through each of the three vesting dates as he helps in the transition to a new chief financial officer upon his retirement. For this award, the Compensation Committee approved the following vesting schedule: 25% of the award vested in December 2016, 25% will vest in June 2017 and the remaining fifty 50% percent will vest in December 2017.

2014-2016 Performance Share Awards Payout

In 2014, the Compensation Committee awarded all of the then-serving NEOs PSAs to be settled in early 2017 if the Company achieved certain EPS and ROIC goals during the cumulative performance period from January 1, 2014 through December 31, 2016, with EPS weighted 75% and ROIC weighted 25%. The Compensation Committee certified a payout level of 80.9%. The target goals for cumulative EPS and average ROIC from January 1, 2014 through December 31, 2016 and the Company’s actual results were as follows:

 

2014-2016 PSA

Target EPS and ROIC Goals and Results

Metric   Target   Actual
Performance
  % of Payout

EPS (75%)

  $6.77   $6.56   80.9%

ROIC (25%)

  12.4%   11.7%  

Based on the achievement of the 2014-2016 EPS and ROIC performance goals, all of the eligible NEOs received the following number of shares of Company common stock pursuant to the terms of the award agreements:

 

Named Executive Officer

   Shares Granted  

Christopher J. Klein

     24,836  

E. Lee Wyatt, Jr.

     10,193  

David M. Randich

     5,986  

Robert K. Biggart

     4,773  

 

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Benefits

Retirement

All of the NEOs are eligible for retirement benefits through the Fortune Brands Home & Security Retirement Savings Plan (the “Savings Plan”), a tax-qualified defined contribution 401(k) plan. The Compensation Committee believes that the Savings Plan benefits are consistent with competitive pay practices, and are an important element in attracting and retaining talent in a competitive market.

Mr. Klein is the only NEO eligible for retirement benefits through the Moen Incorporated Pension Plan, a tax-qualified defined benefit pension plan. Benefit accruals under the Moen Incorporated Pension Plan were frozen effective January 1, 2017, which means that participants, including Mr. Klein, no longer accrue additional benefits. Due to their respective hire and/or transfer dates, Messrs. Wyatt, Randich, Fink and Biggart are not eligible to participate in any of the Company’s tax-qualified defined benefit plans. In addition to its tax-qualified plans, the Company provides non-qualified supplemental retirement benefits for accruals or contributions that would have been made under the tax-qualified plans but for limitations imposed by the Code. Please see the narratives that follow the “2016 Pension Benefits” table on pages 38-39 of this Proxy Statement for further information regarding these retirement plans. The Company also provides a non-qualified deferred compensation plan, which allows executives to defer a portion of their cash compensation and RSU awards, however, none of the NEOs elected to make any deferrals in 2016.

Severance

The Company has Agreements for the Payment of Benefits Following Termination of Employment (the “Severance Agreements”) with each NEO. Under the terms of the Severance Agreements, each NEO is entitled to severance benefits upon a qualifying termination of employment (i.e., termination by the Company without “cause” or by the NEO for “good reason”).

The Compensation Committee believes that these Severance Agreements help accomplish the Company’s compensation objectives of attracting and retaining superior talent. The Compensation Committee also believes that it is appropriate to provide executives with the protections afforded by these Severance Agreements and that these Severance Agreements promote management independence and help focus the attention of executive officers on the Company’s business in the event of a change in control.

All of the Agreements contain “double-trigger” change in control provisions, which means that there must be both a change in control of the Company (or applicable operating company) and a qualifying termination of employment (i.e., termination by the Company without “cause” or by the NEO for “good reason”) before any enhanced benefits can be paid following a change in control. The NEOs are not entitled to any tax gross ups under the Agreements, including those related to the “golden parachute” excise tax under the Code. Please see the “Potential Payments Upon Termination or Change in Control” table, as well as the narratives that follow for further information regarding the Severance Agreements and the treatment of outstanding equity upon a qualifying termination of employment or a change in control on pages 40 to 42.

Perquisites

The Company provides a limited number of perquisites. The Compensation Committee authorized limited annual use of Company aircraft by Messrs. Klein and Wyatt. In 2016, Mr. Klein and Mr. Wyatt reimbursed the Company for any personal use of Company aircraft, equivalent in amount to the cost of a first class ticket for each passenger on these flights. The Company’s executive health program makes annual medical examinations available to certain executives, including each of the NEOs, because the health of the NEOs is important to the Company. The Company also provides broad-based plans which are generally available to employees such as reimbursement of certain relocation expenses incurred when the Company requires an employee to relocate, a match on charitable contributions and company product purchase programs.

 

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Policies

Clawback Policy

The Company has a policy that allows it to recoup all or part of annual cash incentives or PSAs if there is a:

(1) significant or material restatement of the Company’s financial statements covering any of the three fiscal years preceding the grant or payment, or (2) restatement of the Company’s financial statements for any such year which results from fraud or willful misconduct committed by an award holder. The Company also includes the right to recoup all or part of an executive’s other equity awards in the terms and conditions of the awards.

Stock Ownership Guidelines

The Company maintains the following stock ownership guidelines for NEOs and other executives, which require them to hold a number of shares equal to a multiple of their annual base salary. The ownership guidelines are as follows:

 

Position

   Stock Ownership Level as a Multiple
of Base Salary
 

Chief Executive Officer

     6   

Chief Financial Officer

     4   

Operating Company Presidents

     3   

Senior Vice Presidents

     3   

Vice Presidents

     1   

Executives have five years from the date of hire or date of promotion to acquire the requisite amount of stock and are required to hold 50% of net shares acquired from the vesting of PSAs or RSUs until the ownership guidelines are met. All of the NEOs currently satisfy the stock ownership guidelines.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement and the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Compensation Committee

Ann F. Hackett, Chair

Susan S. Kilsby

A. D. David Mackay

John G. Morikis

Norman H. Wesley

 

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2016 E XECUTIVE C OMPENSATION

 

2016 SUMMARY COMPENSATION TABLE

 

 

Name and Principal

Position

   Year     Salary
($)
    Bonus
($)
    Stock
Awards
($)(1)
    Option
Awards
($)(2)
    Non-
Equity
Incentive
Plan
Compen-
sation
($)(3)
    Change in
Pension
Value and
Nonqualified
Deferred
Compen-
sation
Earnings
($)(4)
    All Other
Compen-
sation
($)(5)
    Total
($)
 
       A     B     C     D     E     F     G     H     I  

Christopher J. Klein

     2016       1,093,333       0       3,335,760       1,666,240       1,628,770       770,000       403,518       8,897,622  

Chief Executive Officer

     2015       1,055,000       0       3,072,524       1,538,325       1,392,575       293,000       273,315       7,624,739  
       2014       1,025,000       0       2,770,982       1,382,796       865,200       1,393,000       310,050       7,747,028  

E. Lee Wyatt, Jr.

     2016       770,333       0       3,318,250       633,730       750,316       0       211,497       5,684,127  

Senior Vice President and

Chief Financial Officer

     2015       743,333       0       1,230,918       616,491       667,333       0       126,108       3,384,182  
     2014       718,500       0       1,137,276       566,154       431,375       0       170,564       3,023,869  

David M. Randich

     2016       585,269       0       833,940       416,560       377,069       0       17,489       2,230,327  

President, MasterBrand Cabinets

     2015       574,808       0       3,003,984       366,876       479,388       0       21,631       4,446,687  
       2014       507,500       0       667,924       333,558       49,823       0       21,693       1,580,498  

Nicholas I. Fink*

     2016       505,833       0       701,730       350,520       355,841       0       82,501       1,996,425  

President, Global Plumbing Group

     2015       282,917       0       1,761,226       333,600       331,328       0       252,765       2,961,836  

Robert K. Biggart

     2016       482,500       0       600,030       299,720       359,070       0       80,403       1,821,723  

Senior Vice President, General Counsel and

Secretary

     2015       466,667       0       562,978       283,284       296,382       0       71,306       1,680,617  
     2014       450,000       0       532,534       267,102       189,000       0       107,761       1,546,397  
  * Mr. Fink served as Senior Vice President, Global Growth and Development of Fortune Brands from June 2015 until July 2016 when he became President of the Global Plumbing Group.

 

(1) Stock Awards: The amounts listed in column D for 2016 represent the aggregate grant date fair values calculated in accordance with FASB ASC Topic 718 for RSUs and PSAs granted in 2016. For assumptions used in determining these values, see note 13 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“Form 10-K”).

 

     The amounts included in this column for the PSAs granted during 2016 are calculated based on the probable outcome that the target performance level will be achieved. Assuming the highest level of performance is achieved, the maximum grant date fair value for the PSAs granted during 2016 is: $3,335,760 for Mr. Klein, $1,271,250 for Mr. Wyatt, $833,940 for Mr. Randich, $701,730 for Mr. Fink and $600,030 for Mr. Biggart.

 

(2) Option Awards: The amounts listed in column E for 2016 reflect the aggregate grant date fair values calculated in accordance with FASB ASC Topic 718 for stock options granted in 2016. For assumptions used in determining these values, see note 13 to the consolidated financial statements contained in the Company’s Form 10-K.

 

(3) Non-Equity Incentive Plans: Column F lists amounts earned as annual cash incentives.

 

(4) Change in Actuarial Value of Pension Benefits: Column G includes the change in actuarial value of Mr. Klein’s tax-qualified and non-qualified defined benefit pension plan benefits. The increase in Mr. Klein’s accrued pension benefit in 2016 is due to a decrease in the discount rate, a new mortality assumption and the benefits being calculated using five-year average pay. The narrative and footnotes following the 2016 Pension Benefits table on page 38 provide additional detail about the pension plan. Messrs. Wyatt, Randich, Fink and Biggart are not eligible to participate in any of the Company’s defined benefit pension plans.

 

(5) Perquisites and All Other Compensation: The amounts in column H include the following:

 

  (a) Matching Contributions to the Savings Plan . Matching contributions for 2016 to the Savings Plan were made: by Home & Security, $11,925 for Messrs. Klein, Wyatt, Fink and Biggart; and by MasterBrand Cabinets, $11,925 for Mr. Randich.

 

  (b) Profit Sharing Contributions to the Savings Plan . Profit sharing contributions for 2016 to the Savings Plan were made by Fortune Brands in the amount of $18,098 for Messrs. Klein, Wyatt, Fink and Biggart.

 

  (c) Profit Sharing Contributions to the FBHS Supplemental Plan . The following contributions were made to the Fortune Brands Home & Security, Inc. Supplemental Plan (the “FBHS Supplemental Plan”) for 2016: $166,568 for Mr. Klein, $87,950 for Mr. Wyatt, $42,912 for Mr. Fink and $38,541 for Mr. Biggart. These contributions would have been made under the Savings Plan but for the limitations on compensation imposed by the Code. These amounts were credited to executives’ accounts in early 2017.

 

  (d) Premiums for Life Insurance and Executive Disability: The amounts set forth in column H include the dollar value of all life insurance premiums paid by the applicable employer in 2016. These amounts were: $8,645 for Mr. Klein; $16,246 for Mr. Wyatt; $2,276 for Mr. Randich; $2,279 for Mr. Fink; and $7,533 for Mr. Biggart. The column also includes the dollar value of executive long-term disability premiums paid by the applicable employer in 2016.

 

  (e) Other: In 2016, limited use of the Company’s aircraft was provided to Messrs. Klein and Wyatt, who each reimbursed the Company for their personal use in an amount equivalent to the cost of a first class ticket for each passenger on these flights. The calculation of incremental cost of personal aircraft usage is based on variable costs to the Company, including fuel costs, crew expenses, landing fees and other miscellaneous variable costs. In 2016, the Company’s incremental cost for personal use of Company aircraft not reimbursed by Mr. Klein was $193,511 and by Mr. Wyatt was $67,766, which amounts are reflected in column H.

Also included in column H for each NEO are costs associated with the Company’s executive health program.

 

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2016 GRANTS OF PLAN-BASED AWARDS  

Name and

Grant Date

 

 

Estimated Future Payouts Under

Non-Equity Incentive Plan Awards

   

Estimated Future Payouts

Under Equity Incentive Plan

Awards

   

All Other

Stock

Awards:

Number

of Shares

of Stock

or Units (#)

   

All Other

Option

Awards:

Number of

Securities

Underlying

Options (#)

   

Exercise

or Base

Price of

Option

Awards

($/Sh)

   

Grant

Date

Value of

Stock and

Option

Awards

($)(1)

 
 

Threshold

($)

   

Target

($)

   

Maximum

($)

   

Threshold

(#)

   

Target

(#)

   

Maximum

(#)

         

Christopher J. Klein

                                                                               

02/29/2016(2)

  $ 0     $ 1,430,000     $ 2,860,000                                                          

02/29/2016(3)

                                                            131,200     $ 50.22     $ 1,666,240  

02/29/2016(4)

                                                    32,800                     $ 1,667,880  

02/29/2016(5)

                0       32,800       65,600                 $ 1,667,880  

E. Lee Wyatt, Jr.

                                                                               

02/29/2016(2)

  $ 0     $ 658,750     $ 1,317,500                                                          

02/29/2016(3)

                                                            49,900     $ 50.22     $ 633,730  

02/29/2016(4)

                                                    12,500                     $ 635,625  

02/29/2016(5)

                            0       12,500       25,000                             $ 635,625  

03/11/2016(6)

                                                    40,000                     $ 2,047,000  

David M. Randich

                                                                               

02/29/2016(2)

  $ 0     $ 413,000     $ 826,000                                                          

02/29/2016(3)

                                                            32,800     $ 50.22     $ 416,560  

02/29/2016(4)

                                                    8,200                     $ 416,970  

02/29/2016(5)

                            0       8,200       16,400                             $ 416,970  

Nicholas I. Fink

                                                                               

02/29/2016(2)

  $ 0     $ 331,500     $ 663,000                                                          

02/29/2016(3)

                                                            27,600     $ 50.22     $ 350,520  

02/29/2016(4)

                                                    6,900                     $ 350,865  

02/29/2016(5)

                0       6,900       13,800                 $ 350,865  

Robert K. Biggart

                                                                               

02/29/2016(2)

  $ 0     $ 315,250     $ 630,500                                                          

02/29/2016(3)

                                                            23,600     $ 50.22     $ 299,720  

02/29/2016(4)

                                                    5,900                     $ 300,015  

02/29/2016(5)

                            0       5,900       11,800                             $ 300,015  

 

  (1) For stock options awarded on February 29, 2016, the grant date fair value is based on the Black-Scholes value of $12.70. The grant date fair value of PSAs and RSUs is determined based upon the average of the high and low prices of the Company’s common stock on the grant date (for February 29, 2016 awards, $50.85 and for March 11, 2016 award to Mr. Wyatt, $51.175). Grant date fair values of PSAs and RSUs are computed in accordance with FASB ASC Topic 718. For assumptions used in determining these values, see note 13 to the consolidated financial statements contained in the Company’s Form 10-K.

 

  (2) Amounts in this row reflect the range of potential payments under the Fortune Brands Home & Security, Inc. Annual Executive Incentive Compensation Plan. The target payout for Messrs. Klein, Wyatt, Randich, Fink and Biggart is based on target awards of 130%, 85%, 70%, 65% and 65%, respectively, of base salary as of December 31, 2016. See pages 28-29 of the CD&A for further information regarding the Annual Executive Incentive Compensation Plan.

 

  (3) This row reflects the number of stock options granted under the Fortune Brands Home & Security, Inc. 2013 Long-Term Incentive Plan (the “LTIP”) and the grant date fair value of the stock options on the grant date. These stock options vest ratably in three equal annual installments, subject to continued employment through the applicable vesting dates.

 

  (4) The amounts in this row reflect the number of RSUs that were awarded under the LTIP and will vest in three equal annual installments, subject to continued employment through the applicable vesting dates. For certain executives, these awards were subject to achievement of a 2016 EPS goal of $.25, which was intended to qualify these awards as “performance-based compensation” under Section 162(m) of the Code.

 

  (5) The amounts in this row reflect the range of potential payouts for PSAs that were awarded under the LTIP for the 2016-2018 performance period. The performance goals for the 2016-2018 PSAs are EPS (weighted 75%) and average ROIC (weighted 25%).

 

  (6) For Mr. Wyatt, the amounts in this row reflect the number of RSUs that were awarded as a retention equity award. 25% percent of the award vested in December 2016, 25% will vest in June 2017 and the remaining 50% will vest in December 2017, subject to continued employment through the applicable vesting dates.

 

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OUTSTANDING EQUITY AWARDS AT 2016 FISCAL YEAR-END  
    Option Awards     Stock Awards  
Name  

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

(1)

   

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable

(2)

   

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options (#)

   

Option

Exercise

Price ($)

   

Option

Expiration

Date

   

Number

of

Shares

or Units

of

Stock

Held

that

Have

Not

Vested

(#)(3)

   

Market

Value of

Shares or

Units of

Stock

Held that

Have Not

Vested($)(4)

   

Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)(5)

   

Equity

Incentive

Plan

Awards:

Market or

Payout

Value of

Unearned

Shares,

Units or

Other

Rights That

Have Not

Vested($)(6)

 

Christopher J. Klein

    0       131,200             $ 50.22       2/28/2026       64,499     $ 3,448,117       65,000     $ 3,474,900  
      44,167       88,333             $ 47.87       2/23/2025                                  
      72,133       36,067             $ 44.73       2/24/2024                                  
      135,600       0             $ 33.10       2/25/2023                                  
      189,700       0             $ 19.46       2/21/2022                                  
      155,700       0             $ 12.30       10/04/2021                                  
      179,830       0             $ 13.757       2/22/2021                                  

E. Lee Wyatt, Jr.

    0       49,900             $ 50.22       2/28/2026       55,300     $ 2,956,338       25,400     $ 1,357,884  
      17,700       35,400             $ 47.87       2/23/2025                                  
      29,533       14,767             $ 44.73       2/24/2024                                  
      59,500       0             $ 33.10       2/25/2023                                  
      86,200       0             $ 19.46       2/21/2022                                  
      88,100       0             $ 12.30       10/4/2021                                  

David M. Randich

    0       32,800             $ 50.22       2/28/2026       65,800     $ 3,517,668       15,900     $ 850,014  
      10,534       21,066             $ 47.87       2/23/2025                                  
      17,400       8,700             $ 44.73       2/24/2024                                  
      33,400       0             $ 33.10       2/25/2023                                  
      15,400       0             $ 19.46       2/21/2022                                  

Nicholas I. Fink

    0       27,600             $ 50.22       2/28/2026       27,633     $ 1,477,260       14,100     $ 753,786  
      10,000       20,000             $ 45.65       7/27/2025                                  

Robert K. Biggart

    0       23,600             $ 50.22       2/28/2026       11,800     $ 630,828       11,800     $ 630,828  
      8,134       16,266             $ 47.87       2/23/2025                                  
      13,933       6,967             $ 44.73       2/24/2024                                  

 

  (1) Each outstanding stock option granted that was vested and exercisable on December 31, 2016 is listed in this column.

 

  (2) Each outstanding stock option that was not yet vested and exercisable on December 31, 2016 is listed in this column. All stock options listed in this column were granted on February 24, 2014, February 23, 2015, July 27, 2015 or February 29, 2016. All stock options granted on these dates vest in three equal annual installments. The chart below reflects the number of outstanding stock options that will vest during each of 2017, 2018 and 2019 (assuming each NEO’s continued employment).

 

       Number of Stock Options Vesting by Year  
Name          2017                  2018                  2019        

Christopher J. Klein

     123,967          87,900          43,733    

E. Lee Wyatt, Jr.

     49,101          34,333          16,633    

David M. Randich

     30,167          21,466          10,933    

Nicholas I. Fink

     19,200          19,200          9,200    

Robert K. Biggart

     22,967          15,999          7,867    

 

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  (3) Each outstanding RSU that had not yet vested as of December 31, 2016 is listed in this column. All of the RSUs listed in the column were granted on February 24, 2014, February 23, 2015, April 28, 2015, July 27, 2015, February 29, 2016 or March 11, 2016. All RSUs vest in three equal annual installments except for the grants made to Mr. Randich on April 28, 2015 and Mr. Wyatt on March 11, 2016. Mr. Randich’s retention RSU award vests 50% in 2017 and 25% in 2018 and 2019 and Mr. Wyatt’s retention RSU award vests 25% in December 2016, 25% in June 2017 and 50% in December 2017. The chart below reflects the number of outstanding RSUs that will vest during 2017, 2018 and 2019 (assuming each NEO’s continued employment).

 

       Number of RSUs Vesting by  Year  
Name        2017              2018              2019      

Christopher J. Klein

     31,900        21,666        10,933  

E. Lee Wyatt, Jr.

     42,667        8,466        4,167  

David M. Randich

     32,767        17,800        15,233  

Nicholas I. Fink

     12,666        12,667        2,300  

Robert K. Biggart

     5,900        3,933        1,967  

 

  (4) This column reflects the value of the outstanding RSUs that have not yet vested (using the December 30, 2016 closing price of the Company’s common stock of $53.46).

 

  (5) The amounts reported in this column are based on achieving target performance goals for PSAs granted in 2015 and 2016. The PSAs vest based on the Company’s performance over the three year performance period and are subject to the executive’s continued employment through the end of the performance period. The CD&A on pages 18-33 and the footnotes to the table titled “Grants of Plan-Based Awards” on page 35 provides additional detail on the PSAs granted in 2016. The chart below reflects the target number of outstanding PSAs as of December 31, 2016 (assuming each NEO’s continued employment).

 

       Number of PSAs Outstanding by Performance  Period  
Name    2015-2017      2016-2018  

Christopher J. Klein

     32,200        32,800  

E. Lee Wyatt, Jr.

     12,900        12,500  

David M. Randich

     7,700        8,200  

Nicholas I. Fink

     7,200        6,900  

Robert K. Biggart

     5,900        5,900  

 

  (6) This column reflects the value of the PSAs (using the December 30, 2016 closing price of the Company’s common stock of $53.46).

 

 

2016 OPTION EXERCISES AND STOCK VESTED  
       Option Awards      Stock Awards  
Name    Number of Shares
Acquired on
Exercise (#)(1)
    

Value

Realized Upon
Exercise ($)(2)

     Number of Shares
Acquired on
Vesting (#)(3)
     Value
Realized on
Vesting  ($)(4)
 

Christopher J. Klein

     380,000        18,021,202        57,836        3,044,599  

E. Lee Wyatt, Jr.

     150,000        7,693,471        33,959        1,799,610  

David M. Randich

     130,600        5,511,144        13,985        736,088  

Nicholas I. Fink

     0        0        10,367        655,091  

Robert K. Biggart

     0        0        14,039        756,917  

 

  (1) This column reflects the number of stock options exercised during 2016.

 

  (2) This column reflects the difference between the market value of the shares on the date of exercise and the exercise price of the stock options.

 

  (3) This column reflects the number of shares acquired upon the vesting of RSUs that were granted in 2013, 2014 and 2015 and for Mr. Wyatt includes RSUs granted to him in 2016. This column also reflects the number of shares acquired upon the vesting of PSAs for the 2014-2016 performance period.

 

  (4) This column reflects the value of the shares acquired upon the vesting of RSUs and PSAs, which were calculated using the market value of the shares on the vesting dates.

 

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RETIREMENT AND POST-RETIREMENT BENEFITS

2016 PENSION BENEFITS

 
Name   Plan Name  

Number of

Years

Credited

Service (#)

   

Present

Value of
Accumulated
Benefit ($)

(2)(3)

    Payments
During
Last
Fiscal
Year(4)
 

Christopher J. Klein

  Moen Incorporated Pension Plan(1)     13.75     $ 430,000       0  
    Fortune Brands Home & Security, Inc. Supplemental Retirement Plan     13.75     $ 3,604,000       0  

E. Lee Wyatt, Jr.

  None     N/A       N/A       0  

David M. Randich

  None     N/A       N/A       0  

Nicholas I. Fink

  None     N/A       N/A       0  

Robert K. Biggart

  None     N/A       N/A       0  

 

  (1) Mr. Klein accrued benefits under the Moen Incorporated Pension Plan, a tax-qualified defined benefit pension plan (the “Moen Plan”) through December 31, 2016. Defined benefit pension benefits and liabilities for eligible Fortune Brands employees are provided under the Moen Plan.

 

  (2) The benefit amounts listed reflect the present value of the accumulated benefit payable in the form of a single life annuity where payments continue for the life of the NEO but cease upon his death. All of the tax-qualified and supplemental non-qualified pension plans provide for payment to be made in a single-life annuity to unmarried participants and in a qualified joint and survivor annuity for married participants. At the time of retirement, participants may elect, among other forms of payment, a reduced annuity in the joint and survivor form, which provides payments over the life of the participant and a named beneficiary.

 

  (3) The amounts listed are based on compensation and years of service as of December 31, 2016. The present value of accumulated plan benefits is calculated based on assumptions in accordance with FASB ASC 715, which reflects the updated mortality table to the 2016 Static Mortality Table for Annuitants per 1.430(h)(3)-1(e) and a discount rate of 4.40% for eligible participants in the Moen Plan and a discount rate of 4.50% for eligible participants in the Fortune Brands Home & Security Supplemental Retirement Plan.

 

  (4) None of the tax-qualified defined benefit pension and non-qualified supplemental retirement plans allow in-service distributions.

Tax-Qualified Pension Benefits. Mr. Klein was the only NEO accruing benefits under the Moen Plan in 2016. Effective January 1, 2017, the Company froze all future benefit accruals to all participating employees, including Mr. Klein.

Mr. Klein received pension benefit accruals through December 31, 2016 using the following formula: 1.75% of final average earnings multiplied by years of benefit service as of December 31, 2007, plus 1% of final average earnings multiplied by years of benefit service on and after January 1, 2008. Payment of his benefit would be unreduced after attaining age 62, however, he could commence payment of his benefit as early as age 55. Early commencement would be calculated using a reduction of 6% per year prior to the attainment of age 62.

Messrs. Wyatt, Fink, Biggart and Randich are not eligible to participate in a tax-qualified defined benefit pension plan because their hire or transfer dates, as applicable, occurred after the date the plans were frozen with respect to new participants.

Non-Qualified Pension Benefits. Fortune Brands maintains a supplemental retirement plan. The supplemental plan pays the difference between the benefits payable under the Moen Plan and the amount that would have been paid if the Code did not have a limitation on the amount of compensation permitted for inclusion of the calculation of benefits. The supplemental plan is an unfunded, non-qualified retirement plan, available to certain highly-compensated employees that participate in the Moen Plan. As Mr. Klein is the only NEO that accrued pension benefits under the Moen Plan through December 31, 2016, he is the only NEO that accrued pension benefits under the supplemental plan. Effective January 1, 2017, the Company froze all future benefit accruals in the supplemental plan, including for Mr. Klein. The present value of the accumulated benefits under the supplemental plan will continue to fluctuate after the freeze date based on changes in interest rates and actuarial assumptions.

Under the supplemental plan, payment of benefits commences at termination of employment following attainment of age 55, subject to any delay required under Section 409A of the Code. Additionally, early commencement of benefits would be calculated using a reduction of 6% per year prior to the attainment of age 62.

 

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