DEF 14A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

 

 

Filed by the Registrant                               Filed by a Party other than the Registrant  

Check the appropriate box:

 

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

Zoetis Inc.

(Name of Registrant as Specified In Its Charter)

 

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

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
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Title of each class of securities to which transaction applies:

 

     

  (2)  

Aggregate number of securities to which transaction applies:

 

     

  (3)  

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

 

     

  (4)  

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  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
  (1)  

Amount previously paid:

 

     

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Form, Schedule or Registration Statement No.:

 

     

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Date Filed:

 

     

 

 

 


Table of Contents

LOGO


Table of Contents

Zoetis Inc.

10 Sylvan Way

Parsippany, NJ 07054

   LOGO

NOTICE OF 2018 ANNUAL MEETING OF SHAREHOLDERS

 

 

WHEN

Tuesday, May 15, 2018

10:00 a.m. Eastern Time

 

WHERE

Hilton Short Hills

41 John F. Kennedy Parkway

Short Hills, New Jersey 07078

 

RECORD DATE

Close of Business on March 21, 2018

 

   

 

ITEMS OF BUSINESS

 

1.   Election of Class II Directors until the 2021 Annual Meeting of Shareholders for a three-year term as set forth in this proxy statement

 

2.  An advisory vote to approve the company’s executive compensation (Say on Pay)

 

3.  Ratification of the appointment of KPMG LLP as the company’s independent registered public accounting firm for 2018

 

4.  Such other business as may properly come before the Annual Meeting of Shareholders

 

 

 

HOW TO VOTE

 

Shareholders of record on the Record Date are entitled to vote in the following ways:

 

 

LOGO

 

   

LOGO

 

   

LOGO

 

   

LOGO

 

 

Call 1 (800) 652-8683

(toll free) in the

  United States or Canada  

   

 

Visit

www.envisionreports.com/zts

   

 

Return a properly

completed, signed and

dated proxy card

   

 

Attend the Annual Meeting

of Shareholders in person

and vote your shares

Sincerely yours,

 

 

LOGO

Heidi C Chen

Executive Vice President,

General Counsel and Corporate Secretary

April 2, 2018

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2018 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 15, 2018:

 

Zoetis Inc.’s Proxy Statement and Annual Report on Form 10-K for the year ended December 31, 2017 are available online at www.edocumentview.com/ZTS. We are furnishing proxy materials to our shareholders primarily via “Notice and Access” delivery. On or about April 2, 2018, we mailed to our shareholders a notice of Internet availability of proxy materials. This notice contains instructions on how to access our Proxy Statement and 2017 Annual Report and vote online.

 


Table of Contents

TABLE OF CONTENTS

 

 

PROXY SUMMARY

 

   

 

1

 

 

 

 

2018 Annual Meeting

    1  

 

2017 Business Highlights

    1  

 

Meeting Agenda Items

    2  

CORPORATE GOVERNANCE AT ZOETIS

 

   

 

4

 

 

 

ITEM 1 — ELECTION OF DIRECTORS

 

   

 

4

 

 

 

 

Information about Directors

    5  

 

Key Corporate Governance Features

    12  

 

Corporate Governance Principles and Practices

    13  

 

Compensation of Directors

    18  

EXECUTIVE COMPENSATION

 

   

 

21

 

 

 

ITEM 2 — ADVISORY VOTE TO APPROVE OUR EXECUTIVE COMPENSATION (SAY ON PAY)

 

   

 

21

 

 

 

 

Compensation Discussion and Analysis

    22  

 

Report of the Compensation Committee

    44  

 

Executive Compensation Tables

    45  

 

Equity Compensation Plans

    55  

AUDIT COMMITTEE MATTERS

 

   

 

56

 

 

 

 

 

ITEM 3 — RATIFICATION OF APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2018

 

   

 

56

 

 

 

 

KPMG Fees and Services

    56  

 

Policy on Pre-Approval of Audit Firm Services

    57  

 

Report of the Audit Committee

    58  

 

OWNERSHIP OF OUR COMMON STOCK

 

   

 

59

 

 

 

 

Stock Ownership Tables

    59  

 

Section  16(a) Beneficial Ownership Reporting Compliance

    60  

TRANSACTIONS WITH RELATED PERSONS

 

   

 

61

 

 

 

 

Policy Concerning Related Person Transactions

    61  

 

Related Person Transactions

    61  

INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

 

   

 

62

 

 

 

 

Annual Meeting Information

    62  

 

How to View Proxy Materials Online

    62  

 

How to Vote by Proxy

    63  

 

Revocation of Proxies

    63  

 

Voting at the Meeting

    63  

 

Quorum and Required Vote

    64  

 

Effect of Not Casting Your Vote

    64  

 

Cost of Proxy Solicitation

    65  

 

Availability of Voting Results

    65  

 

Questions

    65  

INFORMATION ABOUT SUBMITTING SHAREHOLDER PROPOSALS AND OUR 2019 ANNUAL MEETING

 

   

 

66

 

 

 

 

 

 

As used in this proxy statement, the terms “we”, “us”, “our”, the “company” or “Zoetis” refer to Zoetis Inc.

 

 

ZOETIS 2018 PROXY STATEMENT


Table of Contents

 

PROXY SUMMARY

 

This summary highlights certain information in this proxy statement. As it is only a summary, please review the complete Zoetis Inc. Proxy Statement and 2017 Annual Report before you vote.

2018 ANNUAL MEETING

 

 

Time and Date

 

  

 

Tuesday, May 15, 2018, at 10:00 a.m. EDT

 

   

 

Place

 

  

 

Hilton Short Hills

41 John F. Kennedy Parkway

Short Hills, New Jersey 07078

 

   

 

Record Date

 

  

 

Close of business on March 21, 2018

 

   

 

Voting

 

  

 

Shareholders on the record date are entitled to one vote per share on each matter to be voted upon at the Annual Meeting.

 

   

 

Admission

  

 

We do not require tickets for admission to the meeting, but we do limit attendance to shareholders on the record date or their proxy holders. Please bring proof of your common share ownership, such as a current brokerage statement, and photo identification.

 

   

2017 BUSINESS HIGHLIGHTS

 

In 2017, our leadership team once again drove strong operating performance based on the three interconnected capabilities that have been critical to our success since becoming a public company: direct customer relationships, innovative research and development, and high-quality manufacturing and supply. We continued to deliver on our value proposition of growing revenue faster than the market and growing our adjusted net income faster than revenue; targeting key investment opportunities for growth; and returning excess capital to our shareholders.

 

 

  LOGO

 

1  Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange. Page 43 of our 2017 Annual Report on Form 10-K, filed with the SEC on February 15, 2018, contains a reconciliation of this non-GAAP financial measure to reported results under GAAP for 2017.
2 Adjusted net income and adjusted diluted EPS (non-GAAP financial measures) are defined as reported net income attributable to Zoetis and reported diluted EPS, excluding purchase accounting adjustments, acquisition-related costs and certain significant items such as costs associated with implementing organizational changes resulting from our Business Review and costs associated with becoming an independent public company. Pages 45 to 50 of our 2017 Annual Report on Form 10-K, filed with the SEC on February 15, 2018, contain a reconciliation of these non-GAAP financial measures to reported results under GAAP for 2017.

 

  ZOETIS 2018 PROXY STATEMENT   1


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PROXY SUMMARY

 

MEETING AGENDA ITEMS

 

 

 

  ITEM 1  

 

ELECTION OF DIRECTORS

 

You are being asked to elect 4 directors – Sanjay Khosla, Willie M. Reed, Linda Rhodes and William C. Steere, Jr. – to hold office until the 2021 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified, or until their earlier death, resignation or removal.

SUMMARY INFORMATION ABOUT OUR DIRECTOR NOMINEES AND CONTINUING DIRECTORS

Additional information about our director nominees and continuing directors can be found under “Information About Directors” on pages 5 to 11.

 

   

Juan 

Ramón 

Alaix 

 

 

Paul M.
Bisaro

 

 

Frank A.
D’Amelio

 

 

Sanjay 

Khosla 

 

 

Michael B. 

McCallister 

 

 

Gregory 

Norden 

 

 

Louise M. 

Parent

 

 

Willie M. 

Reed 

 

 

Linda 

Rhodes 

 

 

Robert W. 
Scully 

 

 

William C.
Steere, Jr.

 

 

Experience, Skills, Expertise

 

Academia

                             

 

 

 

       

 

Animal Health

 

 

     

 

 

 

     

 

     

 

 

 

     

 

 

Consumer Products

         

 

 

 

     

 

                 

 

 

Global Businesses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         

 

 

 

 

Life Sciences

 

 

 

 

 

 

 

 

     

 

     

 

 

 

     

 

 

Manufacturing & Supply

         

 

                               

 

Marketing & Sales

 

 

 

 

     

 

 

 

                     

 

 

Mergers & Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         

 

 

 

 

Other Public Company Board Member

     

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

Public Company CEO

 

 

 

 

         

 

             

 

     

 

Public Company CFO or Finance and Accounting

 

         

 

 

         

 

 

             

 

 

   

Public Company GC, Compliance, or Corporate Governance

 

     

 

 

                 

 

 

               

 

Regulated Industries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

Research & Development

 

 

 

 

                     

 

 

 

     

 

 

Demographic Background

 

Board Tenure

 

Full Years

 

 

 

5

 

 

 

2

 

 

 

5

 

 

 

4

 

 

 

5

 

 

 

5

 

 

 

4

 

 

 

4

 

 

 

<1

 

 

 

4

 

 

 

5

 

Age

 

Years Old

 

 

 

66

 

 

 

57

 

 

 

60

 

 

 

66

 

 

 

65

 

 

 

60

 

 

 

67

 

 

 

63

 

 

 

68

 

 

 

68

 

 

 

81

 

Gender

 

Male

 

 

 

M

 

 

 

M

 

 

 

M

 

 

 

M

 

 

 

M

 

 

 

M

     

 

M

     

 

 

M

 

 

 

M

 

Female

                         

 

F

     

 

F

       

 

LGBTQ (optional reporting)

 

Identify as LGBTQ

                                           

 

Race, Ethnicity (optional reporting)

 

African American/ Black

                             

 

           

 

Asian, Hawaiian or Pacific Islander

             

 

                           

 

White/Caucasian

 

 

 

 

 

 

     

 

 

 

 

 

     

 

 

 

 

 

 

Hispanic/Latino

 

 

                                       

 

Native American

                                           

 

Other

                                           

 

Did not wish to identify

                                           

 

LOGO    Director Nominee           LOGO    Continuing Director

 

 

 

ITEM 1 RECOMMENDATION: OUR BOARD OF DIRECTORS RECOMMENDS THAT  YOU VOTE FOR THE ELECTION OF MR. KHOSLA, DR. REED, DR. RHODES AND MR. STEERE

 

  

 

2   ZOETIS 2018 PROXY STATEMENT


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PROXY SUMMARY

 

 

 

 

  ITEM 2  

  

ADVISORY VOTE TO APPROVE OUR EXECUTIVE COMPENSATION (SAY ON PAY)

 

You are being asked to approve, on an advisory basis, our executive officer compensation program as described in the Compensation Discussion and Analysis and the Executive Compensation Tables and accompanying narrative disclosure, as provided on pages 22 to 54 of this proxy statement. We believe that our program incentivizes and rewards our leadership for increasing shareholder value and aligns the interests of our leadership with those of our shareholders on an annual and long-term basis.

  

Among the Compensation Committee’s compensation-related actions in 2017, the Committee revised the cash-based metric under our Annual Incentive Plan (“AIP”). The Committee reviewed the cash-based metric (weighted 20%, with revenue and adjusted diluted EPS each comprising 40%) used to determine 2016 AIP payouts and approved a change to the use of free cash flow beginning in 2017. In 2016, the cash-based metric was defined as our adjusted net income plus depreciation, amortization and stock-based compensation within adjusted income, minus capital expenditures and certain one-time cash costs (after taxes), plus or minus foreign exchange impacts and changes in accounts receivable, inventories and accounts payable. Free cash flow is defined as U.S. GAAP operating cash flow, minus capital expenditures (adjusted to exclude the impact of extraordinary, one-time events, if any). As free cash flow is a widely used capital management metric, this update was made to bring greater consistency to financial performance evaluation and foster increased transparency for employees and shareholders.

 

   

 

ITEM 2 RECOMMENDATION: OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF OUR EXECUTIVE COMPENSATION.

 

    

 

 

  ITEM 3  

  

RATIFICATION OF APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2018

 

You are being asked to ratify our Audit Committee’s appointment of KPMG LLP (“KPMG”) as our independent registered public accounting firm for 2018. KPMG has been our auditor since 2013.

  

 

The fees paid to KPMG are detailed on page 56.

 

One or more representatives of KPMG will be present at the Annual Meeting. They will be given the opportunity to make a statement if they desire to do so, and they will be available to respond to appropriate questions.

 

   

 

ITEM 3 RECOMMENDATION: OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF KPMG AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2018.

 

    

 

  ZOETIS 2018 PROXY STATEMENT   3


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CORPORATE GOVERNANCE AT ZOETIS

 

 

 

 

  ITEM 1  

 

 

 

   ELECTION OF DIRECTORS

Our Board of Directors currently consists of eleven directors divided into three classes. The directors hold office for staggered terms of three years (and until their successors are elected and qualified, or until their earlier death, resignation or removal). One of the three classes is elected each year to succeed the directors whose terms are expiring.

The directors in Class II, whose terms expire at the 2018 Annual Meeting of Shareholders, are Sanjay Khosla, Willie M. Reed, Linda Rhodes and William C. Steere, Jr. Each of these directors has been nominated by the Board of Directors, upon the recommendation of its Corporate Governance Committee, to stand for election for a term expiring at the 2021 Annual Meeting of Shareholders. Each of these nominees has consented to being named in this proxy statement as a Board nominee and to serve if elected.

The Corporate Governance Committee considers a number of factors and principles in determining the slate of director nominees for election to the company’s Board, as discussed in the section titled “Director Nominations” below. The Corporate Governance Committee and the Board have evaluated each of Mr. Khosla, Dr. Reed, Dr. Rhodes and Mr. Steere against the factors and principles Zoetis uses to select nominees for director. Based on this evaluation, the Corporate Governance Committee and the Board have concluded that it is in the best interests of Zoetis and its shareholders for each of Mr. Khosla, Dr. Reed, Dr. Rhodes and Mr. Steere to continue to serve as a director of Zoetis.

Our Board has appointed Heidi C. Chen and Katherine H. Walden as proxies to vote your shares on your behalf. The proxies intend to vote for the election of Mr. Khosla, Dr. Reed, Dr. Rhodes and Mr. Steere unless you indicate otherwise on your proxy card, voting instruction form or when you vote by telephone or online. Each candidate has consented to being named in this proxy statement and serving as a director if elected. However, if any nominee is not able to serve, the Board can either designate a substitute nominee to serve in his or her place as a director or reduce the size of the Board. If the Board nominates another individual, the persons named as proxies may vote for such substitute nominee.

In order to be elected, a nominee must receive more votes cast “For” than “Against” his or her election. Abstentions and broker non-votes will have no effect on the outcome of the vote. See “Corporate Governance Principles and Practices—Majority Voting Standard for Director Elections” for more information about our procedures if a nominee fails to receive a majority of the votes in an uncontested election.

Our Board of Directors recommends that you vote on your proxy card or voting instruction form “For” the election of each of the Board’s nominees for election – Sanjay Khosla, Willie M. Reed, Linda Rhodes and William C. Steere, Jr. – to serve as directors of Zoetis until our 2021 Annual Meeting and until their successors are elected and qualified, or until their earlier death, resignation or removal. The Board believes that these four nominees have a strong track record of being responsible stewards of shareholders’ interests and of bringing extraordinarily valuable insight, perspective and expertise to the Board. In each individual’s biography set forth on pages 6 and 7, we have highlighted specific experience, qualifications and skills that led the Board to conclude that each individual should continue to serve as a director of Zoetis.

 

   

 

ITEM 1 RECOMMENDATION: OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF MR. KHOSLA, DR. REED, DR. RHODES AND MR. STEERE AS DIRECTORS.

 

   

 

 

4   ZOETIS 2018 PROXY STATEMENT


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CORPORATE GOVERNANCE AT ZOETIS

 

INFORMATION ABOUT DIRECTORS

OUR DIRECTORS

The following table sets forth certain information regarding the director nominees and the directors of the company whose terms will continue after the 2018 Annual Meeting of Shareholders.

 

  Name        Age(1)                      Position(s) with the Company                     Term
Expires
 

 

 

 

  Juan Ramón Alaix

 

 

  

 

 

 

 

 

 

 

66     

 

 

 

 

 

 

 

  

 

 

Chief Executive Officer and Director

 

 

  

 

 

 

 

 

2019   

 

 

 

 

 

 

 

 

 

  Paul M. Bisaro*

 

 

  

 

 

 

 

 

57     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2019   

 

 

 

 

 

 

 

 

 

  Frank A. D’Amelio*

 

 

  

 

 

 

 

 

60     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2019   

 

 

 

 

 

 

 

 

 

  Sanjay Khosla*

 

 

  

 

 

 

 

 

66     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2018(2)

 

 

 

 

 

 

 

 

 

  Michael B. McCallister*

 

 

  

 

 

 

 

 

65     

 

 

 

 

 

 

  

 

Non-Executive Chairman of the Board and Director

 

 

  

 

 

 

 

 

2019   

 

 

 

 

 

 

 

 

 

  Gregory Norden*

 

 

  

 

 

 

 

 

60     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2020   

 

 

 

 

 

 

 

 

 

  Louise M. Parent*

 

 

  

 

 

 

 

 

67     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2020   

 

 

 

 

 

 

 

 

 

  Willie M. Reed*

 

 

  

 

 

 

 

 

63     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2018(2)

 

 

 

 

 

 

 

 

 

  Linda Rhodes*

 

 

  

 

 

 

 

 

68     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2018(2)

 

 

 

 

 

 

 

 

 

  Robert W. Scully*

 

 

  

 

 

 

 

 

68     

 

 

 

 

 

 

  

 

Director

 

 

  

 

 

 

 

 

2020   

 

 

 

 

 

 

 

 

 

  William C. Steere, Jr.*

 

 

 

  

 

 

 

 

 

 

81     

 

 

 

 

 

 

 

 

  

 

Director

 

 

 

  

 

 

 

 

 

 

2018(2)

 

 

 

 

 

 

 

 

 

* Independent Director

 

(1) As of April 2, 2018.

 

(2) Nominee for re-election at the 2018 Annual Meeting for a term expiring in 2021.

 

  ZOETIS 2018 PROXY STATEMENT   5


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CORPORATE GOVERNANCE AT ZOETIS

 

OUR DIRECTOR NOMINEES

 

 

 

LOGO

 

 

SANJAY KHOSLA

 

Age 66

Director since June 2013

 

 

Specific qualifications, experience, skills and expertise:

 

  International business and management experience

 

  Global operational experience, including in developing markets

 

  Experience in animal health industry

 

  Public company director experience

Former Executive Vice President and President, Developing Markets of Mondelēz International from 2007 to 2013. Mr. Khosla brings more than 35 years of international business experience from his career with food, beverage and consumer product leaders such as Mondelēz, Kraft and Unilever, where he managed various business units, particularly in developing markets. As President, Kraft Foods, Developing Markets (now Mondelēz International) from 2007 to 2013, Mr. Khosla transformed the $5 billion business into a $16 billion business, while significantly improving profitability. He also has animal health experience from his three-year tenure from 2004 to 2007 as Managing Director of Fonterra Brands and Food Service, a multinational dairy cooperative based in New Zealand. Mr. Khosla serves on the board of Iconix Brand Group, Inc., a company that licenses and markets a portfolio of consumer brands. From October 2008 until June 2015, he served on the board of Best Buy, Inc., a specialty retailer of consumer electronics, personal computers, entertainment software and appliances, and from 2002 to 2017, he served on the board of NIIT, Ltd., a company involved in technology-related educational services. Mr. Khosla holds a bachelor’s degree in electrical engineering from the Indian Institute of Technology in New Delhi. Mr. Khosla also completed the Advance Management Program at Harvard Business School. Mr. Khosla is currently a senior fellow and adjunct professor at the Kellogg School of Management, Northwestern University and a Senior Advisor for the Boston Consulting Group. Mr. Khosla is also CEO of Bunnik LLC, a management consulting firm. Mr. Khosla’s international business and management experience, along with his public company board experience, make him a valuable member of our Board.

 

 

 

LOGO

 

 

WILLIE M. REED

 

Age 63

Director since March 2014

 

 

Specific qualifications, experience, skills and expertise:

 

  Doctorate in veterinary medicine and pathology

 

  Avian pathology, diagnostic medicine and infectious diseases expert

 

  Expertise in veterinary medicines and vaccines

 

  Thought leadership in the animal health community

 

  Senior management experience

Dean of the College of Veterinary Medicine at Purdue University since 2007. Dr. Reed has more than 30 years of experience in animal health and veterinary medicine, gained during his tenure at Purdue University and Michigan State University, and as a Diplomate of the American College of Veterinary Pathologists and Charter Diplomate of the American College of Poultry Veterinarians. Dr. Reed has served as President of the Association of American Veterinary Medical Colleges, President of the American Association of Veterinary Laboratory Diagnosticians, President of the American Association of Avian Pathologists and Chair of the American Veterinary Medical Association Council on Research. He has served on a number of committees for the National Institutes of Health and the United States Department of Agriculture. Dr. Reed has a Doctor of Veterinary Medicine degree from Tuskegee University, and a Ph.D. in Veterinary Pathology from Purdue University. Dr. Reed’s medical expertise, his expertise in veterinary medicines and vaccines and his thought leadership in the animal health community make him a valuable member of our Board.

 

6   ZOETIS 2018 PROXY STATEMENT


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CORPORATE GOVERNANCE AT ZOETIS

 

 

 

 

 

LOGO

 

 

LINDA RHODES

 

Age 68

Director since August 2017

 

 

Specific qualifications, experience, skills and expertise:

 

  Broad animal health industry experience, including as CEO of animal health start-up company and founder of an animal health contract research organization

 

  Experience in private veterinary practice

 

  Doctorate in veterinary medicine

 

  Public company director experience

Former Chief Scientific Officer of Aratana Therapeutics from 2012 to 2016 and served as Chief Executive Officer and Board member from 2011 to 2012. Dr. Rhodes has extensive experience as a research scientist, academic, veterinary practitioner and business leader, spanning nearly 30 years across the animal health industry. She is a founder of AlcheraBio, LLC, a veterinary contract research organization, and held various research positions with Merial, Merck and Company, and Sterling-Winthrop Drug Company. Dr. Rhodes also held several teaching positions and worked as a bovine veterinarian in private practice for many years. Dr. Rhodes served as a member of the Board of Directors of ImmuCell Corporation from 2005 until 2017. She is currently an adjunct faculty member of the Graduate Program in Endocrinology and Animal Biosciences at Rutgers University in New Brunswick, New Jersey. She serves on the Scientific Advisory Board of the Found Animals Foundation and on the Board of Directors of the Alliance for Contraception in Cats and Dogs. Dr. Rhodes earned her Ph.D. in Physiology from Cornell University and her V.M.D. from the University of Pennsylvania. Dr. Rhodes’ experience as a research scientist, academic, veterinary practitioner, entrepreneur and business leader, her public company board experience and her knowledge of the animal health business make her a valuable member of our Board.

 

 

 

LOGO

 

 

WILLIAM C. STEERE, JR.

 

Age 81

Director since January 2013

 

 

Specific qualifications, experience, skills and expertise:

 

  Senior management experience, including as former CEO of Pfizer

 

  Knowledge of animal health business

 

  Global business experience

 

  Public company director experience

Chairman Emeritus of Pfizer, a global biopharmaceutical company, since July 2001. Mr. Steere joined Pfizer in 1959 and held various positions, including Chief Executive Officer from 1991 until 2000, Chairman of the board of directors from 1992 until 2001, and member of the board of directors until 2011. Mr. Steere also served on the boards of Dow Jones & Company, Inc. until 2007, MetLife, Inc. until 2010 and Health Management Associates, Inc. until 2014. Mr. Steere’s business and senior management experience, his public company board experience and his knowledge of the animal health business obtained through his service with Pfizer make him a valuable member of our Board.

 

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CORPORATE GOVERNANCE AT ZOETIS

 

CONTINUING DIRECTORS

 

 

 

LOGO

  

 

JUAN RAMÓN ALAIX

 

Age 66

Director since July 2012

 

 

Specific qualifications, experience, skills and expertise:

 

  Knowledge and leadership of our company as its current CEO and former President of Pfizer Animal Health

 

  Experience in animal health industry

 

  Global business experience

 

  Background in economics

Chief Executive Officer of our company since July 2012. From 2006 to 2012, Mr. Alaix served as President of Pfizer Animal Health, and was responsible for its overall strategic direction and financial performance. Under his leadership, the company grew to become a $4.3 billion enterprise in 2012. Mr. Alaix has more than 35 years’ experience in finance and management, including 20 years in the human pharmaceutical industry. He joined Pfizer in 2003 and held various positions, including Regional President of Central/Southern Europe for Pfizer’s pharmaceutical business. Prior to that, Mr. Alaix held various positions with Pharmacia, including as Country President of Spain, from 1998 until Pharmacia’s acquisition by Pfizer in 2003. Earlier in his career he served in general management with Rhône-Poulenc Rorer in Spain and Belgium. In 2013, Mr. Alaix completed a two-year term as President of the International Federation for Animal Health (“IFAH”), now known as HealthforAnimals, and he continues to serve as a member of its board and executive committee. HealthforAnimals represents manufacturers of veterinary medicines, vaccines and other animal health products in both developed and emerging markets. A native of Spain, Mr. Alaix received a graduate degree in economics from the Universidad de Madrid. Mr. Alaix’ experience, including his knowledge and leadership of our company, his business and management experience and his experience in the animal health industry make him a valuable member of our Board.

 

 

 

LOGO

  

 

PAUL M. BISARO

 

Age 57

Director since May 2015

 

 

Specific qualifications, experience, skills and expertise:

 

  Senior management experience, including as former CEO of Actavis plc

 

  Experience in global healthcare and pharmaceutical industries

 

  Expertise in mergers and acquisitions

 

  Public company director experience

President and Chief Executive Officer of Impax Laboratories, a specialty pharmaceutical company, since March 2017. Mr. Bisaro was the Executive Chairman of the board of directors of Allergan plc (formerly Actavis plc) from July 2014 to October 2016. Until June 2014, Mr. Bisaro served as Board Chairman, President and Chief Executive Officer of Actavis, a global pharmaceutical company, (formerly Watson Pharmaceuticals). He was appointed President, Chief Executive Officer and a member of the board of Watson Pharmaceuticals in September 2007; and was later appointed Chairman of the board of Watson Pharmaceuticals in October 2013. Prior to joining Watson, Mr. Bisaro was President, Chief Operating Officer and a member of the board of Barr Pharmaceuticals, Inc., a global specialty pharmaceutical company, from 1999 to 2007. Between 1992 and 1999, Mr. Bisaro served as General Counsel of Barr, and from 1997 to 1999 served in various additional capacities including Senior Vice President – Strategic Business Development. Prior to joining Barr, Mr. Bisaro was associated with the law firm Winston & Strawn and a predecessor firm, Bishop, Cook, Purcell and Reynolds from 1989 to 1992. Mr. Bisaro currently serves on the board of directors of Allergan plc and Impax Laboratories, and on the Board of Visitors of The Catholic University of America’s Columbus School of Law. Mr. Bisaro previously served on the board of Zimmer Biomet Holdings, Inc., a world leader in musculoskeletal health solutions, from 2013 to 2017. Mr. Bisaro holds an undergraduate degree in General Studies from the University of Michigan and a Juris Doctor from The Catholic University of America in Washington, D.C. Mr. Bisaro’s business, management and leadership experience, his understanding of the pharmaceutical industry, and his public company board experience make him a valuable member of our Board.

 

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CORPORATE GOVERNANCE AT ZOETIS

 

 

 

 

 

LOGO

 

 

FRANK A. D’AMELIO

 

Age 60

Director since July 2012

 

 

Specific qualifications, experience, skills and expertise:

 

  Senior management experience

 

  Experience in finance and accounting

 

  Expertise in mergers and acquisitions

 

  Global business experience

 

  Public company director experience

Executive Vice President, Business Operations, and Chief Financial Officer of Pfizer, a global pharmaceutical company, since December 2010, where he serves as a member of Pfizer’s Senior Executive Leadership Team. Mr. D’Amelio joined Pfizer in September 2007 and held various positions, including Senior Vice President and Chief Financial Officer. From November 2006 to August 2007, Mr. D’Amelio held the position of Senior Executive Vice President of Integration and Chief Administrative Officer at Alcatel-Lucent, S.A., a global telecommunications equipment company. Prior to the merger of Alcatel and Lucent Technologies in 2006, Mr. D’Amelio was the Chief Operating Officer of Lucent Technologies, responsible for leading business operations, including sales, the product groups, the services business, the supply chain, information technology operations, human resources and labor relations. In 2001, he was appointed Executive Vice President and Chief Financial Officer of Lucent and in 2004 was promoted to be Executive Vice President, Chief Administrative Officer and Chief Financial Officer and helped lead the company through one of the most challenging periods in the telecom industry’s history and returned the company to profitability. In this role, Mr. D’Amelio was responsible for management and oversight of all financial, accounting, real estate and labor relations operations and the operational aspects of the legal and human resources organizations. Mr. D’Amelio currently serves as a member of the board of Humana Inc., a health care company that offers a wide range of insurance products and health and welfare services, and as chair of its audit committee. He also serves on the board of the Independent College Fund of New Jersey, and formerly served as a member of the National Advisory Board of JPMorgan Chase & Co. Mr. D’Amelio earned his MBA in Finance from St. John’s University and his bachelor’s degree in Accounting from St. Peter’s College. Mr. D’Amelio’s senior management experience and finance expertise, along with his public company board experience, make him a valuable member of our Board.

 

 

 

LOGO

 

 

MICHAEL B. MCCALLISTER

 

Age 65

Director since January 2013;

Board Chair since June 2013

 

 

Specific qualifications, experience, skills and expertise:

 

  Senior management experience, including as former CEO of Humana

 

  Accounting background

 

  Corporate governance experience

 

  Public company director experience

Former Chairman of the Board and CEO of Humana Inc. from 2010 to 2013. Humana is a health care company that offers a wide range of insurance products and health and welfare services. Mr. McCallister joined Humana in 1974, and was its Chief Executive Officer from February 2000 until his retirement on December 31, 2012. During his tenure as CEO, Humana gained a reputation as one of the industry’s leading people-focused innovative companies, leveraging products, processes and technology to help individuals take control of their own health. Mr. McCallister served for many years on the board of the Business Roundtable and is past Chairman of its Health and Retirement Task Force. He is currently on the boards of AT&T, where he serves on the audit committee, and Fifth Third Bank. Mr. McCallister holds a bachelor’s degree in accounting from Louisiana Tech University and an MBA from Pepperdine University. Mr. McCallister’s senior management experience in the health care industry, along with his public company board experience, make him a valuable member of our Board.

 

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CORPORATE GOVERNANCE AT ZOETIS

 

 

 

 

 

LOGO

 

 

GREGORY NORDEN

 

Age 60

Director since January 2013

 

 

Specific qualifications, experience, skills and expertise:

 

  Corporate finance experience, including as former Chief Financial Officer of Wyeth

 

  Experience in global healthcare and pharmaceutical industries

 

  Background in accounting as an audit manager at a major accounting firm

 

  Public company director experience

Former Chief Financial Officer of Wyeth. Prior to his role as Chief Financial Officer of Wyeth, Mr. Norden held various senior positions with Wyeth Pharmaceuticals and American Home Products. Prior to his affiliation with Wyeth, Mr. Norden served as Audit Manager at Arthur Andersen & Co. Mr. Norden currently serves on the boards of Entasis Therapeutics, a leader in the discovery and development of breakthrough anti-infective products; NanoString Technologies, a provider of life science tools for translational research and development of molecular diagnostic products; Royalty Pharma, a leader in the acquisition of revenue-producing intellectual property; and Univision, the leading media company serving Hispanic America. Mr. Norden is a former director of Welch Allyn, where he served until 2015; Lumara Health, where he served until 2014; and Human Genome Sciences, Inc., where he served until 2012. In addition, Mr. Norden is the Managing Director of G9 Capital Group LLC, which invests in early stage ventures and provides corporate finance advisory services. Mr. Norden’s background in finance and experience as a senior executive in the global healthcare and pharmaceutical industries, along with his public company board experience, make him a valuable member of our Board.

 

 

 

LOGO

 

 

LOUISE M. PARENT

 

Age 67

Director since August 2013

 

 

Specific qualifications, experience, skills and expertise:

 

  Experience in corporate governance and board matters

 

  Compliance and risk management experience

 

  Operations and senior management experience as former General Counsel and executive of American Express

 

  Global business experience

 

  Legal background

Former Executive Vice President and General Counsel of American Express Company, a global services company that provides charge and credit card products and travel-related services, from 2003 to 2013. Since early 2014, Ms. Parent has served as Of Counsel at the law firm of Cleary Gottlieb Steen & Hamilton LLP. Ms. Parent brings deep experience in corporate governance and board matters, and in compliance and risk management, gained during her tenure with American Express, where she worked extensively with the Audit, Compensation and Nomination and Governance committees in her role as General Counsel. Ms. Parent also served on the operating committee and global management team of American Express from 2003 through 2013 and was a member of the board of American Express Centurion Bank through 2013. Ms. Parent currently serves on the Supervisory Board of Deutsche Bank AG and on the board of Fidelity National Information Services Inc., a global financial services technology company. Ms. Parent holds a bachelor’s degree from Smith College and a law degree from Georgetown University Law Center. Ms. Parent’s experience in corporate governance, compliance, risk management and global management makes her a valuable member of our Board.

 

10   ZOETIS 2018 PROXY STATEMENT


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CORPORATE GOVERNANCE AT ZOETIS

 

 

 

 

 

LOGO     

 

 

ROBERT W. SCULLY

 

Age 68

Director since June 2013

 

 

Specific qualifications, experience, skills and expertise:

 

  Experience in financial services

 

  Mergers and acquisitions expertise

 

  Global management experience

 

  Public company director experience

 

  Public company experience in risk management, audit and financial reporting

Former member of the Office of the Chairman of Morgan Stanley. Mr. Scully has nearly 35 years of experience in the financial services industry. He served as a member of the Office of the Chairman of Morgan Stanley from 2007 until his retirement in January 2009, where he had previously been Co-President of the firm, Chairman of global capital markets and Vice Chairman of investment banking. Prior to joining Morgan Stanley in 1996, he served as a Managing Director at Lehman Brothers and at Salomon Brothers Inc. He currently serves on the boards of KKR & Co. LP, a private equity and asset management firm, Chubb Limited (formerly ACE Limited), a global property and casualty company, and UBS Group AG, a global financial services company. Previously, he served as a director of Bank of America Corporation, GMAC Financial Services and MSCI Inc. and as a Public Governor of FINRA, Inc., the Financial Industry Regulatory Authority. Mr. Scully holds a bachelor’s degree from Princeton University and an MBA from Harvard Business School, where he currently serves on its Board of Dean’s Advisors. Mr. Scully’s global management experience, financial acumen, business development knowledge and investor insights, along with his public company board experience, make him a valuable member of our Board.

 

  ZOETIS 2018 PROXY STATEMENT   11


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CORPORATE GOVERNANCE AT ZOETIS

 

KEY CORPORATE GOVERNANCE FEATURES

 

 

  Topic

 

 

 

   Zoetis Key Corporate Governance Feature

 

 

 

  Board Independence and Expertise

 

 

 

   All directors are independent other than our CEO

 

   Board consists of highly qualified, experienced and diverse directors with relevant expertise for overseeing our strategy and business

 

 

 

 

  Independent Board Chair

 

 

 

 

 

   Board Chair is an independent director and is elected by Board annually

 

 

 

 

  Board Committees

 

 

 

   Four Board committees: Audit, Compensation, Corporate Governance and Quality and Innovation

 

   All four committees are composed entirely of independent directors

 

 

 

 

  Executive Sessions

 

 

 

   Directors hold regularly scheduled executive sessions, at which directors can discuss matters without management present

 

   Independent Board Chair presides over all executive sessions of the Board

 

 

 

 

  Board Oversight of Risk

 

 

 

 

 

   Risk oversight by full Board and committees

 

 

 

 

  Proxy Access

 

 

 

 

 

   Proactively adopted a proxy access right for shareholders

 

 

 

 

  Board Oversight of Management   Succession

 

 

 

 

 

   Board regularly reviews and discusses succession plans for CEO and other key executives

 

 

 

  Board Self-Evaluation

 

 

 

 

 

   Our Board and each of its committees conduct an annual self-evaluation

 

 

 

 

  Accountability

 

 

 

   In uncontested director elections, our directors are elected by a majority of the votes cast

 

   Each share of common stock is entitled to one vote

 

   Processes in place to facilitate communication with shareholders and other stakeholders

 

   Ongoing communication between our Board (including the Board Chair and committee chairs) and management

 

   Anti-hedging and anti-pledging policies covering directors and employees

 

   Claw-back policy covering incentive compensation paid to executives

 

 

 

 

  Director Stock Ownership

 

 

 

   Each non-employee director is required to hold Zoetis stock worth at least USD $400,000 (including share equivalent units), to be acquired within five years of joining our Board

 

 

 

 

  Open Lines of Communication

 

 

 

   Board promotes open and frank discussions with senior management

 

   Our directors have access to all members of management and other employees and are authorized to hire outside consultants or experts at the company’s expense

 

 

 

 

  Board Refreshment

 

 

 

   Led by the Corporate Governance Committee, the Board regularly reviews the Board’s composition

 

 

 

 

  Director Orientation and

  Continuing Education

 

 

 

 

   Comprehensive orientation for new directors

 

   In-house presentations, third-party courses and field trips for directors

 

 

 

12   ZOETIS 2018 PROXY STATEMENT


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CORPORATE GOVERNANCE AT ZOETIS

 

CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES

DIRECTOR INDEPENDENCE

It is the policy of our company, and a requirement under New York Stock Exchange (“NYSE”) listing standards, that a majority of our Board consists of independent directors. To assist it in determining director independence, our Board has adopted categorical independence standards, referred to as our Director Qualification Standards, which meet the independence requirements of the NYSE. Our Director Qualification Standards can be found on our website at www.zoetis.com under About Us—Corporate Governance.

To be considered “independent” under our Director Qualification Standards, a director must be determined by our Board to have no material relationship with the company other than as a director. In addition, under our Director Qualification Standards, a director is not independent if the director is, or has been within the last three years, an employee of the company or an employee of a member of the company’s consolidated group for financial reporting.

From January 1, 2017 through August 2, 2017, our Board of Directors consisted of ten directors, nine of whom were determined by our Board to be independent under our Director Qualification Standards and one of whom was not independent under those standards. The independent directors during this period were Paul M. Bisaro, Frank A. D’Amelio, Sanjay Khosla, Michael B. McCallister, Gregory Norden, Louise M. Parent, Willie M. Reed, Robert W. Scully and William C. Steere, Jr. The only non-independent director in 2017 was Juan Ramón Alaix, who is not an independent director because he is employed as the company’s CEO.

On August 3, 2017, Linda Rhodes was elected to our Board. Prior to her election, our Board determined that Dr. Rhodes is independent under our Director Qualification Standards.

On February 13, 2018, our Board completed its annual review of director independence and affirmatively determined that Ms. Parent, Dr. Reed, Dr. Rhodes, and Messrs. Bisaro, D’Amelio, Khosla, McCallister, Norden, Scully and Steere are independent under NYSE listing standards and our Director Qualification Standards.

BOARD LEADERSHIP STRUCTURE

Our Corporate Governance Principles, which can be found on our website at www.zoetis.com under About Us—Corporate Governance, provide the Board flexibility in determining its leadership structure. Currently, Juan Ramón Alaix serves as our CEO and Michael B. McCallister serves as Chair of our Board. The Board believes that this leadership structure, which separates the CEO and the Board Chair roles, is optimal at this time because it allows Mr. Alaix to focus on operating and managing our company, while Mr. McCallister can focus on the leadership of the Board. The Board Chair presides over all meetings of our shareholders and of the Board as a whole, including its executive sessions, and performs such other duties as may be designated in our By-laws or by the Board. The Board periodically evaluates our leadership structure and will determine whether continuing the separate roles of CEO and Board Chair is in the best interest of the company and its shareholders based on circumstances existing at the time.

DIRECTOR ATTENDANCE

During 2017, our Board met five times. Each of our directors attended at least 75% of the meetings of the Board and Board committees on which he or she served during 2017. All Board members are expected to attend our Annual Meeting unless an emergency prevents them from doing so. All of our directors attended our 2017 Annual Meeting.

 

  ZOETIS 2018 PROXY STATEMENT   13


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CORPORATE GOVERNANCE AT ZOETIS

 

BOARD COMMITTEE MEMBERSHIP

Our Board has a standing Audit Committee, Compensation Committee, Corporate Governance Committee and Quality and Innovation Committee. The written charter of each of our standing committees is available on our website at www.zoetis.com under About Us—Corporate Governance. Each committee has the authority to hire outside advisors at the company’s expense. All of the members of each of our committees are independent under NYSE listing standards and our Director Qualification Standards, and the members of our Audit Committee and Compensation Committee satisfy the additional NYSE independence requirements for members of audit and compensation committees.

The following table lists the Chair and current members of each committee and the number of meetings held in 2017.

 

        Committee

Name

    Independent            Audit               Compensation      

Corporate

  Governance   

 

Quality and  

  Innovation    

         

Juan Ramón Alaix

 

  no

 

       
         

Paul M. Bisaro

 

  yes

 

    LOGO

 

    LOGO

 

         

Frank A. D’Amelio

 

  yes

 

       
         

Sanjay Khosla

 

  yes

 

    LOGO

 

    LOGO

 

         

Michael B. McCallister

 

  yes

 

      LOGO

 

 
         

Gregory Norden

 

  yes

 

  LOGO

 

  LOGO

 

   
         

Louise M. Parent

 

  yes

 

  LOGO

 

  LOGO

 

   
         

Willie M. Reed

 

  yes

 

      LOGO

 

  LOGO

 

         

Linda Rhodes

 

  yes

 

      LOGO

 

  LOGO

 

         

Robert W. Scully

 

  yes

 

  LOGO

 

  LOGO

 

   
         

William C. Steere, Jr.

 

  yes

 

  LOGO

 

    LOGO

 

 
         

Number of Meetings in 2017

 

      8

 

  6

 

  4

 

  5

 

                        LOGO Chair             LOGO  Member

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the Compensation Committee are Robert W. Scully (Chair), Paul M. Bisaro, Sanjay Khosla, Gregory Norden and Louise M. Parent. All of the current members are independent under NYSE listing standards and our Director Qualification Standards. None of the current members is a former or current officer or employee of Zoetis or any of its subsidiaries. None of the current members has any relationship that is required to be disclosed under this caption under the rules of the SEC. During 2017, no executive officers of the company served on the compensation committee (or its equivalent) or board of directors of another entity whose executive officer served on the company’s Compensation Committee or Board.

 

14   ZOETIS 2018 PROXY STATEMENT


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CORPORATE GOVERNANCE AT ZOETIS

 

PRIMARY RESPONSIBILITIES OF BOARD COMMITTEES

 

 

Board Committees

 

      

 

   Responsibilities

 

   

 

AUDIT COMMITTEE

 

All Members Independent

 

All Members Financially Literate

 

Each of Mr. Norden and Mr. Scully qualifies as

an “audit committee financial expert”

      

 

   Oversees of the integrity of our financial statements and system of internal controls

 

   Sole authority and responsibility to select, determine the compensation of, evaluate and, when appropriate, replace our independent public accounting firm

 

   Oversees the performance of our internal audit function

 

   Reviews reports from management, legal counsel and third parties (including our independent public accounting firm) relating to the status of our compliance with laws, regulations and internal procedures

 

   Oversees our Enterprise Risk Management process

 

   

 

COMPENSATION COMMITTEE

 

All Members Independent

      

 

   Responsible for approving our overall compensation philosophy

 

   Oversees our compensation and benefit programs, policies and practices and manages the related risks

 

   Annually establishes the corporate goals and objectives relevant to the compensation of our CEO, reviews the goals established by our CEO for our other executive officers and evaluates their performance in light of these goals

 

   Recommends to the Board the compensation of our CEO and approves the compensation of our other executive officers

 

   Administers our incentive and equity-based compensation plans

 

   

 

CORPORATE GOVERNANCE COMMITTEE

 

All Members Independent

      

 

   Responsible for the company’s corporate governance practices, policies and procedures

 

   Identifies and recommends candidates for election to our Board; recommends members and chairs of Board committees

 

   Advises on and recommends director compensation for approval by the Board

 

   Administers our policies and procedures regarding related person transactions

 

   

 

QUALITY AND INNOVATION COMMITTEE

 

All Members Independent

      

 

   Evaluates our strategy, activities, results and investment in research and development and innovation

 

   Oversees compliance with processes and internal controls relating to our manufacturing quality and environmental, health and safety (“EHS”) programs; reviews organizational structures and qualifications of key personnel in our supply chain, manufacturing quality and EHS functions

 

   

BOARD’S ROLE IN RISK OVERSIGHT

The Board of Directors as a whole and through its committees oversees the company’s risk management. Management provides regular reports to the Board on the areas of material risk to the company, and the Board discusses with management the company’s major and emerging risks, including operational, technology, privacy, data and physical security, disaster recovery, legal and regulatory risks. In addition, the Board regularly reviews the company’s strategy, finances, operations, legal and regulatory developments, research and development, manufacturing quality and competitive environment, as well as the risks related to these areas.

The Audit Committee oversees our Enterprise Risk Management process, the management of risks related to financial reporting, and the annual internal audit risk assessment, which identifies and prioritizes risks related to the company’s internal controls in order to develop internal audit plans for future fiscal years. The Compensation Committee oversees the management of risks relating to our compensation plans and arrangements. The Corporate Governance Committee oversees risks associated with potential conflicts of interest and the management of risks associated with the independence of the Board, as well as the effectiveness of our Corporate Governance Principles and the Board’s compliance with our Code of Business Conduct and Ethics. The Quality and Innovation Committee oversees risks related to manufacturing quality and environmental, health and safety matters and our strategy and investments in research

 

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CORPORATE GOVERNANCE AT ZOETIS

 

and development and innovation initiatives. Each committee of the Board provides periodic reports to the full Board regarding their areas of responsibility and oversight. We believe that our Board’s active role in risk oversight supports our efforts to manage areas of material risk to the company.

BOARD’S ROLE IN CEO AND MANAGEMENT SUCCESSION

Our Board is responsible for planning for succession to the position of CEO as well as other senior management positions. Our Board works together with the CEO to review annual assessments of senior management and other persons considered potential successors to certain senior management positions.

MAJORITY VOTING STANDARD FOR DIRECTOR ELECTIONS

Our By-laws contain a majority voting standard for all uncontested director elections. Under this standard, a director is elected only if the votes cast “for” his or her election exceed the votes cast “against” his or her election. Our Corporate Governance Principles provide that every nominee for director is required to agree to tender his or her resignation if he or she fails to receive the required majority vote in an uncontested director election. Our Corporate Governance Committee will recommend, and our Board of Directors will determine, whether or not to accept such resignation. The Board will then publicly disclose its decision-making process and the reasons for its decision.

In the event of a contested election, the director nominees will be elected by the affirmative vote of a plurality of the votes cast. Under this standard, in a contested election the directors receiving the highest number of votes in favor of their election will be elected as directors.

BOARD EVALUATION

Our Board conducts an annual self-evaluation of itself and its committees to assess its effectiveness and to identify opportunities for improvement.

 

 

LOGO

DIRECTOR NOMINATIONS

The Corporate Governance Committee considers and recommends the annual slate of director nominees for approval by the full Board. When evaluating director candidates, the Corporate Governance Committee considers, among other factors: the candidate’s integrity; independence; leadership and ability to exercise sound judgment; animal health or veterinary expertise; prior public company executive experience; significant operations, manufacturing or research and development experience; as well as other areas relevant to the company’s global business. The Corporate Governance Committee is responsible for considering the appropriate size and needs of the Board, and may develop and recommend to the Board additional criteria for Board membership. Diversity of experience, background and thought among Board members is an important factor in the selection of directors.

The Corporate Governance Committee will consider director candidates recommended by shareholders. Recommendations should be sent to the Chair of the Corporate Governance Committee (in the manner described below) by November 19, 2018, to be considered for the 2019 annual meeting. The Corporate Governance Committee evaluates candidates recommended by shareholders under the same criteria it uses for other director candidates. Shareholders may also submit nominees for election at an annual or special meeting of shareholders by following the procedures set forth in our By-laws, which are summarized on page 66.

 

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CORPORATE GOVERNANCE AT ZOETIS

 

Since the initial public offering of our stock in 2013, seven directors have been elected to our Board: Sanjay Khosla, Robert W. Scully, Louise M. Parent, Willie M. Reed, William F. Doyle (director from February 3, 2015 through May 11, 2016), Paul M. Bisaro and Linda Rhodes. Dr. Rhodes was identified as a potential director candidate by an executive officer of the company. The Corporate Governance Committee also retained a third-party search firm that worked with the Committee to identify other director prospects, vet director candidates, verify candidate credentials, and assess interest and willingness to serve on the Zoetis Board.

BOARD REFRESHMENT

Board development and director succession is an integral part of the company’s long-term strategy. Our Board maintains a rigorous board refreshment process, spearheaded by the Corporate Governance Committee, focused on identifying and evaluating potential board candidates. Information about how we select our director nominees can be found in the section titled “Director Nominations.”

COMMUNICATIONS WITH THE BOARD OF DIRECTORS

Under our Corporate Governance Principles, our CEO is responsible for establishing effective communications with the company’s stakeholder groups, including shareholders, customers, employees, communities, suppliers, creditors, governments, corporate partners and other interested parties. While it is our policy that management speaks for the company, non-employee directors, including the Board Chair, may meet with stakeholders, but in most circumstances such meetings will be held with management present.

Stakeholders and other interested parties may communicate with the following Board and committee Chairs at the following email addresses:

 

 

LOGO

Stakeholders and other interested parties may also write to any of our outside directors, including the Board and committee Chairs, by directing the communication to Katherine H. Walden, Vice President, Chief Governance Counsel and Assistant Secretary, Zoetis Inc., 10 Sylvan Way, Parsippany, NJ 07054.

Communications are distributed to the Board, or to any individual director as appropriate, depending on the facts and circumstances outlined in the communication, but excluding spam, junk mail and mass mailings, product complaints, product inquiries, new product suggestions, job inquiries, surveys and business solicitations or advertisements. Material that is unduly hostile, threatening, illegal or similarly unsuitable will also be excluded. However, any communication that is filtered out under our policy will be made available to any director upon his or her request.

ATTENDANCE OF DIRECTORS AT ANNUAL MEETING OF SHAREHOLDERS

We believe that it is important for directors to directly hear concerns expressed by stakeholders and other interested parties. It is our policy that all Board members are expected to attend the Annual Meeting of Shareholders. All Board members attended our 2017 Annual Meeting of Shareholders.

CODE OF ETHICS

All of our employees, including our CEO, Chief Financial Officer and Controller, are required to abide by our policies on business conduct to ensure that our business is conducted in a consistently legal and ethical manner. A copy of the Code of Conduct can be found on our website www.zoetis.com under About Us—Corporate Compliance. We have also

 

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adopted a separate Code of Business Conduct and Ethics for members of our Board of Directors, a copy of which can be found on our website www.zoetis.com under About Us—Corporate Governance. We will disclose any future amendments to, or waivers from, provisions of these Codes affecting our directors or executive officers on our website as required under applicable SEC and NYSE rules.

COMPENSATION OF DIRECTORS

2017 COMPENSATION OF DIRECTORS

We provide competitive compensation to our non-employee directors that enables us to attract and retain high quality directors, provides them with compensation at a level that is consistent with our compensation objectives, and encourages their ownership of our stock to further align their interests with those of our shareholders. Our directors who are our full-time employees receive no additional compensation for service as a member of our Board of Directors.

In 2017, our non-employee directors’ compensation consisted of an annual cash retainer of $100,000 and an equity retainer to each non-employee director upon his or her first election as such and annually thereafter with a value of $200,000 on the date of grant, based upon the closing price of shares of Zoetis common stock on that date. The equity retainer is in the form of restricted stock units that vest on the third anniversary of the date of grant.

 

LOGO

 

In 2017, we granted equity retainers in the form of restricted stock units, valued at $200,000 in the aggregate for each director on the date of grant, as follows:

 

  To each of Ms. Parent, Dr. Reed and Messrs. Bisaro, D’Amelio, Khosla, Norden, McCallister, Scully and Steere, 3,635 restricted stock units valued at $55.02 per share.

 

  To Dr. Rhodes upon her initial appointment to the Zoetis Board in August 2017, 3,211 restricted stock units valued at $62.28 per share.

Each restricted stock unit earns dividend equivalents which are credited as additional restricted stock units. Each non-employee director has a right to receive the shares of Zoetis common stock underlying the restricted stock units on the third anniversary of the date of grant of the restricted stock units (or in the case of dividend equivalents, on the third anniversary of the date of grant of the underlying restricted stock units), subject to the director’s continued service through such vesting date and subject to earlier vesting and settlement upon certain specific events.

 

18   ZOETIS 2018 PROXY STATEMENT

2017 Annual Director Compensation Board Chair: An additional $150,000 annual cash retainer Committee Chair: An additional $25,000 annual cash retainer


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We have adopted share ownership guidelines applicable to non-employee directors, requiring the directors to hold Zoetis shares with a value of four times their annual cash retainer of $100,000. For purposes of satisfying these requirements, (a) a director’s holdings of the company’s stock shall include, in addition to shares held outright, units granted to the director as compensation for Board service and shares or units held under a deferral or similar plan, and (b) each such unit shall have the same value as a share of the company’s common stock. Each non-employee director has five years from the date of (y) his or her first election as a director, or (z) if later, an increase in the amount of company stock required to be held to achieve the share ownership requirement.

The following table summarizes the total compensation earned in 2017 by each of our directors who served as a non-employee director during 2017.

 

Name

  Fees
Earned or
Paid in
Cash($)(1)
    Stock
Awards
($)(2)(3)
   

Option     

Awards($)     

 

Non-Equity     

Incentive Plan     

Compensation     
($)     

 

Change in     

Pension Value     

and Non-     

Qualified     

Deferred     

Compensation     

Earnings($)     

 

All Other     

Compensation     

($)     

  Total
($)
 
             

Paul M. Bisaro(4)

 

   

 

$125,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

325,000

 

 

 

             

Frank A. D’Amelio(5)

 

   

 

$100,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

300,000

 

 

 

             

Sanjay Khosla(5)

 

   

 

$100,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

300,000

 

 

 

             

Michael B. McCallister(6)

 

   

 

$275,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

475,000

 

 

 

             

Gregory Norden(7)

 

   

 

$125,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

325,000

 

 

 

             

Louise M. Parent(5)

 

   

 

$100,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

300,000

 

 

 

             

Willie M. Reed(5)

 

   

 

$100,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

300,000

 

 

 

             

Linda Rhodes(8)

 

   

 

$  41,667 

 

 

 

  $

 

200,000 

 

 

 

          $

 

241,667

 

 

 

             

Robert W. Scully(9)

 

   

 

$125,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

325,000

 

 

 

             

William C. Steere, Jr.(5)

 

 

   

 

$100,000 

 

 

 

  $

 

200,000 

 

 

 

  –    

 

  –    

 

  –    

 

  –    

 

  $

 

300,000

 

 

 

 

(1) Non-employee directors may defer the receipt of up to 100% of their annual cash retainer into a notional stock unit account under the Zoetis Non-Employee Director Deferred Compensation Plan. Any deferrals under this plan are credited as phantom stock units in the Zoetis stock fund or an alternate investment fund, with each phantom unit representing one share of Zoetis common stock. Phantom units in the Zoetis stock fund receive dividend equivalent rights but do not receive voting rights. Phantom stock units are settled in cash following the director’s separation from service and may be transferred into an alternate investment fund at any time, subject to the limitations described in the Zoetis Non-Employee Director Deferred Compensation Plan. During 2017, two directors, Ms. Parent and Mr. Steere, deferred all of their cash retainers into their respective Non-Employee Director Deferred Compensation Plan accounts.

 

(2) The amounts in the Stock Awards column reflect the aggregate grant date value of restricted stock units granted to directors in 2017 calculated in accordance with FASB ASC Topic 718. The grant date fair value of each restricted stock unit granted to each non-employee director other than Dr. Rhodes on February 14, 2017, was $55.02. The grant date fair value of each restricted stock unit granted to Dr. Rhodes on August 3, 2017, was $62.28. Restricted stock units accrue dividend equivalents, the value of which is factored into the grant date fair value. Restricted stock units vest and are settled in shares of Zoetis common stock on the third anniversary of the date of grant, subject to the director’s continued service through such vesting date and subject to earlier vesting and settlement upon certain specified events. Dividend equivalents vest and are settled in shares of Zoetis common stock on the third anniversary of the date of grant of the underlying restricted stock units, subject to the director’s continued service through such vesting date and subject to earlier vesting and settlement upon certain specified events. At the end of 2017, the aggregate number of restricted stock units (including dividend equivalents) held by each current non-employee director was as follows: Mr. Bisaro, 11,654; Mr. D’Amelio, 11,536; Mr. Khosla, 11,536; Mr. McCallister, 11,536; Mr. Norden, 11,536; Ms. Parent, 11,536; Dr. Reed, 11,536; Dr. Rhodes, 3,216; Mr. Scully, 11,536; and Mr. Steere, 11,536.

 

(3) Prior to 2015, each non-employee director was granted an equity retainer in the form of deferred stock units upon his or her election to the Board and annually thereafter. Deferred stock units vest fully on the date of grant, accrue dividend equivalents and are settled in Zoetis common stock only upon the director’s separation from service with the company. At the end of 2017, the aggregate number of deferred stock units (including dividend equivalents) held by each current non-employee director was as follows: Mr. D’Amelio, 9,484; Mr. Khosla, 9,484; Mr. McCallister, 10,252; Mr. Norden, 10,252; Ms. Parent, 9,484; Dr. Reed, 4,664; Mr. Scully, 9,484; and Mr. Steere, 10,252.

 

(4) Represents (a) a cash retainer of $100,000 for service to the Board as a non-employee director during 2017, (b) a cash retainer of $25,000 for service as Chair of the Quality and Innovation Committee during 2017 and (c) an equity retainer of 3,635 restricted stock units granted on February 14, 2017.

 

(5) Represents (a) a cash retainer of $100,000 for service to the Board as a non-employee director during 2017 and (b) an equity retainer of 3,635 restricted stock units granted on February 14, 2017.

 

(6) Represents (a) a cash retainer of $100,000 for service to the Board as a non-employee director during 2017, (b) a cash retainer of $150,000 for service as Chair of the Board during 2017, (c) a cash retainer of $25,000 for service as Chair of the Corporate Governance Committee during 2017 and (d) an equity retainer of 3,635 restricted stock units granted on February 14, 2017.

 

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(7) Represents (a) a cash retainer of $100,000 for service to the Board as a non-employee director during 2017, (b) a cash retainer of $25,000 for service as Chair of the Audit Committee during 2017 and (c) an equity retainer of 3,635 restricted stock units granted on February 14, 2017.

 

(8) Represents (a) a prorated cash retainer of $41,667 for service to the Board as a non-employee director beginning on August 3, 2017 through the remainder of 2017 and (b) an equity retainer of 3,211 restricted stock units granted on August 3, 2017.

 

(9) Represents (a) a cash retainer of $100,000 for service to the Board as a non-employee director during 2017, (b) a cash retainer of $25,000 for service as Chair of the Compensation Committee during 2017 (due to an administrative error a portion of this amount was paid in March 2018) and (c) an equity retainer of 3,635 restricted stock units granted on February 14, 2017.

 

20   ZOETIS 2018 PROXY STATEMENT


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EXECUTIVE COMPENSATION

 

 

 

 

  ITEM 2  

 

 

 

   ADVISORY VOTE TO APPROVE OUR EXECUTIVE COMPENSATION (SAY ON PAY)

We are seeking your vote, on an advisory basis, on the compensation of our named executive officers as described in the Compensation Discussion and Analysis and the Executive Compensation Tables and accompanying narrative disclosure, as provided on pages 22 to 54 of this proxy statement. While the vote is not binding on the Board, the Compensation Committee will consider the outcome of the vote when making future executive compensation decisions.

For background, Section 14A of the Exchange Act of 1934 (the “Exchange Act”) requires an advisory vote on the frequency of shareholder votes on executive compensation. We conducted this advisory vote on frequency at our 2014 Annual Meeting of Shareholders; our shareholders voted for, and our Board subsequently approved, an annual advisory vote on executive compensation.

Our Board of Directors believes that our executive compensation program incentivizes and rewards our leadership for increasing shareholder value and aligns the interests of our management with those of our shareholders on an annual and long-term basis.

 

   

 

ITEM 2 RECOMMENDATION: OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF OUR EXECUTIVE COMPENSATION.

 

    

 

  ZOETIS 2018 PROXY STATEMENT   21


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EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY

In this Compensation Discussion and Analysis (“CD&A”) we describe our executive compensation philosophy and programs and the compensation decisions made by the Compensation Committee of the Board of Directors of Zoetis Inc. (the “Committee”) regarding the 2017 compensation of our named executive officers (“NEOs”).

Zoetis’ executive compensation program is designed to incent and reward our leadership for increasing shareholder value and align the interests of leadership with those of our shareholders on an annual and long-term basis.

Our NEOs for 2017, whose compensation is discussed in this CD&A and shown in the Executive Compensation Tables below, are:

 

  NEO    Title
 

  Juan Ramón Alaix

 

 

  

Chief Executive Officer (“CEO”)

 

 

 

  Glenn C. David

  

Executive Vice President and Chief Financial Officer (“CFO”)

 

 

 

  Kristin C. Peck

  

Executive Vice President and President of U.S. Operations *

 

 

 

  Clinton A. Lewis, Jr.

  

Executive Vice President and President of International Operations *

 

 

 

  Catherine A. Knupp

  

Executive Vice President and President of Research and Development

 

 

 

* Effective March 1, 2018, Ms. Peck assumed the role of Executive Vice President and Group President, U.S. Operations, Business Development and Strategy, and Mr. Lewis assumed the role of Executive Vice President and Group President, International Operations, Commercial Development, Global Genetics and Aquatic Health.

2017 BUSINESS HIGHLIGHTS

In 2017, our leadership team once again drove strong operating performance based on the three interconnected capabilities that have been critical to our success since becoming a public company: direct customer relationships, innovative research and development, and high-quality manufacturing and supply. We continued to deliver on our value proposition of growing revenue faster than the market and growing our adjusted net income faster than revenue; targeting key investment opportunities for growth; and returning excess capital to our shareholders.

 

  Business Review. We completed the operational efficiency initiative that was launched in 2015, referred to as our “Business Review”, and in 2017 fully realized our Business Review’s goals of: (1) reducing complexity that does not add value for our customers or our business; (2) optimizing resource allocation and efficiency; and (3) better positioning Zoetis for long-term profitable growth. By the end of 2017, we exceeded our goal of achieving annual cost savings of $300 million.

 

  Financial Highlights. We delivered our fifth consecutive year of operational revenue growth and increased profitability consistent with our value proposition, as highlighted below.

(For more information please review the company’s Annual Report on Form 10-K for fiscal year 2017 and this proxy statement.)

 

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  ¡    Revenues. For full year 2017, reported revenue was $5,307 million, with revenue growth of 8% on an operational3 basis; this growth is greater than the expected global animal health growth for the year and in line with our value proposition. We generated strong operational revenue growth based on the diversity of our product portfolio, as well as solid, balanced performance across the U.S. and all our major international markets. Our companion animal products revenue grew 14% operationally3, with particular strength in dermatology, as well as other new products like Simparica®. We delivered 5% operational revenue growth3 in our livestock business.

 

  ¡    Adjusted Net Income. Net income for 2017 was $864 million and adjusted net income4 for 2017 was $1,185 million. Adjusted net income increased 22% over 2016. In line with our long-term value proposition, we grew adjusted net income faster than revenue, demonstrating our focus on long-term profitable growth.

 

  ¡    Earnings Per Share (“EPS”). Reported diluted EPS for 2017 was $1.75 per diluted share, compared to $1.65 per diluted share reported in 2016. Adjusted diluted EPS4 for 2017 was $2.40 per diluted share, compared to the 2016 amount of $1.96 per diluted share.

Our 2017 financial performance as compared to 2016 is reflected in the chart below.

 

 

LOGO

 

  Value-Added Investment Opportunities. Our Research & Development (“R&D”) team continued to increase the value of Zoetis’ long-term portfolio in 2017. We received approval for more than 200 new and enhanced products worldwide and completed a number of major research alliance deals, including a research collaboration with Celgene Global Health to develop novel solutions to help control parasitic infestations in animals and people. We were proud to be the first company to receive approval in the European Union for a veterinary use monoclonal antibody (mAb) therapy with marketing authorization for Cytopoint®, a mAb that helps reduce the clinical signs associated with atopic dermatitis, such as itching, in dogs. We also received approval of Suvaxyn® PRRS MLV in the European Union, a vaccine to protect pigs against porcine respiratory and reproductive syndrome.

 

3  Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange. Page 43 of our 2017 Annual Report on Form 10-K, filed with the SEC on February 15, 2018, contains a reconciliation of this non-GAAP financial measure to reported results under GAAP for 2017.
4  Adjusted net income and adjusted diluted EPS (non-GAAP financial measures) are defined as reported net income attributable to Zoetis and reported diluted EPS, excluding purchase accounting adjustments, acquisition-related costs and certain significant items such as charges due to U.S. tax reform and costs associated with implementing organizational changes resulting from our Business Review. Pages 45 to 50 of our 2017 Annual Report on Form 10-K, filed with the SEC on February 15, 2018, contain a reconciliation of these non-GAAP financial measures to reported results under GAAP for 2017.

 

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  Acquisitions. We executed on our strategy to deploy capital toward acquisitions that strengthen our portfolio, including our acquisition of Nexvet, a biologic therapeutics company developing a pipeline of monoclonal antibody (mAb) therapies for companion animals in pain and other therapeutic areas. We also completed an acquisition of Nordland Sett Vaks AS, a company with vaccination biodevices and services for the aquaculture market.

 

  Dividends and Capital Allocation. In 2017, we paid out approximately $206 million dollars in common stock dividends to shareholders totaling $0.42 per share, and in December of 2017, our Board of Directors declared a first quarter 2018 dividend of $0.126 per share, a 20% increase over the quarterly dividend rate paid in 2017. In December 2016, we announced that our Board of Directors had authorized the repurchase of $1.5 billion of our outstanding common stock, and in 2017 we bought back approximately $500 million in shares at regular intervals. We continue to prioritize our capital allocation in ways that will add value to Zoetis through targeted business development activities and by returning excess capital to shareholders.

2017 COMPENSATION HIGHLIGHTS

Among the Committee’s compensation-related actions in 2017, the Committee revised the cash-based metric under our Annual Incentive Plan (“AIP”). The Committee reviewed the cash-based metric (weighted 20%, with revenue and adjusted diluted EPS each comprising 40%) used to determine 2016 AIP payouts and approved a change to the use of free cash flow beginning in 2017. In 2016, the cash-based metric was defined as our adjusted net income plus depreciation, amortization and stock-based compensation within adjusted income, minus capital expenditures and certain one-time cash costs (after taxes), plus or minus foreign exchange impacts and changes in accounts receivable, inventories and accounts payable. Free cash flow is defined as U.S. GAAP operating cash flow, minus capital expenditures (adjusted to exclude the impact of extraordinary, one-time events, if any). As free cash flow is a widely used capital management metric, this update was made to bring greater consistency to financial performance evaluation and foster increased transparency for employees and shareholders.

CEO COMPENSATION: AT A GLANCE

Components of CEO Target Total Direct Compensation

Mr. Alaix’ target total direct compensation is comprised of base salary, target annual incentive compensation opportunity and target long-term incentive compensation opportunity.

Base Salary and Annual Incentive

Mr. Alaix’ base salary for the first three months of 2017 was $1,160,000 and his target annual incentive opportunity for that three-month period was 115% of his base salary, providing for annualized target total cash compensation of $2,494,000.

On February 14, 2017, the Committee recommended increasing Mr. Alaix’ base salary to $1,200,000, and increasing his target annual incentive opportunity from 115% to 125% of his base salary, providing for annualized target total cash compensation of $2,700,000.

Upon the Committee’s recommendation, the Board of Directors approved this increase effective April 1, 2017, the effective date of annual salary increases generally applicable to other employees. Because this increase was not applied retroactively, Mr. Alaix’ full year target total cash compensation for 2017 was $2,648,500 (base salary of $1,190,000 and annual incentive target of $1,458,500).

 

    

 

2017

   
    

 

January 1 – March 31

  

 

April 1 – December 31

 

 

Full Year

Base Pay

 

 

$1,160,000

 

  

$1,200,000

 

 

$1,190,000

 

Target Annual Incentive

 

 

$1,334,000

 

  

$1,500,000

 

 

$1,458,500

 

Total Target Cash Compensation

 

 

$2,494,000

 

  

$2,700,000

 

 

$2,648,500

 

 

24   ZOETIS 2018 PROXY STATEMENT


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In February 2018, the Committee recommended, and the Board of Directors approved, an annual incentive payment for 2017 of $1,750,000 (120% of the full year annual incentive target) for Mr. Alaix based on Zoetis’ 2017 financial results and his individual performance.

Long-Term Incentive

On February 14, 2017, Mr. Alaix received a long-term equity incentive grant with a total grant date fair value of $7,300,000, consisting of one-third each of stock options, time-vesting restricted stock units (“RSUs”) and performance-vesting RSUs (“performance award units”). Each of these awards (170,163 stock options, 44,226 RSUs and 32,758 performance award units) is subject to three-year cliff vesting and vests 100% on the third anniversary of the date of grant (i.e., they remain unvested until February 14, 2020), generally subject to Mr. Alaix’ continued employment through the vesting date and, in the case of performance award units, the company’s results against its three-year relative total shareholder return (“TSR”) goals. As provided under the Zoetis Inc. 2013 Equity and Incentive Plan (the “Equity Plan”), vesting of awards may be accelerated in part or in full upon a termination of Mr. Alaix’ employment as a result of death, disability, retirement or upon a change in control.

Target Total Direct Compensation (“TTDC”)

The chart below shows the TTDC for Mr. Alaix for the first three months of 2017, the last nine months of 2017 (which includes the April 1, 2017 increase to Mr. Alaix’ base salary described above) and his full year 2017 TTDC (which reflects the pro-rata combination of Mr. Alaix’ pre-April 1, 2017 and post-April 1, 2017 TTDC).

 

 

 

LOGO

 

  ZOETIS 2018 PROXY STATEMENT   25


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CEO Pay Ratio

Item 402(u) of the SEC’s Regulation S-K, which was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, requires disclosure of the ratio of the annual total compensation of our CEO to our median employee’s annual total compensation. The ratio disclosed below is a reasonable estimate calculated in a manner consistent with item 402(u).

To identify our median employee, we chose “annual base pay” as our globally-consistent definition of pay. We calculated annual base pay using a methodology that reasonably reflects the annual compensation of employees, which included reasonable estimates of hours worked during 2017 for hourly workers and annualized base pay for employees who commenced work during 2017. We chose not to exclude any employees.

We used a valid statistical sampling approach to estimate the base pay for our median employee. We selected an individual whose base pay as of October 1, 2017 was at or near that value and whose total compensation (determined in a manner consistent with that of our CEO in the Summary Compensation Table) was $70,260. We then compared the annual total compensation of our CEO to the total annual compensation of the median employee. Our CEO’s total annual compensation for the year ended December 31, 2017, as disclosed in the summary compensation table, was $10,528,769. Therefore, the ratio of CEO pay to median employee pay was 150 to 1.

OUR COMPENSATION PROGRAM

COMPENSATION PHILOSOPHY

Our compensation philosophy, which is set by the Committee, is summarized below.

 

     

    Compensation Philosophy

 

 

  Objectives

 

   
 

    Pay for Performance

 

Foster a pay-for-performance culture by tying a large portion of our executives’ pay to performance against pre-established annual company financial and operational metrics, as well as pre-established annual individual goals for each executive

 

 
     

    Align Management Interests with Shareholders

 

 

Align the interests of management with results delivered to our shareholders through the use of long-term incentive programs that are designed to reward executives for increasing the value of our shareholders’ investment

 

   
 

    Pay Mix

 

Provide competitive compensation opportunities over the short term (base salary and annual incentives) and long term (equity-based long-term incentive awards) which are intended to retain our experienced management team, enable us to attract new qualified executives when needed and remain externally aligned with the compensation practices of our peer group

 

   

 

26   ZOETIS 2018 PROXY STATEMENT


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BASIC PRINCIPLES OF OUR EXECUTIVE COMPENSATION PROGRAM

Key principles and elements of our executive compensation program are summarized below. We believe these practices promote good governance and serve the interests of our shareholders.

 

 

WHAT WE DO:

 

 

  Emphasize pay for performance – our executive compensation program emphasizes variable pay over fixed pay, with more than two-thirds of our executives’ target compensation tied to our financial results and stock performance.

 

  Maintain a three-year cliff vesting schedule for equity-based long-term incentive awards.

 

  Require executives to comply with market-competitive stock ownership guidelines.

 

  Require executives to hold net shares upon the exercise of stock options or vesting of stock until they achieve the relevant stock ownership guideline.

 

  Maintain a policy prohibiting traditional perquisites of employment (as determined by our Board of Directors) for our employees, including our NEOs.

 

  Maintain anti-hedging and anti-pledging policies applicable to our directors and employees, including our NEOs.

 

  Maintain a claw-back policy that allows us to recover incentive payments based on financial results that are subsequently restated or in response to certain inappropriate actions on the part of our executives.

 

  Provide for “double trigger” equity award vesting and severance benefits following a change in control.

 

  Provide severance benefits through an Executive Severance Plan, consisting of cash equal to a multiple of base salary and target annual incentive, as well as continued health and welfare benefits, as described in the Executive Severance Plan.

 

  Use an independent compensation consultant when designing and evaluating our executive compensation policies and programs.

 

  Conduct an annual risk assessment to ensure that the company’s pay programs and practices do not create risks that are likely to have a material adverse impact on the company.

 

 

WHAT WE DON’T DO:

 

 

û   Maintain employment agreements with our executives, including our NEOs (other than agreements that are required or customary for executives outside of the U.S.).

 

û   Allow repricing of stock options without shareholder approval.

 

û   Provide tax “gross ups” to any of our executives, including our NEOs (except with respect to certain international assignment or relocation expenses, consistent with our policies and available on the same basis to all eligible employees).

 

û   Provide for “single trigger” equity award vesting or other “single trigger” payments or benefits upon a change in control.

ELEMENTS OF 2017 COMPENSATION

 

       

Element

 

  

Description and Purpose

 

  

Comments

 

    

 

Cash Compensation    

 

       
   

Base Salary

  

   Fixed cash compensation that reflects fulfillment of day-to-day responsibilities, skills and experience.

 

   Addresses employee cash-flow needs and retention objectives.

 

  

   Reviewed annually in light of changes in market practice, performance and individual responsibility.

 
   

Annual Incentive Plan
(“AIP”)

  

   Annual cash incentive that rewards achievement of our financial and strategic/operational goals, as well as the individual performance of the NEO and, along with base salary, provides a market-competitive annual cash compensation opportunity.

 

   For 2017, the AIP pool was funded based on Zoetis’ performance against revenue, adjusted diluted EPS and free cash flow goals.

 

  

   Amount of payout is based on the extent of achievement of company and individual goals set and approved by the Committee in the first quarter of each year.

 

   The Committee may exercise discretion in considering performance results in the context of other strategic and operational objectives.

   

 

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ELEMENTS OF 2017 COMPENSATION (CONTINUED)

 

       

Element

 

  

Description and Purpose

 

  

Comments

 

    

 

Long-Term Incentives

 

       
   

Stock Options

  

   Equity awards that provide value based on growth in our stock price.

 

   Intended to focus NEOs on increasing the company’s stock price.

 

   Reward NEOs for increases in the stock price over a period of up to ten years.

  

   In 2017, stock options represented one-third of each NEO’s long-term incentive opportunity based on the grant date fair value of the awards.

 

   Exercise price equals 100% of the stock price on the date of grant.

 

   Ten-year term.

 

   Three-year cliff vesting: vests 100% on the third anniversary of the date of grant, subject to the NEO’s continued employment through such date (with vesting on certain earlier terminations, such as retirement, death, change in control, etc., that are generally aligned with market practice).

 

 
   

Restricted Stock Units

  

   Equity awards that give the recipient the right to receive shares of Zoetis stock on a specified future date, subject to vesting.

 

   Align NEO and shareholder interests, as NEOs will realize a higher value from RSUs from an increasing stock price.

  

   In 2017, RSUs represented one-third of each NEO’s long-term incentive opportunity based on the grant date fair value of the awards.

 

   Three-year cliff vesting: vests 100% on the third anniversary of the date of grant, subject to the NEO’s continued employment through such date (with vesting on certain earlier terminations, such as retirement, death, change in control, etc., that are generally aligned with market practice).

 

   Paid out in shares of our company common stock upon vesting.

 

   Dividend equivalents are accrued over the vesting period and paid when and if the RSUs vest (subject to the same vesting conditions as the underlying RSUs).

 

 
   

Performance Award Units  

  

   Equity awards that give the recipient the right to receive shares of Zoetis stock on a specified future date, subject to vesting and the company’s performance against its three-year relative TSR goals.

 

   Align NEO and shareholder interests, as the value NEOs realize from their performance award units depends on the value of the shareholders’ investment relative to other investment opportunities over the same time period.

  

   In 2017, the target number of performance award units represented one-third of each NEO’s long-term incentive opportunity based on the grant date fair value of the awards.

 

   Three-year cliff vesting: units earned based on the company’s TSR results over the three-year performance period relative to the TSR results of the S&P 500 Group (as described below under “Long-Term Incentives”) vest 100% on the third anniversary of the date of grant, subject to the NEO’s continued employment through such date (with vesting on certain earlier terminations, such as retirement, death, change in control, etc., that are generally aligned with market practice).

 

   Paid out in shares of our company common stock upon vesting, with the payout ranging from 0% to 200% of target (including dividend equivalents), depending on the extent to which the pre-determined performance goals have been achieved.

 

   Dividend equivalents are accrued over the vesting period and paid when and if the performance award units vest (subject to the same vesting conditions as the underlying performance award units).

 

   

 

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ELEMENTS OF 2017 COMPENSATION (CONTINUED)

 

       

Element

 

  

Description and Purpose

 

  

Comments

 

    

 

Retirement

 

       
   

U.S. Savings Plan

(“Savings Plan”)

  

   A tax-qualified 401(k)/profit sharing plan that allows U.S. participants to defer a portion of their compensation, up to U.S. Internal Revenue Code (“IRC”) and other limitations, and receive a company matching contribution.

 

   A discretionary profit sharing contribution of up to 8% of an eligible employee’s total cash pay, within IRC limitations and based on company performance.

 

  

   We provide a matching contribution of 100% on the first 5% of an employee’s total cash pay contributed to the Savings Plan, up to IRC limitations.

 

   For 2017, we made a profit sharing contribution of 4.0% of total cash pay (within IRC limitations) to all eligible U.S. employees.

 
   

Supplemental Savings

Plan

  

   A non-qualified deferred compensation plan that makes up for amounts that would otherwise have been contributed to the Savings Plan (by the employee or as matching or profit sharing contributions by the company) but could not be contributed due to IRC limitations.

 

   Also allows NEOs and certain other executives to defer up to an additional 60% of the amount of their AIP payment that is over the IRC 401(a)(17) limit and that is not matched by the company.

 

  

   Matching and profit sharing contributions are notionally credited as company stock.

 
   

Equity Deferral Plan

  

   The Zoetis Equity Deferral Plan allows the most senior leaders of the company (9 U.S. employees, including the NEOs) to defer the receipt of our company’s common stock upon vesting of RSUs and performance award units.

 

   Participation in this plan is voluntary.

  

   Participants may elect to defer up to 100% of the company common stock to be received upon vesting, or a lesser amount in 25% increments.

 

   Participants may elect to receive their deferred shares upon termination of employment in a lump sum or in annual installments (special provisions provide for situations such as death or disability, or to comply with IRC regulations, as described more fully in the Zoetis Equity Deferral Plan).

 

   In general, election decisions must be made by the end of the year before the RSUs are granted, and by the end of the second year of a three-year performance period for performance award units.

 

 

 

Severance

 

       
 

Executive Severance
Plan

  

   Severance benefits provided to NEOs and certain other executives (currently 12 employees, including the NEOs) upon an involuntary termination of employment without cause (whether before or after a change in control), or upon a “good reason” termination of employment upon or within 24 months following a change in control.

  

   Facilitates recruitment and retention of NEOs and certain other executives by providing income security in the event of involuntary job loss.

 

 
     

   Provides the CEO with:

 

 
     

¡    1.5 times base salary and target annual incentive upon an involuntary termination of employment without cause (unrelated to a change in control).

 

¡     2.5 times base salary and target annual incentive upon an involuntary termination of employment without cause or a “good reason” termination following a change in control.

 

   Provides other executives, including the NEOs other than the CEO with:

 

¡     1 times base salary and target annual incentive upon an involuntary termination of employment without cause (unrelated to a change in control).

 

¡    2 times base salary and target annual incentive upon an involuntary termination of employment without cause or a “good reason” termination following a change in control.

 

 

   

 

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SAY ON PAY CONSIDERATION AND SHAREHOLDER OUTREACH

At our 2017 Annual Shareholder Meeting we held a shareholder advisory vote on the compensation of our NEOs in 2016 (“say on pay”). Our shareholders overwhelmingly approved the compensation of our NEOs, with 97.6% of the votes cast in favor of our say on pay resolution. We believe that the outcome of our say on pay vote signals our shareholders’ support of our compensation approach, specifically our efforts to retain and motivate our NEOs and to align pay with performance and the long-term interests of our shareholders.

We value feedback from our shareholders and throughout 2017 we continued to actively engage our shareholders through participation in numerous investor meetings and conferences. The majority of these meetings were attended by our CEO in person, with an emphasis on high-quality interactions with our shareholders and the broader investment community.

The Committee reviewed and considered these voting results and our shareholder engagement activities, among other factors described in this CD&A, in evaluating the company’s executive compensation program.

THE COMMITTEE’S PROCESS

According to its Charter, the Committee is responsible for, among other duties:

 

  Reviewing and approving the company’s overall compensation philosophy;

 

  Overseeing the administration of related compensation and benefit programs, policies and practices;

 

  Reviewing and approving the company’s peer companies and data sources for purposes of evaluating the company’s compensation competitiveness;

 

  Establishing the appropriate competitive positioning of the levels and mix of compensation elements;

 

  Evaluating the performance of the CEO against performance goals and objectives approved by the Board of Directors in the first quarter of the year; and

 

  Approving the performance goals, evaluating the performance of each executive against individual performance goals established in the first quarter of the year and approving the compensation of the company’s executive officers.

To evaluate the performance of the CEO, the other NEOs and the other members of the Zoetis Executive Team (“ZET”), at the beginning of each year, the Committee meets and approves strategic, financial and operational objectives for the CEO, the other NEOs and the other ZET members for the upcoming year, and it also evaluates their performance for the previous year.

Our CEO, Mr. Alaix, does not play any role in the Committee’s determination of his own compensation. For the other NEOs and ZET members, Mr. Alaix presents the Committee with recommendations for each element of compensation. He bases these recommendations upon his assessment of each individual’s performance, the performance of the relevant functions overseen by the individual, benchmark information and retention risk. The Committee then reviews the CEO’s recommendations, makes appropriate adjustments and approves compensation changes at its discretion.

ROLE OF THE COMPENSATION CONSULTANT

The Committee retained Willis Towers Watson to serve as its executive compensation consultant in 2017. While Willis Towers Watson may make recommendations on the form and amount of compensation, the Committee continues to make all decisions regarding the compensation of our NEOs, subject to the review (and approval in the case of the CEO) of the other independent directors. In 2017, Willis Towers Watson served the Committee in a variety of activities, including:

 

  Reviewing and advising the Committee on evolving trends in executive compensation and as to materials presented by management to the Committee;

 

  Attending all 2017 Committee meetings and communicating with the Committee Chair between meetings as necessary;

 

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  Providing the Committee with advice, pay-for-performance analytics and benchmarking norms related to the compensation of the CEO, the other NEOs and the other ZET members;

 

  Reviewing and making recommendations for changes to our compensation peer group;

 

  Reviewing our annual incentive and long-term incentive plan design;

 

  Reviewing recommendations for stock ownership guidelines for our executives;

 

  Reviewing and assessing our incentive and other compensation programs to ensure they do not create undue risk for the company; and

 

  Reviewing this CD&A and related Executive Compensation Tables.

PEER GROUP AND COMPENSATION BENCHMARKING

Each year, the Committee conducts a review of Zoetis’ compensation peer group of publicly-traded companies that is used for purposes of benchmarking pay levels and pay practices for our CEO, our other NEOs and the other ZET members, to determine if any changes are necessary or appropriate. Because there are currently no other independent publicly-traded animal health companies of comparable size and complexity, our peer group selection looks beyond our animal health competitors to a broader list of companies in the pharmaceutical, biotechnology, life sciences and healthcare equipment industries. Additionally, companies with similar sales and market capitalization, as well as similarities to Zoetis in the nature of their businesses, and the availability of relevant comparative compensation data, are also considered.

As a result of this review and due to recent merger and acquisition activity among companies that had previously been identified as peers, the Committee made certain revisions to the company’s compensation peer group for 2018 in order to provide a robust number of peer companies and a good balance of companies across the various industries. The revised compensation peer group is comprised of the 15 peer companies listed in the table below.

 

   

Agilent Technologies, Inc.

 

 

Mallinckrodt plc

 

 

Alexion Pharmaceuticals, Inc.

 

 

Mettler-Toledo International Inc.

 

 

Biogen Inc.

 

 

Mylan N.V.

 

 

Bio-Rad Laboratories, Inc.

 

 

PerkinElmer, Inc.

 

 

Boston Scientific Corporation

 

 

Perrigo Company plc

 

 

Celgene Corporation

 

 

Stryker Corporation

 

 

Endo International plc

 

 

Zimmer Biomet Holdings, Inc.

 

 

IQVIA Holdings Inc.

 

   

Zoetis ranks in the 47th percentile in revenue and 71st percentile in total market capitalization among the companies in this revised peer group. This peer group will be used to guide the Committee in making 2018 compensation decisions.

In determining the elements of 2017 compensation for our NEOs, we used the following benchmarks:

 

  Proxy statement data for the peer group as disclosed in each company’s prior year CD&A and Executive Compensation Tables.

 

  Survey data from similarly-sized companies in life sciences and other industries for benchmarking purposes to ensure robust data. In particular, in certain cases we used data from the Willis Towers Watson Executive Compensation Survey for this purpose.

The Committee will continue to review our compensation peer group on an annual basis and will make any adjustments that are deemed to be appropriate to reflect our financial and operational performance and other matters the Committee deems relevant.

ROLE OF MANAGEMENT IN COMPENSATION DECISIONS

Our CEO and Chief Human Resources Officer provide the Committee with preliminary recommendations for compensation of the NEOs and other members of the ZET other than themselves. The Committee, with the advice of its

 

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independent compensation consultant, approves the compensation for the NEOs (other than the CEO) and the other members of the ZET, and recommends the compensation of the CEO to our full Board of Directors for approval.

2017 COMPENSATION PROGRAM AND DECISIONS

COMPENSATION STRUCTURE

The compensation structure for our executives, including our NEOs, reflects our overall compensation philosophy of emphasizing pay-for-performance and aligning the interests of our executive officers and our shareholders, and is designed to emphasize incentive compensation over fixed compensation and equity compensation over cash compensation. For all of our NEOs, long-term incentive compensation is entirely equity-based and makes up the largest portion of their pay mix. In 2017, 88% of the TTDC of our CEO was incentive-based pay, either subject to achievement of performance goals or with value directly tied to the price of our common stock. For each of our NEOs other than our CEO, on average 75% of TTDC was incentive-based pay.

The table and chart below show the mix of TTDC for our NEOs for 2017. The TTDC for our NEOs reflects their annualized base salaries and target annual incentive opportunities as of the end of the year. The numbers in this table differ from those shown in the 2017 Summary Compensation Table (provided later in this proxy statement) in that the Summary Compensation Table reflects actual base salary and annual incentives earned during 2017 (rather than annualized target amounts), and this table does not include all compensation information required to be presented in the Summary Compensation Table under the rules of the SEC.

2017 NEO Compensation Structure*

 

    

Base

Salary

    

 

Target  

Annual  

Incentive  

    

Long-Term  

Incentive  

    

 

Target Total  

Direct  

Compensation  

     Pay Mix
  NEO               

Base  

Salary  

  

 

Target  

Annual  

Incentive  

  

 

Long-  

Term  

Incentive  

 

  Juan Ramón Alaix

 

  

 

$

 

 

1,200,000  

 

 

 

 

  

 

$

 

 

1,500,000  

 

 

 

 

  

 

 

 

 

$7,300,000  

 

 

 

 

  

 

 

 

 

$10,000,000  

 

 

 

 

  

 

12%

 

  

 

15%

 

  

 

73%  

 

 

  Glenn C. David

 

  

 

$

 

 

600,000  

 

 

 

 

  

 

$

 

 

480,000  

 

 

 

 

  

 

 

 

 

$1,400,000  

 

 

 

 

  

 

 

 

 

$  2,480,000  

 

 

 

 

  

 

24%

 

  

 

19%

 

  

 

56%  

 

 

  Kristin C. Peck

 

  

 

$

 

 

660,000  

 

 

 

 

  

 

$

 

 

528,000  

 

 

 

 

  

 

 

 

 

$1,400,000  

 

 

 

 

  

 

 

 

 

$  2,588,000  

 

 

 

 

  

 

26%

 

  

 

20%

 

  

 

54%  

 

 

  Clinton A. Lewis, Jr.

 

  

 

$

 

 

660,000  

 

 

 

 

   $

 

528,000  

 

 

 

  

 

 

 

 

$1,400,000  

 

 

 

 

  

 

 

 

 

$  2,588,000  

 

 

 

 

  

 

26%

 

  

 

20%

 

  

 

54%  

 

 

  Catherine A. Knupp

 

  

 

$

 

 

600,000  

 

 

 

 

  

 

$

 

 

480,000  

 

 

 

 

  

 

 

 

 

$1,400,000  

 

 

 

 

  

 

 

 

 

$  2,480,000  

 

 

 

 

  

 

24%

 

  

 

19%

 

  

 

56%  

 

 

* Amounts in this table are as of December 31, 2017

 

 

LOGO

 

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BASE SALARY

Base salary is the principal fixed component of the TTDC of our NEOs, and is determined by considering the relative importance of the position, the competitive marketplace and the individual’s performance and contributions. In setting base salaries and determining salary increases for our NEOs, the Committee takes into account a variety of factors, including:

 

  Level of responsibility;

 

  Individual and team performance;

 

  Internal review of the NEO’s total compensation, individually and relative to our other officers and executives with similar levels of responsibility within the company; and

 

  General levels of salaries and salary changes relative to officers and executives with similar responsibilities at peer group companies.

With regard to individual and team performance, the Committee considers the CEO’s evaluation of the individual performance of each NEO. Salary levels are typically reviewed annually as part of the Committee’s performance review process and would otherwise be reviewed in the context of a promotion or other change in job responsibility.

After taking into consideration the factors listed above, the Committee approved increases to the base salaries and target incentives of Mr. Alaix, Mr. David, Ms. Peck, Mr. Lewis, and Dr. Knupp, effective April 1, 2017, as reflected in the section above entitled “Compensation Structure”.

ANNUAL INCENTIVE PLAN (“AIP”)

Our AIP is our annual cash incentive plan, which is intended to reward all AIP-eligible employees, including our NEOs, for achievement of company financial and strategic/operational goals, as well as achievement of their own individual performance goals.

 

 

Our AIP utilizes a funded pool approach. An overall target AIP pool for the year is determined by adding together the target AIP payouts for each eligible employee, including the NEOs. The actual amount of the AIP pool for 2017 was determined by the Committee based on the company’s attainment of the revenue, adjusted diluted EPS and free cash flow goals (weighted 40%, 40% and 20%, respectively) approved by the Committee in the first quarter of the year.

 

   

 

 

 

LOGO

 

   

 

Beginning in 2017, the AIP cash-based metric is free cash flow, defined as U.S. GAAP operating cash flow, minus capital expenditures (adjusted to exclude the impact of extraordinary, one-time events, if any). As free cash flow is a widely used capital management metric, this new definition of the cash-based metric was implemented to bring greater consistency to financial performance evaluation and foster increased transparency for employees and shareholders.

The three measures (revenue, adjusted diluted EPS and free cash flow) were selected because they reflect the successful execution of our business strategy and support the achievement of the company’s annual operating plan, more specifically:

 

  Revenue and adjusted diluted EPS are measures that shareholders closely track in their analysis of our performance

 

  Free cash flow helps drive the efficient management of working capital and discipline in capital expenditures

The threshold, target and maximum performance levels for AIP pool funding for 2017 were established by the Committee in early 2017.

 

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COMPANY 2017 PERFORMANCE

The revenue, adjusted diluted EPS and free cash flow target levels and results reflected here and used to determine the funding level of our AIP pool exclude the impact of foreign exchange during 2017 and are therefore different from our reported revenue, adjusted diluted EPS and free cash flow results of $5,307 million, $2.40 per share and $1,122 million, respectively. The impact of foreign exchange is excluded as it is not a direct measure of the company’s operating performance. These adjusted financial results for 2017 led to above-target payouts under our AIP:

 

  Revenue, excluding the impact of foreign exchange, was $5,251 million, 101% of the 2017 revenue target established for the AIP of $5,201 million.

 

  Adjusted diluted EPS, excluding the impact of foreign exchange, was $2.38 per share and exceeded the 2017 adjusted diluted EPS target established for the AIP of $2.34 per share.

 

  Free cash flow in 2017, excluding the impact of foreign exchange, was $1,112 million, which was 116% of our 2017 free cash flow target of $959 million.

Given these results, the Committee approved an aggregate funding level of 118% of target for payment of awards under the AIP. The Committee believes this funding level recognizes Zoetis’ delivery of strong 2017 financial performance.

The threshold, target and maximum performance levels for AIP pool funding, as well as the actual results for 2017, are shown in the table below.

 

LOGO

The target payout levels for our NEOs were set by the Committee (and, in the case of the CEO, the Board of Directors) in February 2017. Payouts under the AIP program can range from 0% to 200% of the target level depending on actual performance.

 

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COMPLETION OF BUSINESS REVIEW

In February 2018, the Committee approved one-time cash payments of $300,000 each to Mr. Lewis, Ms. Peck and Dr. Knupp to recognize their contributions to the successful completion of the company’s Business Review. In addition, the Committee approved a one-time cash payment of $150,000 to Mr. David for his contribution to the Business Review since his appointment as Executive Vice President and CFO in August of 2016. In December 2016, Mr. David received a special equity-based award of $300,000 to recognize his contributions to the company’s Business Review prior to the time he was appointed Executive Vice President and CFO.

PERFORMANCE AWARD UNITS

Our performance award units awarded in 2015 used relative total shareholder return (“Relative TSR”) as the metric for assessing our performance for the three-year performance period ended December 31, 2017. TSR is the appreciation of share price, including dividends, during the Performance Period. Relative TSR is Zoetis’ TSR as compared to the TSR over the performance period of the “S&P 500 Group”, which we define as the companies comprising the S&P 500 stock market index as of the beginning of the performance period, excluding companies that during the performance period are acquired or no longer publicly traded. Relative TSR was selected because we believe it best aligns the interests of our NEOs with those of our shareholders over the performance period.

In February 2018, the Committee certified that for the 2015-2017 performance cycle, our Relative TSR was at the 83rd percentile, ranking in the top 20% of the 454 companies remaining in the S&P 500 Group at December 31, 2017. Based on this Relative TSR achievement, in accordance with the vesting matrix established at the beginning of the performance period, each 2015-2017 performance award unit vested at 200% of the established target amount.

 

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CEO 2017 PERFORMANCE

In determining Mr. Alaix’ 2017 annual incentive payment, the Board of Directors and the Committee considered the strong financial results achieved by the company under Mr. Alaix’ leadership, including performance against the revenue, adjusted diluted EPS and free cash flow metrics included in the AIP. The Board of Directors and the Committee also considered Mr. Alaix’ other 2017 achievements, including those summarized in the table below.

 

CEO 2017 Achievements

 

    

 

Leadership of the

Business Review

  

 

As a result of the completion of the Business Review that was launched in 2015:

 

   We fully realized our Business Review’s goals of: (1) reducing complexity that does not add value for our customers or our business; (2) optimizing resource allocation and efficiency; and (3) better positioning Zoetis for long-term profitable growth.

 

   We exceeded our aggressive target of $300 million in annual cost savings by the end of 2017.

 

   

 

Product Launches

and Approvals

  

 

We delivered on all of our key R&D milestones and notably:

 

   We were the first company to receive approval in the European Union for a veterinary use monoclonal antibody (mAb) therapy with marketing authorization for Cytopoint, a mAb that helps reduce the clinical signs associated with atopic dermatitis, such as itching, in dogs.

 

   We received approval of Suvaxyn PRRS MLV in the European Union (“EU”), a vaccine to protect pigs against porcine respiratory and reproductive syndrome, AlphaJect micro® PD vaccine in Norway, the UK and Ireland for the control of pancreatic disease in farmed salmon, and Simparica in Japan, a once-monthly chewable formulation of sarolaner to treat fleas and ticks in dogs.

 

   We delivered on a number of lifecycle innovations including: a chewable formula for Clavamox® (amoxicillin/clavulanic acid), a line of anti-infectives for dogs and cats in the U.S.; Stronghold Plus®, a line extension of our feline parasiticide product Stronghold® into the European Union; Rimadyl® chewable tablets in Singapore to treat chronic pain in dogs; Fostera® PRRS in Korea, a vaccine to protect against respiratory and reproductive disease in pigs; and Cefaclear® in New Zealand to treat bacterial infections in livestock.

 

   

 

Business

Development and Strategic Alliances

  

 

In line with our goal of pursuing strategically aligned business development opportunities that enhance our product portfolio, strengthen our presence in emerging markets and help expand our complementary businesses such as Diagnostics, Genetics and Biodevices:

 

   We acquired Nexvet, a biologic therapeutics company developing a pipeline of mAb therapies for companion animals in pain and other therapeutic areas.

 

   We completed the acquisition of Nordland Sett Vaks AS, a company with vaccination biodevices and services for the aquaculture market.

 

   We completed a number of major research alliance deals, including a collaboration with Celgene Global Health to develop novel solutions to help control parasitic infestations in animals and people.

 

   

 

Improvements in Manufacturing Quality, Cost and Reliable Supply

  

 

We focused on improvements in manufacturing quality, cost and reliable supply initiatives:

 

   We continued to execute our Plant Network Strategy initiatives in our efforts to reduce cost of goods sold.

 

   We improved our demand forecast accuracy and successfully achieved our targets for reducing inventory on hand, as part of our efforts to improve working capital and cash flow.

 

   We completed the purchase of a manufacturing site in Rathdrum, Ireland, enabling us to increase our capacity to produce active pharmaceutical ingredients that are used in many of our key products for companion animals and livestock.

 

   

 

Employee

Engagement

  

 

Zoetis was again recognized in the top 10 Working Mother’s Best Companies to work for, was named a 2017 Forbes Best Mid-Sized employer, and was named as a top 150 company to work for in Brazil by Voce S/A magazine for the second time.

 

   

The Board of Directors and the Committee also considered the results of an anonymous 360 degree feedback survey, conducted among the members of the ZET, in evaluating Mr. Alaix’ 2017 performance. ZET members provided their views on Mr. Alaix’ performance across various leadership dimensions, including strategic acumen and insightfulness, judgment and decision making, team and talent building, operational effectiveness, and reputation and external relationships. The

 

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results of this survey were considered by the Board of Directors in its assessment of Mr. Alaix’ 2017 performance and were used to provide constructive feedback to Mr. Alaix to enhance his leadership effectiveness going forward. After considering and balancing each of these inputs to Mr. Alaix’ overall 2017 performance, the Committee recommended and the Board of Directors approved an annual incentive payout to Mr. Alaix of 120% of target ($1,750,000).

OTHER NEO 2017 PERFORMANCE

What follows are highlights of individual and business unit/function performance considered in the CEO’s evaluation of the performance of the other NEOs and the CEO’s recommendations with respect to the other NEOs’ AIP payouts for 2017. In reviewing the compensation recommendations for the other NEOs and approving their AIP payouts, the Committee considered the overall performance of the company, as well as the CEO’s assessment of each NEO’s individual performance and accomplishments relative to each NEO’s individual performance objectives that were approved by the Committee at the start of 2017.

 

NEO

 

       

2017 Achievements

 

    

 

Glenn C. David

 

Executive Vice President

and Chief Financial Officer

      

 

As Executive Vice President and CFO, Mr. David:

 

   Successfully completed the issuance of $1,250 million in debt.

 

   Led efforts to enhance and improve our internal controls, financial reporting and SOX compliance.

 

   Improved efficiency and lowered operating costs of our global finance organization.

 

   Provided effective financial leadership that enabled the company to achieve its strong 2017 financial results.

 

   

 

Kristin C. Peck

 

Executive Vice President

and President of U.S. Operations

      

 

As Executive Vice President and President of U.S. Operations, Ms. Peck:

 

   Delivered above-market revenue, expanded operating margins and delivered strong income growth.

 

   Cemented recently launched products as clear market leaders with products such as Apoquel®, Cytopoint and Simparica.

 

   Developed and led several U.S.-wide initiatives to enhance customer experiences and make Zoetis a company that is easy to do business with:

 

¡   Launched a successful new customer rewards program, My Zoetis Rewards, and

 

¡   Streamlined key customer journeys such as implementing 24-hour online account setup for our customers and providing 24/7 access to statements and invoicing.

 

   Led successful design and implementation of Zoetis’ first direct-to-consumer advertising campaign for Apoquel and Simparica.

 

   

 

Clinton A. Lewis, Jr. 

 

Executive Vice President

and President of

International Operations

      

As Executive Vice President and President of International Operations, Mr. Lewis:

 

   Achieved strong revenue and income growth, growing faster than the overall animal health market globally and in each major regional segment.

 

   Achieved strong growth of key and new products, including Apoquel, Simparica, PCV Combo and Stronghold Plus.

 

   Played a key role in the plan to expand our presence and capabilities (R&D and Manufacturing) in China.

 

   

 

Dr. Catherine A. Knupp

 

Executive Vice President

and President of Research and Development

    

 

As Executive Vice President and President of Research and Development, Dr. Knupp:

 

   Led efforts that generated more than 200 approvals worldwide for new products and enhancements to the current portfolio.

 

   For companion animals:

 

¡  In the EU, received approval of Cytopoint, a monoclonal antibody that helps reduce the clinical signs associated with atopic dermatitis in dogs, and Stronghold Plus (selamectin/sarolaner) for the treatment of fleas, ticks, ear mites, lice and gastrointestinal worms and prevention of heartworm disease in cats.

 

¡  In the U.S., extended our Clavamox (amoxicillin/clavulanic acid) line of anti-infectives for dogs and cats with approval of a chewable formula.

 

   For livestock, received approval of Suvaxyn PRRS MLV in the EU to extend our Suvaxyn swine vaccine franchise to help protect pigs against porcine respiratory and reproductive syndrome.

 

 

 

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EXECUTIVE COMPENSATION

 

NEO AIP DECISIONS

In February 2018, the Committee (and, in the case of the CEO, the Board of Directors) determined the amount of annual incentive earned by each of our NEOs and approved the final payouts to each NEO for 2017. The NEOs’ 2017 annual incentive awards were based on:

 

  The financial performance of Zoetis (measured against targets for revenue, adjusted diluted EPS and free cash flow);

 

  The financial performance of their respective region/business unit/function measured by annual budgets for revenue and income before adjustments (as applicable);

 

  The achievement of approved strategic and operational goals for their respective region/business unit/function; and

 

  An assessment of each NEO’s individual performance relative to each executive’s performance objectives (indicated above), including an assessment of whether such performance objectives were achieved in alignment with our Core Beliefs, which define the values and behaviors that we expect all Zoetis employees, including our NEOs, to exhibit in carrying out their responsibilities.

The 2017 AIP target amounts are prorated to reflect base salary increases received during the year. The 2017 AIP awards for our NEOs reflecting the Committee’s assessment of their performance in 2017 (and, in the case of our CEO, the Board of Directors’ assessment of his performance in 2017) are shown in the table below.

 

  NEO

 

 

AIP Target  
Amount  

 

    

AIP Award    

% of    
Target    

 

  

AIP Award  
Paid  

 

 

 

  Juan Ramón Alaix

 

  $

 

1,458,500  

 

 

 

   120.0%  

 

   $

 

1,750,000  

 

 

 

 

  Glenn C. David

 

  $

 

462,375  

 

 

 

   119.0%  

 

   $

 

550,041  

 

 

 

 

  Kristin C. Peck

 

  $

 

508,000  

 

 

 

   118.0%  

 

   $

 

599,440  

 

 

 

 

  Clinton A. Lewis, Jr.

 

  $

 

508,000  

 

 

 

   119.5%  

 

   $

 

607,060  

 

 

 

 

 

  Catherine A. Knupp

  $

 

452,750  

 

 

 

   118.0%  

 

   $

 

 

534,245  

 

 

 

 

 

LONG-TERM INCENTIVES (“LTI”)

Our Equity Plan is a comprehensive long-term incentive compensation plan that permits us to grant equity-based long-term compensation awards to employees and directors. The Committee believes that equity-based long-term incentive awards align the interests of management with our shareholders and focus management on our long-term growth. In addition, the Committee believes that equity-based awards are essential to attract and retain the talented professionals and managers needed for our continued success. In determining the size of equity-based grants, the Committee considers the number of shares available under the Equity Plan, the potential dilutive impact of such grants on our shareholders, the individual’s position with us, the appropriate allocation of such grants based on past and projected individual and corporate performance and the level of grants awarded by our peers to similarly situated executives.

 

 

In 2017, long-term incentive awards were delivered to the NEOs, other ZET members and approximately 180 other senior leaders generally through a mix of one-third each of stock options, RSUs and performance award units. We believe that the mix of stock options (which have value only if there is an increase in the value of our stock), RSUs (which focus our executives on sustained growth) and performance award units (which reward the company’s executives in alignment with the relative return in our shareholders’ investment in the company over the three-year performance period) that was delivered in 2017 supports our pay-for-performance objective by tying executive awards to shareholder value accretion. Long-term incentive awards were delivered to other eligible Zoetis employees generally through RSUs.

 

 

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EXECUTIVE COMPENSATION

 

LTI awards vest in full on the third anniversary of the date of grant, assuming continued employment through the vesting date and, in the case of performance award units, subject to the company’s total shareholder return over the three-year performance period relative to the total shareholder return of the S&P 500 Group. For all LTI awards, earlier vesting may occur in connection with certain termination conditions, such as retirement, death, disability, restructuring, change in control, etc., that are generally aligned with market practice.

The three forms of LTI awards granted to our senior leaders, including the NEOs, are described below.

 

  Stock Options   Objectives
 
 

We view stock options as a form of long-term incentive that focuses and rewards executives for increasing our stock price. If the stock price does not increase from the level at the date of the grant, the stock options will have no value to the executives.

 

   Encourage our executives to focus on decisions that will lead to increases in the stock price for the long term

 

   Retain executive talent, since executives generally must remain with the company for three years following the date of the grant before they can exercise the stock options (with exceptions for certain terminations of employment), and the options have a ten-year term from the date of the grant

 

     

 

  Restricted Stock Units   Objectives
 
 

RSUs provide executives with the right to receive shares of our stock at the end of the three-year cliff-vesting period, generally subject to continued employment (with exceptions for certain terminations of employment). Dividend equivalents are applied to outstanding RSUs and are paid out in shares of our stock at the same time the associated RSUs are paid out.

 

   Align the interests of executives with those of shareholders over the vesting period

 

   Retain executive talent

 

   Encourage stock ownership by delivering shares upon settlement

 

     

 

  Performance Award Units   Objectives
 
 

We award performance award units to enhance the alignment of executive pay with the value created for our shareholders. Performance award units provide executives with the right to receive shares of our stock after the end of the three-year performance vesting period. The number of shares paid, if any, is generally subject to continued employment (with exceptions for certain terminations of employment) and the company’s total shareholder return over the performance period relative to the S&P 500 Group. Dividend equivalents are applied to outstanding performance award units and are paid out in shares of our stock at the same time the associated performance award units are paid.

 

   Align the interests of executives with those of shareholders over the performance vesting period

 

   Retain executive talent, as performance awards provide an opportunity for higher rewards when the company’s total shareholder return results exceed the median of the S&P 500 Group

 

   Encourage stock ownership by delivering shares upon settlement in accordance with the company’s relative total shareholder return results

 

 

The performance award unit vesting schedule is as follows:

 

 

If the company’s TSR for the 2017-2019 performance period is:

 

 

The number of shares of stock that will vest is:

 

Below the 25th percentile of the S&P 500 Group

 

 

Zero

 

At the 25th percentile of the S&P 500 Group

 

 

50% of the target number of units

 

At the 50th percentile of the S&P 500 Group

 

 

100% of the target number of units

 

At or above the 75th percentile of the S&P 500 Group

 

 

200% of the target number of units

 

The number of shares that vest and are paid is determined by linear interpolation when the company’s total shareholder return is between the 25th and 50th or between the 50th and 75th percentiles of the S&P 500 Group.

 

 

 

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EXECUTIVE COMPENSATION

 

NEO LTI DECISIONS

Our NEOs typically receive equity-based grants as part of our annual grant of long-term incentive awards which occurs during the first quarter of each year. The following table sets forth the long-term incentive awards delivered to our NEOs in 2017. In determining the number of shares underlying each applicable award, the value of RSUs is divided by the grant date closing price of Zoetis common shares, the option value is divided by the Zoetis Black-Scholes value as of the grant date and the performance award unit value is divided by the Zoetis Monte Carlo simulation value as of the grant date (in each case, the number of underlying shares is rounded down to the nearest whole number).

 

  NEO Total LTI
Value
Value of Awards:     Number of Shares Underlying
Awards:

 

Stock

Options

RSUs

Performance    

Award Units    

    Stock
Options
RSUs Performance  
Award Units  

 

  Juan Ramón Alaix

 

$

 

7,300,000     

 

 

$

 

2,433,333

 

 

$

 

2,433,333

 

 

$

 

2,433,333    

 

 

 

 

170,163

 

 

 

 

44,226

 

 

32,758

 

  Glenn C. David

 

$

 

1,400,000     

 

 

$

 

466,667

 

 

$

 

466,667

 

 

$

 

466,667    

 

 

 

 

32,634

 

 

 

 

8,481

 

 

  6,282

 

  Kristin C. Peck

 

$

 

1,400,000     

 

 

$

 

466,667

 

 

$

 

466,667

 

 

$

 

466,667    

 

 

 

 

32,634

 

 

 

 

8,481

 

 

  6,282

 

  Clinton A. Lewis, Jr.

 

$

 

1,400,000     

 

 

$

 

466,667

 

 

$

 

466,667

 

 

$

 

466,667    

 

 

 

 

32,634

 

 

 

 

8,481

 

 

  6,282

 

  Catherine A. Knupp

 

$

 

1,400,000     

 

 

$

 

466,667

 

 

$

 

466,667

 

 

$

 

466,667    

 

 

 

 

32,634

 

 

 

 

8,481

 

 

  6,282

RETIREMENT BENEFITS

Our NEOs receive retirement benefits through Zoetis’ U.S. Savings Plan. The Savings Plan is a tax-qualified 401(k) savings plan available to all eligible U.S. employees. Participants may elect to contribute up to 60% of their salary and annual incentive payment to the Savings Plan, subject to Internal Revenue Code (“IRC”) limitations. We match 100% of the employee contribution, up to 5% of each eligible employee’s pay. We may also contribute a discretionary profit-sharing amount of up to 8% of each eligible employee’s pay (subject to IRC limitations). For 2017, we contributed 4.0% of each eligible employee’s pay (including the NEOs) as a profit sharing contribution.

To the extent the IRC limitations are exceeded, our Zoetis Supplemental Savings Plan is a non-qualified deferred compensation plan that makes up for amounts that would otherwise have been contributed to the Savings Plan but could not be contributed due to IRC limitations on the amount of compensation that may be taken into account under a tax-qualified plan ($270,000 for 2017). Eligible employees, including all of our NEOs, may elect to defer up to 30% of the amount by which their salary and annual incentive payment exceeds this compensation limit. We match these deferrals at the same rate as under the Savings Plan, i.e., 100% match up to 5% of pay. In addition, our NEOs and certain other executives may elect to defer up to an additional 60% of the amount of their annual incentive payment that is over the IRC 401(a)(17) limit. We do not match these additional deferrals. If an employee’s profit sharing contribution to the Savings Plan is limited by the compensation or contribution limit, the portion that the employee was not able to receive in the Savings Plan is credited to the employee’s account in the Zoetis Supplemental Savings Plan.

 

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EXECUTIVE COMPENSATION

 

SEVERANCE

The Zoetis Executive Severance Plan covers our NEOs, ZET members and certain other executives (currently 12 employees). We do not maintain individual employment agreements with our executives (other than agreements that are required or customary for executives outside of the U.S.). The plan provides for payment of severance benefits in the event of an involuntary termination of employment (other than for Cause5) that is not in connection with a Change of Control5, and a higher level of benefits in the event of an involuntary termination of employment (other than for Cause) or a termination for “Good Reason”5 that occurs upon or within 24 months following a Change of Control. The amounts payable under the plan are shown below.

 

     

Severance    

(Base Salary)    

  

Continued   

Health and   

Life Insurance   

(at active   

employee cost)   

  

Annual     

Incentive     

 

  Non-Change of Control Severance:

 

        

 

  CEO

 

  

18 months     

 

  

12 months     

 

  

1.5x target     

 

 

  Other Participants

 

  

12 months     

 

  

12 months     

 

  

1x target     

 

 

  Change of Control Severance:

 

        

 

  CEO

 

  

30 months     

 

  

18 months     

 

  

2.5x target     

 

 

  Other Participants

 

  

24 months     

 

  

18 months     

 

  

2x target     

 

The salary payments are made as salary continuation in the case of a non-Change of Control severance, and in a lump sum in the case of a Change of Control severance. The annual incentive payments are made in a lump sum under both circumstances. In addition to the benefits reflected in the table, we provide outplacement services to plan participants. All benefits under the plan are subject to the participant’s execution of a general release of all claims against the company.

PERQUISITES

We maintain a policy prohibiting traditional perquisites of employment (as determined by our Board of Directors) for our employees, including our NEOs. However, the company does provide certain benefits to employees serving outside of their home country at the company’s request, including our NEOs, pursuant to our international assignment policy, which benefits fall into the category of perquisites or other personal benefits under applicable SEC rules. Certain benefits of this type provided to Mr. Lewis in connection with his international assignment are included in the Summary Compensation Table under the heading “All Other Compensation”.

CORPORATE GOVERNANCE POLICIES

STOCK OWNERSHIP REQUIREMENTS

Our stock ownership guidelines encourage our NEOs to own and maintain a substantial stake in the company. Our guidelines are established as a multiple of each executive’s base salary. In assessing compliance with the guidelines, we count stock held outright, unvested restricted stock or RSUs, unvested performance award units and stock held in benefit plans. Our stock ownership guidelines are as follows:

 

  Mr. Alaix: 5 times base salary

 

  All other ZET members, including our NEOs: 3 times base salary

A Zoetis executive must achieve the guidelines before he or she can sell any stock acquired upon the exercise of options or the vesting of other awards, other than stock sold to satisfy the exercise price of stock options or taxes due upon the exercise of options or the vesting or settlement of other awards. Our NEOs (and all other ZET members) have five years from the establishment of the guidelines in 2013 to achieve the stock ownership requirements. Newly hired employees and employees newly appointed to the ZET will have five years from the date of hire or appointment, as applicable, to achieve the stock ownership requirements. As of the last annual measurement date, all our NEOs have met the stock ownership requirements.

 

5  “Cause”, “Change of Control” and “Good Reason” are as defined in the Zoetis Executive Severance Plan.

 

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EXECUTIVE COMPENSATION

 

ANTI-HEDGING AND ANTI-PLEDGING POLICIES

Zoetis maintains a policy prohibiting any of our directors or employees, including the NEOs, from “hedging” their ownership in shares of our common stock or other equity-based interests in our company, including by engaging in short sales or trading in derivative securities relating to our common stock. Zoetis also maintains a policy prohibiting any of our directors or employees, including the NEOs, from pledging Zoetis shares as collateral for loans or for any other purpose.

CLAW-BACK POLICY

Zoetis maintains a claw-back policy under which the Committee shall, to the extent permitted by law, make retroactive adjustments to any cash-based or equity-based incentive compensation paid to employees, including our NEOs, where the payment was predicated upon the achievement of specified financial results that are the subject of a subsequent restatement, or where employees were found to have altered financial or operational results used to determine award values. Additionally, our claw-back policy includes recoupment due to willful misconduct or gross negligence which caused or might reasonably be expected to cause significant business or reputational harm to the company. The intent of the policy is to enable the company to recover any amount determined by the Committee to have been inappropriately received by the employee.

COMPENSATION RISK ASSESSMENT

In 2017, the Committee considered whether the company’s compensation policies and practices for its employees, including the NEOs, create risks that are reasonably likely to have a material adverse effect on the company.

In evaluating a compensation risk assessment that was conducted by Willis Towers Watson, the Committee’s independent executive compensation consultant, the Committee considered the following:

 

  The mix of cash and equity compensation, which is balanced with a strong emphasis on long-term awards;

 

  Goals and objectives of the company’s compensation programs, reflecting both quantitative and qualitative performance measures and avoiding excessive weight on a single performance measure;

 

  The design of the company’s sales incentive plans, to ensure the mix of fixed and variable compensation promotes appropriate behaviors among participants;

 

  Equity compensation granted in the form of stock options, restricted stock units and performance award units to provide greater incentive to create and preserve long-term shareholder value;

 

  Regular review of comparative compensation data to maintain competitive compensation levels in light of the company’s industry, size and performance;

 

  The company’s minimum stock ownership guidelines, which ensure that executive officers have a meaningful direct ownership stake in the company and align executive officers with long-term shareholder interests;

 

  The company’s restrictions on engaging in hedging transactions in the company’s securities; and

 

  The company’s claw-back policy.

Based on its evaluation in 2017, the Committee has determined, in its reasonable business judgment, that the company’s compensation policies and practices as generally applicable to its executive officers and employees do not create risks that are reasonably likely to have a material adverse impact on the company and instead promote behaviors that support long-term sustainability and shareholder value creation.

TAX DEDUCTIBILITY OF NEO COMPENSATION

Section 162(m) of the IRC has historically disallowed a federal income tax deduction to public companies for compensation greater than $1 million paid in any tax year to covered executive officers unless the compensation meets the requirements of the “qualified performance-based compensation” exemption under that section. As discussed

 

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EXECUTIVE COMPENSATION

 

below, recent legislation has eliminated the “qualified performance-based compensation” exemption for tax years after 2017. As a general matter, while the Committee considers tax deductibility as one of several relevant factors in determining compensation, it retains the flexibility to design and maintain executive compensation arrangements that it believes will attract and retain executive talent, even if such compensation is not deductible by the company for federal income tax purposes.

In 2017 and in prior years, certain of our compensation and benefit plans were designed to permit us to grant awards that could qualify for the “qualified performance-based compensation” exemption; however, as noted above, this exemption was eliminated by recent tax legislation, effective for taxable years beginning after December 31, 2017. The legislation also expanded the group of executives covered by Section 162(m). Therefore, we expect that compensation paid to our covered executive officers in excess of $1 million in 2018 and later tax years will not be deductible by the company unless it qualifies for limited transition relief that applies to certain arrangements in place as of November 2, 2017. Because of uncertainties in the application and interpretation of Section 162(m), and the absence at this juncture of regulatory guidance on the scope of the transition relief, no assurance can be given that awards paid in 2018 and later years that were originally intended to qualify for the “qualified performance-based compensation” exemption, or that were otherwise expected to be deductible prior to the recent tax legislation, will in fact be deductible. The Committee believes that the tax deduction limitation imposed by Section 162(m) should not be permitted to compromise the ability to design and maintain executive compensation arrangements that will attract and retain executive talent. Accordingly, achieving the desired flexibility in the design and delivery of compensation may result in compensation that is not deductible for federal income tax purposes.

 

  ZOETIS 2018 PROXY STATEMENT   43


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EXECUTIVE COMPENSATION

 

REPORT OF THE COMPENSATION COMMITTEE

The Zoetis Compensation Committee has reviewed and discussed with management the preceding Compensation Discussion and Analysis contained in this proxy statement. Based on its review and discussions with management, the Zoetis Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the company’s proxy statement on Schedule 14A filed with the SEC.

THE COMPENSATION COMMITTEE

Robert W. Scully, Chair

Paul M. Bisaro

Sanjay Khosla

Gregory Norden

Louise M. Parent

 

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EXECUTIVE COMPENSATION

 

EXECUTIVE COMPENSATION TABLES

The following tables summarize our NEO compensation:

 

1. Summary Compensation Table. The Summary Compensation Table summarizes the compensation earned by our NEOs for the fiscal years ended December 31, 2017, 2016 and 2015, including salary earned, annual incentive plan awards, the aggregate grant date fair value of equity-based incentive awards granted to our NEOs and all other compensation paid to our NEOs.

 

2. 2017 Grants of Plan-Based Awards Table. The 2017 Grants of Plan-Based Awards Table summarizes all grants of plan-based awards made to our NEOs during the fiscal year ended December 31, 2017.

 

3. Outstanding Equity Awards at 2017 Fiscal Year-End Table. The Outstanding Equity Awards at 2017 Fiscal Year-End Table summarizes the outstanding equity-based incentive awards held by our NEOs as of December 31, 2017.

 

4. 2017 Option Exercises and Stock Vested Table. The 2017 Option Exercises and Stock Vested Table summarizes our NEOs’ option exercises and equity-based award vesting during the fiscal year ended December 31, 2017.

 

5. 2017 Non-Qualified Deferred Compensation Table. The 2017 Non-Qualified Deferred Compensation Table summarizes the activity during 2017 and account balances under our Supplemental Savings Plan as of December 31, 2017.

 

6. Potential Payments upon Employment Termination Table. The Potential Payments upon Employment Termination Table summarizes payments and benefits that would be made to our NEOs in the event of certain employment terminations, assuming such terminations occurred on December 31, 2017.

 

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EXECUTIVE COMPENSATION

 

SUMMARY COMPENSATION TABLE

 

  Name   Year    

Salary

($)

   

Bonus

($)

  Stock
Awards(1)
($)
    Option
Awards(2)
($)
     Non-Equity
Incentive
Plan
Compensation(3)
($)
   All Other
Compensation(4)
($)
 

Total

($)

 
               

  Juan Ramón Alaix

 

   

 

2017

 

 

 

   

 

1,190,000

 

 

 

         —    

 

4,866,579

 

 

 

   

 

2,433,331

 

 

 

   1,750,000

 

      288,859

 

   

 

10,528,769

 

 

 

  Chief Executive Officer

 

   

 

2016

 

 

 

   

 

1,150,000

 

 

 

         —    

 

4,199,957

 

 

 

   

 

2,099,994

 

 

 

   1,720,000

 

      296,675

 

   

 

9,466,626

 

 

 

   

 

2015

 

 

 

   

 

1,115,000

 

 

 

         —    

 

3,733,253

 

 

 

   

 

1,866,663

 

 

 

   1,705,393

 

      261,878

 

   

 

8,682,187

 

 

 

               

  Glenn C. David

 

   

 

2017

 

 

 

   

 

596,250

 

 

 

  150,000(5)

 

   

 

933,252

 

 

 

   

 

466,666

 

 

 

      550,041

 

      101,388

 

   

 

2,797,597

 

 

 

  Executive Vice President and

 

   

 

2016

 

 

 

   

 

483,030

 

 

 

         —    

 

608,223

 

 

 

   

 

516,651

 

 

 

      526,676

 

        73,526

 

   

 

2,208,106

 

 

 

  Chief Financial Officer

 

   

 

2015

 

 

 

   

 

410,500

 

 

 

       75,000  

 

   

 

179,943

 

 

 

   

 

89,999

 

 

 

      291,000

 

        64,145

 

   

 

1,110,587

 

 

 

               

  Kristin C. Peck

 

   

 

2017

 

 

 

   

 

655,000

 

 

 

  300,000(5)

 

   

 

933,252

 

 

 

   

 

466,666

 

 

 

      599,440

 

      112,245

 

   

 

3,066,603

 

 

 

  Executive Vice President and

 

   

 

2016

 

 

 

   

 

636,375

 

 

 

         —    

 

899,958

 

 

 

   

 

449,995

 

 

 

      568,856

 

      119,499

 

   

 

2,674,683

 

 

 

  President of U.S. Operations

 

   

 

2015

 

 

 

   

 

625,500

 

 

 

         —    

 

866,622

 

 

 

   

 

433,330

 

 

 

      582,341

 

      112,886

 

   

 

2,620,679

 

 

 

               

  Clinton A. Lewis, Jr.

 

   

 

2017

 

 

 

   

 

655,000

 

 

 

  300,000(5)

 

   

 

933,252

 

 

 

   

 

466,666

 

 

 

      607,060

 

   1,485,268

 

   

 

4,447,246

 

 

 

  Executive Vice President and

 

   

 

2016

 

 

 

   

 

630,054

 

 

 

         —    

 

799,972

 

 

 

   

 

399,998

 

 

 

      571,303

 

      966,604

 

   

 

3,367,931

 

 

 

  President of International Operations

 

   

 

2015

 

 

 

   

 

558,943

 

 

 

         —    

 

666,639

 

 

 

   

 

333,330

 

 

 

      512,587

 

      277,016

 

   

 

2,348,515

 

 

 

               

  Catherine A. Knupp

 

   

 

2017

 

 

 

   

 

582,500

 

 

 

  300,000(5)

 

   

 

 

933,252

 

 

 

 

 

   

 

466,666

 

 

 

      534,245

 

        99,895

 

   

 

2,916,558

 

 

 

  Executive Vice President and

 

   

 

2016

 

 

 

   

 

525,027

 

 

 

         —    

 

733,301

 

 

 

   

 

366,663

 

 

 

      474,940

 

        93,299

 

   

 

2,193,230

 

 

 

  President of R&D

 

   

 

2015

 

 

 

   

 

499,625

 

 

 

         —    

 

666,639

 

 

 

   

 

333,330

 

 

 

      453,923

 

        88,850

 

   

 

2,042,367

 

 

 

 

(1) The amounts shown in the “Stock Awards” column represent the aggregate grant date fair values for the Restricted Stock Units (“RSUs”) and the performance award units granted by Zoetis in 2017, 2016 and 2015, determined in accordance with FASB ASC Topic 718 based on the assumptions and methodologies set forth in Note 14 to Zoetis’ 2017 Annual Report on Form 10-K, filed with the SEC on February 15, 2018 (the “2017 10-K”). Further information regarding the 2017 awards is included in the 2017 Grants of Plan-Based Awards Table and the Outstanding Equity Awards at 2017 Fiscal Year-End Table. With respect to the performance award units granted by Zoetis in 2017, 2016 and 2015, the amounts included in the “Stock Awards” column of the Summary Compensation Table above represent the target payout at the grant date based upon the probable outcome of the performance conditions. The table below shows the amount of the target payout value at the grant date and the maximum value at the grant date assuming that the highest performance conditions would be achieved for each of the performance award units granted in 2017.

 

     Performance Award Unit
Grants in 2017
  Name    Grant Date
Target Payout
($)
    

Maximum Value

at Grant Date

($)

   

  Juan Ramón Alaix

 

    

 

2,433,264    

 

 

 

   4,866,528

 

   

  Glenn C. David

 

    

 

466,627    

 

 

 

      933,254

 

   

  Kristin C. Peck

 

    

 

466,627    

 

 

 

      933,254

 

   

  Clinton A. Lewis, Jr.

 

    

 

466,627    

 

 

 

      933,254

 

   

  Catherine A. Knupp

 

    

 

466,627    

 

 

 

      933,254

 

 

(2) The amounts shown in the “Option Awards” column represents the aggregate grant date fair values of long-term incentive awards granted to the NEOs by Zoetis in 2017, 2016 and 2015, determined in accordance with FASB ASC Topic 718 based on the assumptions and methodologies set forth in Note 14 to the 2017 10-K. Further information regarding the 2017 awards is included in the 2017 Grants of Plan-Based Awards Table and the Outstanding Equity Awards at 2017 Fiscal Year-End Table.

 

(3) The amounts shown in the “Non-Equity Incentive Plan Compensation” column represent annual cash incentive awards earned by the NEOs under the Zoetis Annual Incentive Plan for 2017, 2016 and 2015.

 

46   ZOETIS 2018 PROXY STATEMENT


Table of Contents

EXECUTIVE COMPENSATION

 

 

(4) The following table sets forth the component amounts presented in the “All Other Compensation” column above for the year ended December 31, 2017:

 

  Name   

Company     

Contributions     

Under the Zoetis     

Savings Plan     

(i) ($)     

  

Company     

Contributions     

Under the Zoetis     

Supplemental     

Savings Plan     

(ii) ($)     

  

International

Assignment

(iii) ($)

    

Other

(iv) ($)

    

All Other     

Compensation     

($)     

         

  Juan Ramón Alaix

 

   10,800     

 

   248,331     

 

    

 

—     

 

 

 

    

 

29,728

 

 

 

       288,859     

 

         

  Glenn C. David

 

   23,400     

 

     76,737     

 

    

 

—     

 

 

 

    

 

1,251

 

 

 

       101,388     

 

         

  Kristin C. Peck

 

   24,300     

 

     85,813     

 

    

 

—     

 

 

 

    

 

2,132

 

 

 

       112,245     

 

         

  Clinton A. Lewis, Jr.

 

   24,300     

 

     86,033     

 

    

 

1,371,864     

 

 

 

    

 

3,071

 

 

 

    1,485,268     

 

         

  Catherine A. Knupp

 

   24,300     

 

     70,749     

 

    

 

—     

 

 

 

    

 

4,846

 

 

 

         99,895     

 

 

  (i) The amounts shown in this column represent the sum of profit sharing and matching contributions under the Zoetis Savings Plan (“ZSP”), a tax-qualified retirement savings plan. Under the terms of the ZSP, the company will match up to 5% of salary compensation contributed by each employee, subject to limitations under the Internal Revenue Code of 1986, as amended (“IRC”). The company contribution to the ZSP for Mr. Alaix and Mr. David are lower than that of the other NEOs because they reached IRC limits for contributions to the ZSP.

 

  (ii) The amounts shown in this column represent the sum of profit sharing and matching contributions under the Zoetis Supplemental Savings Plan (“ZSSP”). The ZSSP is discussed in more detail in the 2017 Non-Qualified Deferred Compensation Table.

 

  (iii) In connection with his role of President of International Operations, Mr. Lewis was on assignment in Ireland throughout 2017. This assignment was at the company’s request and Mr. Lewis received benefits in line with those that are generally available to all Zoetis employees serving in international assignments. In 2017 these benefits included $184,101 for housing and living costs, $87,383 for relocation services in Ireland, $20,600 for education for his children residing with him and taxes of $1,079,780 paid by the company for benefits related to his assignment.

 

  (iv) The amounts shown in this column include the imputed income related to Zoetis’ group term life insurance coverage in excess of $50,000.

 

(5) These NEOs were awarded a one-time cash payment to recognize their contributions to the successful completion of the company’s Business Review.

 

  ZOETIS 2018 PROXY STATEMENT   47


Table of Contents

EXECUTIVE COMPENSATION

 

2017 GRANTS OF PLAN-BASED AWARDS TABLE

The following table provides additional information about non-equity incentive awards and equity incentive awards granted to our NEOs during the fiscal year ended December 31, 2017. All stock options, RSUs and performance award units granted to our NEOs in 2017 were granted under the 2013 Equity and Incentive Plan and the applicable award agreements. See the discussion under the heading “Long-Term Incentives” in the CD&A for further information about these stock options, RSUs and performance award units.

 

             

 

Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(1)

    Estimated Future Payouts
Under Equity
Incentive Plan
Awards(2)
   

All
Other
Stock
Awards:
Number
of
Shares
of
Stock

or Units
(#)

   

All Other
Option
Awards:
Number of
Securities
Underlying

Options
(#)

   

Exercise
or Base
Price of
Option

Awards(3)
($/Sh)

   

Grant
Date Fair
Value of
Stock
and
Option

Awards(4)
($)

 

Name

 

 

Award

 

  Grant
Date
   

Threshold
($)

 

   

Target

($)

 

   

Maximum
($)

 

   

Threshold
(#)

 

   

Target
(#)

 

   

Maximum
(#)

 

         
                         

Juan Ramón Alaix

 

Annual Incentive

      0               1,458,500       2,917,000                
                       
 

Stock Options (5)

    2/14/2017                     170,163        55.02         2,433,331  
                       
 

Restricted Stock Units (5)

    2/14/2017                   44,226            2,433,315  
                       
 

Performance Award Units (6)

 

   

 

2/14/2017

 

 

 

         

 

0        

 

 

 

   

 

32,758

 

 

 

   

 

65,516 

 

 

 

         

 

2,433,264

 

 

 

                       

Glenn C. David

 

Annual Incentive

      0               462,375       924,750                
                       
 

Stock Options (5)

    2/14/2017                     32,634        55.02         466,666  
                       
 

Restricted Stock Units (5)

    2/14/2017                   8,481            466,625  
                       
 

Performance Award Units (6) 

 

   

 

2/14/2017

 

 

 

         

 

0        

 

 

 

   

 

6,282

 

 

 

   

 

12,564 

 

 

 

         

 

466,627

 

 

 

                       

Kristin C. Peck

 

Annual Incentive

      0               508,000       1,016,000                
                       
 

Stock Options (5)

    2/14/2017                     32,634        55.02         466,666  
                       
 

Restricted Stock Units (5)

    2/14/2017                   8,481            466,625  
                       
 

Performance Award Units (6)

 

   

 

2/14/2017

 

 

 

         

 

0        

 

 

 

   

 

6,282

 

 

 

   

 

12,564 

 

 

 

         

 

466,627

 

 

 

                       

Clinton A. Lewis, Jr. 

 

Annual Incentive

      0               508,000       1,016,000                
                       
 

Stock Options (5)

    2/14/2017                     32,634        55.02         466,666  
                       
 

Restricted Stock Units (5)

    2/14/2017                   8,481            466,625  
                       
 

Performance Award Units (6)

 

   

 

2/14/2017

 

 

 

         

 

0        

 

 

 

   

 

6,282

 

 

 

   

 

12,564 

 

 

 

         

 

466,627

 

 

 

                       

Catherine A. Knupp

 

Annual Incentive

      0               452,750       905,500                
                       
 

Stock Options (5)

    2/14/2017                     32,634        55.02         466,666  
                       
 

Restricted Stock Units (5)

    2/14/2017                   8,481            466,625  
                       
   

Performance Award Units (6) 

 

   

 

2/14/2017

 

 

 

                           

 

0        

 

 

 

   

 

6,282

 

 

 

   

 

12,564 

 

 

 

                           

 

466,627

 

 

 

 

(1) These amounts represent the threshold, target and maximum non-equity incentive plan awards under the Zoetis Annual Incentive Plan for 2017.

 

(2) These amounts represent the threshold, target and maximum share payouts under our performance award unit program for the performance period beginning January 1, 2017 and ending December 31, 2019. The payment for threshold performance is 0%. The target payout is equal to 100% of the granted units and represents the number of performance award units that may be earned for achieving the target level of the performance goal. The maximum payout is 200% of the target number of performance award units and represents the number of performance award units that may be earned for achieving the maximum level of the performance goal. Dividend equivalent units are accrued through the payout date and increase the target number of performance award units.

 

(3) The exercise price of the stock options is the closing price of the company’s stock on the grant date.

 

(4) The amounts shown in this column represent the award values as of the grant date, computed in accordance with FASB ASC Topic 718 based on the assumptions and methodologies set forth in Note 14 to the 2017 10-K. The stock options are shown using a Black-Scholes value of $14.30 on the grant date, the RSUs are shown using the company’s grant date closing stock price of $55.02, and the performance award units are shown using a Monte Carlo simulation model value of $74.28 on the grant date. For each NEO, the target grant date values of the stock option, RSU and performance award unit grants were intended to be equally weighted; however, there are slight differences in value due to rounding down upon the conversion from dollar values to a whole number of options or units using the grant date values.

 

(5) These Zoetis stock option and RSU awards are subject to three-year cliff vesting and vest 100% on the third anniversary of the grant date.

 

(6) These performance award units are subject to three-year cliff vesting and are earned based on achievement of a performance goal measured over a three-year performance period beginning January 1, 2017 and ending December 31, 2019. The performance goal is based on the company’s TSR results as compared to the TSR results of the companies comprising the S&P 500 Group. The number of shares paid under these performance award units, if any, ranges from 0% to 200% of the target number of shares (including accrued dividend equivalent units) and depends upon the extent to which the performance goal is achieved, as determined by the Committee after the end of the performance period.

 

48   ZOETIS 2018 PROXY STATEMENT


Table of Contents

EXECUTIVE COMPENSATION

 

OUTSTANDING EQUITY AWARDS AT 2017 FISCAL YEAR-END TABLE

The following table summarizes the Zoetis equity-based long-term incentive awards made to our NEOs that were outstanding as of December 31, 2017.

 

                Option Awards     Stock Awards  

Name

       Grant
Date
       Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)(1)
    Option
Exercise
Price
($)
    Option
Expiration
Date
   

Number
of Shares or
Units of

Stock
That Have
Not Vested

(#)(1)(2)

    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(3)
   

Equity
Incentive Plan
Awards:
Number of
Unearned
Shares,

Units, or
Other Rights

That Have
Not Vested
(#)(2)(4)

          

Equity
Incentive Plan
Awards:
Market or

Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

($)(3)

 
                 

Juan Ramón Alaix(7)

    1/31/2013     285,306       26.00 (5)      1/31/2023              
                 
    3/4/2014     312,109       30.89       3/3/2024              
                 
    2/27/2015         159,954       46.09       2/26/2025       101,702 (6)        7,326,612        
                 
    2/19/2016         187,667       41.83       2/18/2026       50,864         3,664,243       42,383         3,053,271  
                 
    2/14/2017

 

       

 

170,163

 

 

 

   

 

55.02

 

 

 

   

 

2/13/2027

 

 

 

   

 

44,456

 

 

 

     

 

3,202,610

 

 

 

   

 

32,928

 

 

 

     

 

2,372,133

 

 

 

                 

Glenn C. David

    3/4/2014     16,385       30.89       3/3/2024              
                 
    2/27/2015             7,712       46.09       2/26/2025       4,903 (6)        353,212        
                 
    2/19/2016             8,191       41.83       2/18/2026       2,220         159,929       1,850         133,274  
                 
    8/22/2016           21,301       51.23       8/21/2026       5,416         390,169        
                 
    12/6/2016           11,144       50.22       12/5/2026       3,007         216,624        
                 
    2/14/2017

 

       

 

  32,634

 

 

 

   

 

55.02

 

 

 

   

 

2/13/2027

 

 

 

   

 

8,525

 

 

 

     

 

614,141

 

 

 

   

 

6,315

 

 

 

     

 

454,933

 

 

 

                 

Kristin C. Peck(7)

    1/31/2013     79,885       26.00 (5)      1/31/2023              
                 
    3/4/2014     78,651       30.89       3/3/2024              
                 
    2/27/2015           37,132       46.09       2/26/2025       23,609 (6)        1,700,792        
                 
    2/19/2016           40,214       41.83       2/18/2026       10,899         785,164       9,082         654,267  
                 
    2/14/2017

 

       

 

  32,634

 

 

 

   

 

55.02

 

 

 

   

 

2/13/2027

 

 

 

   

 

8,525

 

 

 

     

 

614,141

 

 

 

   

 

6,315

 

 

 

     

 

454,933

 

 

 

                 

Clinton A. Lewis, Jr.(7) 

    1/31/2013     42,796       26.00 (5)      1/31/2023              
                 
    3/4/2014     46,816       30.89       3/3/2024