UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. __)
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¨ | Definitive Proxy Statement |
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¨ | Soliciting Material Pursuant to §240.14a-12 |
CERNER CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name(s) of Person(s) Filing Proxy Statement, if other than the Registrant)
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PRELIMINARY PROXY STATEMENT - SUBJECT TO COMPLETION
April 7, 2020
Cerner shareholders:
I am pleased to invite you to attend the 2020 Annual Shareholders' Meeting of Cerner Corporation to be held on May 22, 2020 at 10:00 a.m. (CDT). The situation with COVID-19 is continuing to rapidly evolve, as is Cerner's response to help protect the health of our associates, clients and their patients, shareholders, and our communities. Based on the unfolding information, we have elected to hold our first virtual meeting of stockholders. You will be able to attend the 2020 Annual Meeting online, vote your shares, and submit questions during the meeting by visiting www.virtualshareholdermeeting.com/CERN2020.
Three directors will stand for re-election at this year's Annual Shareholders' Meeting. We also will vote to ratify the appointment of KMPG LLP as our independent accounting firm and approve the compensation of our Named Executive Officers. Additionally, after carefully considering the advantages and disadvantages of the classification of our Board, the current views of our shareholders, and a growing sentiment among institutional investors and their advisory services in favor of annual elections, Cerner's Board recommends that you approve the proposed amendments to our charter that would declassify our Board of Directors and more clearly align the advance notice provisions for director nominations with those in our bylaws.
Health information technology remains a dynamic industry that is an integral component in the delivery of global health care. For more than 40 years, Cerner has been at the forefront of digitizing health care - an important step toward improving the standard of living of the world's population. Since the beginning, we've had a vision for what comes next. With nearly three million health care professionals accessing Cerner's systems every day, we manage the data of nearly 250 million lives around the world. As we enter the cognitive era of health care, alongside our clients, Cerner is leading health care's ever-quickening evolution. The opportunities are massive. We expect the foundational work from digitization to enable health care's true potential; bring a heightened focus on preventative care, improved safety, and reduced costs; and to help us all be more connected and thrive.
Since our last meeting, we have taken steps to realize operational efficiencies across the enterprise and implement transformative structure and process improvements that should enable future growth for Cerner. Other 2019 highlights include the following:
• | As part of our agreements with Amazon and Amazon Web Services, we have migrated eligible HealtheIntent® clients to AWS, scheduled to migrate Cerner-hosted CareAware® clients by year's end and are making progress to cloud-enable our Cerner Millennium® platform. |
• | Organizationally, we added a new Chief Human Resources Officer and Chief Marketing Officer. We also added to the roles of Don Trigg, who was named President with responsibility for all Cerner business units, and John Peterzalek, who as Chief Client and Services Officer is now responsible for all aspects of the client experience. Also in 2019, and prior to last year's shareholder meeting, we expanded Cerner's Board by adding four new directors: John Greisch, Melinda Mount, George Riedel and Halsey Wise. These new members have collaborated with existing board members to provide valuable counsel and make significant contributions. |
• | We are also gaining momentum with many of our strategic growth initiatives. We have positioned HealtheIntent as a core enabler of provider network strategies, created an enhanced data commercialization service and |
extended Cerner's reach to non-provider segments of health care by expanding our consumer and employer capabilities.
• | We've made good progress on our work to modernize the health records for the U.S. Departments of Defense and Veterans Affairs. In an important step, we migrated 78 billion health records of 23.5 million Veterans to Cerner's data center. Additionally, the implementation of several federal sites is scheduled to occur this year. |
• | We delivered financial results in line with expectations and returned $1.4 billion of capital in 2019 through share buybacks and dividend payments, reflecting our continued commitment of delivering value to shareholders. |
These actions demonstrate our focus on delivering world-class client experiences, operational improvements, improved governance and attractive shareholder value. As such, we ask for your proxy support (FOR) each of the proposals included in the following proxy statement.
On behalf of the entire Board of Directors, thank you for your continued interest in Cerner.
Brent Shafer
Chairman of the Board of Directors and Chief Executive Officer
PRELIMINARY PROXY STATEMENT - SUBJECT TO COMPLETION
CERNER CORPORATION
2800 ROCKCREEK PARKWAY
NORTH KANSAS CITY, MISSOURI 64117
NOTICE OF 2020 ANNUAL SHAREHOLDERS' MEETING
MAY 22, 2020
Virtual Annual Meeting of Shareholders - Online Meeting Only - No Physical Meeting Location
TO OUR SHAREHOLDERS:
The 2020 Annual Shareholders' Meeting of Cerner Corporation will be held virtually on Friday, May 22, 2020, at 10:00 a.m. (CDT). You can attend the 2020 Annual Meeting online, vote your shares, and submit questions during the meeting by visiting www.virtualshareholdermeeting.com/CERN2020. Be sure to have the Control Number we have provided to you to join the meeting.
At the meeting, shareholders will be asked to vote on the following:
1. | To elect three Class I Directors: Julie L. Gerberding, M.D., M.P.H., Brent Shafer and William D. Zollars, each to serve for a three-year term (see Proposal #1); |
2. | To ratify the appointment of KPMG LLP as the independent registered public accounting firm of Cerner Corporation for 2020 (see Proposal #2); |
3. | To conduct a non-binding advisory vote to approve the compensation of our Named Executive Officers (see Proposal #3); |
4. | To consider an amendment to our Third Restated Certificate of Incorporation to declassify our Board of Directors (Proposal #4); |
5. | To consider an amendment to our Third Restated Certificate of Incorporation to amend the advance notice provisions for director nominations (Proposal #5); and |
6. | Any other business that may properly come before the 2020 Annual Shareholders' Meeting or any postponement or adjournment thereof. |
These items are more fully described in the following pages, which are made part of this notice.
Holders of record as of the close of business on Tuesday, March 24, 2020 (the "Record Date"), are entitled to receive notice of and to vote at the 2020 Annual Shareholders' Meeting or any adjournment or postponement of the meeting. A list of all shareholders as of the Record Date will be made available during the meeting at www.virtualshareholdermeeting.com/CERN2020.
It is important that your shares be voted at the 2020 Annual Shareholders' Meeting. Even if you plan to attend the 2020 Annual Shareholders' Meeting online, the Board of Directors of Cerner Corporation requests that you submit your
proxy in advance by telephone or the Internet or, if you have requested a paper copy of these materials, by marking, signing, dating and promptly mailing the Proxy Card or voting instruction form in the enclosed postage prepaid envelope.
A copy of our 2019 Annual Report to Shareholders, which includes audited consolidated financial statements, is available at both www.cerner.com and www.proxyvote.com or, if you have requested a paper copy of these materials, is enclosed. The Annual Report is not part of our proxy soliciting material.
BY ORDER OF THE BOARD OF DIRECTORS, | ||||
 | ||||
Randy D. Sims | ||||
Secretary | ||||
You may vote your shares in advance by telephone, via the Internet or, if you requested to receive printed proxy materials, by completing, signing, dating and mailing your Proxy Card. The proxy may be revoked at any time before your shares are voted at the meeting by submitting written notice of revocation to the Secretary of Cerner Corporation or by submitting another timely proxy before the applicable deadlines. If you attend the meeting online, you may choose to vote your shares at www.virtualshareholdermeeting.com/CERN2020 and following the instructions, and any previously submitted proxy will not be used. If you hold shares through a broker, bank or other nominee, please check the voting instructions used by that broker, bank or nominee.
Important Notice Regarding the Availability of Proxy Materials for the 2020 Annual Shareholders' Meeting to be held on May 22, 2020: The 2020 Proxy Statement and 2019 Annual Report to Shareholders are available at www.proxyvote.com and on www.cerner.com under "Investor Relations, Financials, Proxy Materials."
PROXY STATEMENT
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING | |
INFORMATION CONCERNING DIRECTORS AND NOMINEES | |
MEETINGS OF THE BOARD AND COMMITTEES | |
COMMITTEES OF THE BOARD | |
DIRECTOR COMPENSATION | |
AUDIT COMMITTEE REPORT | |
GUIDELINES OF CERNER CORPORATION'S AUDIT COMMITTEE FOR PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES | |
COMPENSATION COMMITTEE REPORT | |
COMPENSATION DISCUSSION AND ANALYSIS | |
PAY RATIO | |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION | |
CORPORATE GOVERNANCE | |
CONSIDERATION OF DIRECTOR NOMINEES | |
CERTAIN TRANSACTIONS | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | |
PROPOSAL #1 ELECTION OF DIRECTORS | |
RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
PROPOSAL #2 RATIFICATION OF THE APPOINTMENT OF KPMG AS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | |
PROPOSAL #3 ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS | |
PROPOSAL #4 APPROVAL OF THE PROPOSED AMENDMENT TO THE THIRD RESTATED CERTIFICATE OF INCORPORATION TO DECLASSIFY THE BOARD | |
PROPOSAL #5 APPROVAL OF THE PROPOSED AMENDMENT TO THE THIRD RESTATED CERTIFICATE OF INCORPORATION TO AMEND ADVANCE NOTICE PROVISIONS FOR DIRECTOR ELECTIONS | |
SHAREHOLDER PROPOSALS | |
HOUSEHOLDING OF PROXY MATERIALS | |
OTHER MATTERS | |
RECONCILIATION OF GAAP RESULTS TO NON-GAAP RESULTS | APPENDIX I |
PROPOSED AMENDMENT TO THIRD RESTATED CERTIFICATE OF INCORPORATION TO DECLASSIFY THE BOARD | APPENDIX II |
PROPOSED AMENDMENT TO THIRD RESTATED CERTIFICATE OF INCORPORATION TO AMEND ADVANCE NOTICE PROVISIONS FOR DIRECTOR ELECTIONS | APPENDIX III |
CERNER CORPORATION
2800 ROCKCREEK PARKWAY
NORTH KANSAS CITY, MISSOURI 64117
PROXY STATEMENT |
2020 ANNUAL SHAREHOLDERS' MEETING
MAY 22, 2020
This Proxy Statement, which is first made available on or about April 7, 2020, is furnished to you in connection with the solicitation of proxies by the Board of Directors (the "Board") of Cerner Corporation, a Delaware corporation ("Cerner," the "Company," "us," "our" or "we"), for use at the 2020 Annual Shareholders' Meeting of the Company to be held on May 22, 2020, commencing at 10:00 a.m. (CDT) (the "2020 Annual Shareholders' Meeting"). As part of our precautions regarding the coronavirus (COVID-19), and in an effort to protect the health and safety of our shareholders, associates (employees) and other stakeholders, we are holding our annual meeting solely by means of remote communication. You can attend the 2020 Annual Shareholders' Meeting online, vote your shares, and submit questions during the meeting by visiting www.virtualshareholdermeeting.com/CERN2020. Your vote is very important. For this reason, the Board is requesting that you allow your shares of common stock, par value $0.01 per share, of the Company ("Common Stock") to be represented at the 2020 Annual Shareholders' Meeting by the persons named as proxies on the Proxy Card.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Who can vote? | You are entitled to vote your outstanding shares of Common Stock if our records show that you held your shares as of the close of business on Tuesday, March 24, 2020, the Record Date for our meeting. At the close of business on March 24, 2020, 304,245,692 shares of Common Stock were outstanding and entitled to vote. Each share of Common Stock is entitled to one vote. Your Proxy Card shows the number of shares that you are entitled to vote. Your individual vote is confidential and will not be disclosed to third parties. | |
What is the difference between a shareholder of record and a "street name" holder? | If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the shareholder of record with respect to those shares. If your shares are held in a stock brokerage account or by a broker, bank or other nominee, then the broker, bank or other nominee is considered to be the shareholder of record with respect to those shares. However, you still are considered the beneficial owner of those shares and your shares are said to be held in "street name." Street name holders generally cannot vote their shares directly and must instead instruct the broker, bank or other nominee how to vote their shares using the voting instruction form provided by such broker, bank or other nominee. | |
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How do I vote prior to the meeting? | If your Common Stock is held by a broker, bank or other nominee (i.e., in street name or through the Cerner Corporation Foundations Retirement Plan), you will receive instructions from the broker, bank or other nominee that you must follow in order to have your shares voted. These instructions should indicate if Internet or telephone voting is available and, if so, provide details regarding how to use those systems to submit your voting instructions. If you hold your shares in your own name (i.e., as a holder of record), and even if you plan to attend our virtual 2020 Annual Shareholders' Meeting, please vote in advance of the meeting by one of the following methods. PLEASE CHOOSE ONLY ONE OF THE FOLLOWING: 1. By Internet: To submit your proxy by Internet, go to www.proxyvote.com. You may submit your proxy via the Internet 24 hours a day, 7 days a week until 11:59 p.m. (EDT) on Thursday, May 21, 2020. 2. By Telephone: You may submit your proxy by telephone 24 hours a day, 7 days a week until 11:59 p.m. (EDT) on Thursday, May 21, 2020. If you are in the United States or Canada, you may call toll-free 1 (800) 690-6903. 3. By Mail: If you received your proxy materials by mail, you may instruct the persons named as proxies how to vote your Common Stock by completing, signing, dating and mailing the Proxy Card in the envelope provided. If you mail your Proxy Card, Broadridge Financial Solutions, Inc. must receive it before 10:00 a.m. (EDT) on Thursday, May 21, 2020, the last business day before the 2020 Annual Shareholders' Meeting. In order to vote, you will need the control number included on your Proxy Card, voting instruction form or Notice of Internet Availability of Proxy Materials. Each shareholder has a unique control number so we can ensure all voting instructions are genuine and prevent duplicate voting. Depending on the number of accounts in which you hold Common Stock, you may receive and need to vote more than one control number. If you submit your proxy by Internet or telephone, you do not need to return a Proxy Card. You can vote by any of the methods above prior to the meeting and still attend the virtual 2020 Annual Shareholders' Meeting. | |
How do I vote during the meeting? | Except for any shares you hold in the Cerner Corporation Foundations Retirement Plan (the "401(k) Plan") which may only be voted in advance as provided below, you may also vote during the virtual 2020 Annual Shareholders' Meeting by visiting www.virtualshareholdermeeting.com/CERN2020 and following the instructions. You will need the control number included on your Proxy Card, voting instruction form or Notice of Internet Availability of Proxy Materials. A vote at the 2020 Annual Shareholders' Meeting will revoke any prior votes (except for votes by 401(k) Plan participants, which must be cast prior to the meeting). | |
How do I vote if my shares are held in the Cerner Corporation Foundations Retirement Plan? | If you hold any shares in the 401(k) Plan, you are receiving, or are being provided access to, the same proxy materials as any other shareholder of record. However, your proxy vote will serve as voting instructions to the 401(k) Plan trustee. Your voting instructions must be received at least three business days prior to the 2020 Annual Shareholders' Meeting in order to count. In accordance with the terms of the 401(k) Plan, the trustee will vote all of the shares held in the 401(k) Plan in the same proportion as the actual proxy votes submitted by 401(k) Plan participants as of 11:59 p.m. (EDT) on May 18, 2020. We encourage you to provide instructions to the trustee regarding the voting of your shares. Due to the structure of the virtual meeting site, plan participants will technically have the ability to submit votes for 401(k) Plan shares during the meeting, but votes submitted by plan participants during the meeting will not be counted or revoke their prior instructions; in order for your vote to be counted, you must provide instructions to the Trustee by 11:59 p.m. (EDT) on May 18, 2020. | |
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How may I revoke or change my proxy instructions? | If you are a shareholder of record and you submit a proxy with your voting instructions, and later desire to revoke or change your voting instructions (prior to the final vote at the 2020 Annual Shareholders' Meeting), you may revoke and then change your initial proxy instructions by any of the following procedures: 1. Following the telephone or Internet voting instructions on how to revoke or change your voting instructions by telephone or logging in and resubmitting your vote prior to 11:59 p.m. (EDT) on Thursday, May 21, 2020; 2. Completing, signing and returning another signed Proxy Card with a later date that Broadridge Financial Solutions, Inc. receives before 10:00 a.m. (EDT) on Thursday, May 21, 2020; or 3. Attending the virtual 2020 Annual Shareholders' Meeting and voting your shares by visiting www.virtualshareholdermeeting.com/CERN2020 and following the instructions. Your attendance at the 2020 Annual Shareholders' Meeting will not automatically revoke your proxy unless you vote again at or before the 2020 Annual Shareholders' Meeting or specifically request that your prior proxy be revoked by delivering to the Corporate Secretary a written notice of revocation that is received prior to 10:00 a.m. (CDT) on May 21, 2020. If your shares are held in "street name" through a broker, bank or other nominee, you must contact your broker, bank or nominee to receive instructions as to how to revoke your proxy if such instructions have not already been provided to you. In any case, your last properly-received and timely voted proxy or ballot will be the vote that is counted. | |
How are votes counted? | The 2020 Annual Shareholders' Meeting will be held if a quorum represented by a majority of our outstanding shares entitled to vote is represented at the meeting, either in person or by properly executed proxy. Your shares will be counted towards the quorum if you vote by mail, by telephone, or through the Internet by the deadlines described above or vote at the virtual 2020 Annual Shareholders' Meeting, even if you wish to abstain from voting on some or all matters introduced at the meeting. Broker non-votes (which are discussed below) will also be counted for the purpose of determining whether there is a quorum. If a quorum is not present or represented by proxy, the 2020 Annual Shareholders' Meeting may be adjourned from time to time until a quorum is obtained, without notice other than announcement at the meeting. However, if the adjournment is for more than thirty (30) days, or if after adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting will be given to each shareholder of record entitled to vote at the meeting. If you give us a proxy without giving specific voting instructions, your shares will be voted by the persons named as proxies as recommended by the Board. We are not aware of any other matters to be presented at the 2020 Annual Shareholders' Meeting except for those described in this Proxy Statement. However, if any other matters not described in this Proxy Statement are properly presented at the meeting, the persons named as proxies will use their own judgment to determine how to vote your shares. If the meeting is postponed or adjourned, your shares may be voted by the persons named as proxies on the new meeting date as well, unless you have revoked your proxy instructions prior to that time. All votes will be tabulated by one or more Inspectors of Election appointed by the Board. | |
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What is a broker non-vote? | A "broker non-vote" occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the broker, bank or other nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Broker non-votes are counted as present or represented for purposes of determining the presence or absence of a quorum for the 2020 Annual Shareholders' Meeting, if such shares are otherwise properly represented at the meeting. If you are a beneficial shareholder and your broker, bank or other nominee holds your shares in its name, the broker, bank or other nominee is permitted to vote your shares on the ratification of the appointment of KPMG LLP (Proposal #2) as the Company's independent registered public accounting firm, even if the broker, bank or other nominee does not receive voting instructions from you. Brokers, banks and other nominees do not have discretionary voting rights with respect to the election of Directors (Proposal #1), the advisory vote to approve the compensation of our Named Executive Officers (Proposal #3), the proposed amendment to our Third Restated Certificate of Incorporation to declassify the Board (Proposal #4), or the proposed amendment to our Third Restated Certificate of Incorporation to amend the advance notice provisions for director nominations (Proposal #5). Therefore, if you do not instruct your broker, bank or other nominee how you would like your shares voted with respect to these proposals, your shares will not be voted on such proposals. | |
How do I attend the 2020 Annual Shareholders' Meeting? | Cerner will be hosting the 2020 Annual Shareholders' Meeting online. A summary of the information you need to attend online is provided below. – Any holder of record as of the close of business on Tuesday, March 24, 2020, may attend and vote at the 2020 Annual Shareholders' Meeting by visiting www.virtualshareholdermeeting.com/CERN2020. If you want to vote during the 2020 Annual Shareholders' Meeting any shares you hold in street name, you must obtain instructions from your broker, bank or other nominee.– The live audio webcast of the 2020 Annual Shareholders' Meeting will begin promptly at 10:00 a.m. (CDT). Online access to the audio webcast will open five minutes prior to the start of the 2020 Annual Shareholders' Meeting to allow time for you to log-in and test your device's audio system. We encourage you to access the meeting in advance of the designated start time.– Any person may access the 2020 Annual Shareholders' Meeting online, but only shareholders may vote electronically and submit questions online while attending the 2020 Annual Shareholders' Meeting.– Please have the control number we have provided to you to join the 2020 Annual Shareholder's Meeting.– Instructions on how to attend and participate in the 2020 Annual Shareholders' Meeting, including how to demonstrate proof of stock ownership, are available at www.virtualshareholdermeeting.com/CERN2020.– A replay of the 2020 Annual Shareholders' Meeting will be available shortly after the meeting on www.cerner.com under Investor Relations (Presentations and Webcasts) through May 21, 2021. | |
What if I have technical difficulties or trouble accessing the virtual meeting website? | We will have support available to assist shareholders with any technical difficulties they may have accessing or hearing the virtual meeting. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call the technical support number that will be posted on the virtual shareholder meeting log in page. | |
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Can I listen to the 2020 Annual Shareholders' Meeting by telephone if I am unable to attend online? | Yes. If you are unable to access the 2020 Annual Shareholders' Meeting online, you will be able to call 1-877-328-2502 and listen to the 2020 Annual Shareholders' Meeting. Although shareholders accessing the 2020 Annual Shareholders' Meeting by telephone will be able to listen to the 2020 Annual Shareholders' Meeting, you will not be considered present at the 2020 Annual Shareholders' Meeting and will not be able to vote or ask questions during the 2020 Annual Shareholders' Meeting unless you also attend the 2020 Annual Shareholders' Meeting online. If you choose to listen in via telephone only, please be sure to vote your shares in advance of the 2020 Annual Shareholders' Meeting via one of the methods noted above. | |
Why did I receive a Notice in the mail regarding the Internet Availability of Proxy Materials instead of a full set of printed proxy materials? | Pursuant to rules adopted by the SEC, we have elected to provide access to our proxy materials via the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials to our shareholders. All shareholders will have the ability to access the proxy materials on the website referred to in the Notice or request to receive a printed set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice. In addition, shareholders may request to receive proxy materials in printed form by mail or electronically by e-mail on an ongoing basis. We encourage shareholders to take advantage of the availability of the proxy materials on the Internet to help reduce the environmental impact of our annual meetings. | |
What vote is required? | With respect to Proposal #1 (the election of Directors), you may vote "For" or "Against" each of the nominees for Director, or you may "Abstain" from voting for one or more nominees. In an uncontested Director election, such as this one, the affirmative vote of a majority of the votes cast, in person or by proxy, is required for the election of Directors (meaning the number of shares voted "For" a nominee must exceed the number of shares voted "Against" a nominee). If any nominee for Director receives a greater number of votes "Against" his or her election than votes "For" such election, our Amended and Restated Bylaws (effective as of March 20, 2020) (the "Bylaws") require that such person tender his or her resignation to the Board following certification of the vote as further discussed below under "Consideration of Director Nominees - Majority Voting for Directors." Abstentions and broker non-votes are not considered votes cast for the foregoing purpose and will have no effect on the election of nominees. No shareholder may vote in person or by proxy for more than three nominees at the 2020 Annual Shareholders' Meeting. Shareholders do not have cumulative voting rights in the election of Directors. The affirmative vote ("For") of a majority of the shares present in person or by proxy and entitled to vote at the meeting will be required for the approval of the following: • the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2020 (Proposal #2); • the approval, on an advisory basis, of the compensation of our Named Executive Officers (Proposal #3); and • any other proposal that might properly come before the meeting. With respect to Proposal #4 (consideration of an amendment to our Third Restated Certificate to declassify our Board of Directors) and Proposal #5 (consideration of an amendment to our Third Restated Certificate to amend the advance notice provisions for director elections), such amendments will not become effective unless approved by 80% of the shares of our Common Stock outstanding and entitled to vote thereon. | |
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With respect to Proposal #s 2, 3, 4 and 5, you may vote "For," "Against" or "Abstain." Abstentions and broker non-votes are considered to be "present" and "entitled to" vote at the meeting with respect to Proposal #s 2, 3, 4 and 5, and as a result, abstentions and broker non-votes will have the same effect as a vote "Against" these proposals. However, as discussed above, brokers, banks and other nominees may use their discretionary voting authority with respect to the ratification of our independent registered public accounting firm (Proposal #2), so no broker non-votes are expected for this proposal. The results of the vote on Proposal #3 (the advisory say-on-pay vote on the compensation of our Named Executive Officers) is not binding on the Board, whether or not the proposal is approved at the 2020 Annual Shareholders' Meeting. In evaluating the shareholder vote on this advisory resolution, the Board will consider the voting results in their entirety. | ||
How does the Board recommend that I vote? | The Board recommends a vote in favor of: • each nominee included in this Proxy Statement for Director (Proposal #1); • the ratification of the appointment of KPMG LLP as the independent registered public accounting firm of the Company for 2020 (Proposal #2); • the approval, on an advisory basis, of the compensation of our Named Executive Officers (Proposal #3); • the approval of the proposed amendment to our Third Restated Certificate of Incorporation to declassify the Board of Directors (Proposal #4); and • the approval of the proposed amendment to our Third Restated Certificate of Incorporation to amend the advance notice provisions for director elections (Proposal #5). | |
Who pays the cost of this proxy solicitation? | This Proxy Statement and the accompanying Proxy Card are being furnished to shareholders in connection with the solicitation of proxies by the Board of the Company. We will bear all costs of solicitation of such proxies. In addition to solicitation of proxies by mail, our Directors, officers and associates, at no additional compensation, may solicit proxies from shareholders by telephone, email, Internet or in person. We will request brokers, banks, custodians, fiduciaries and other nominees to forward proxy soliciting materials to the beneficial owners of stock they hold of record. We will reimburse them for their reasonable out-of-pocket expenses incurred in connection with the distribution of the proxy materials. | |
What does it mean if I receive more than one proxy card or voting instruction form? | It generally means your shares are registered differently or are in more than one account. Please provide voting instructions for each proxy card or voting instruction form or, if you vote via the Internet or by telephone, vote once for each proxy card or voting instruction form you receive to ensure that all of your shares are voted. | |
How can I receive my proxy materials by e-mail in the future? | If you have previously elected to receive your proxy materials by e-mail, there is no need to opt in again, and you will receive future copies of proxy materials by e-mail. For those who have not yet opted to receive your proxy materials by e-mail but would like to do so for future annual shareholders' meetings, you can elect to receive an e-mail with links to these documents, your control number and instructions for voting over the Internet. Opting to receive your proxy materials by e-mail will save the cost of producing and mailing documents to you and will also help conserve resources. Your e-mail address will be kept separate from any other company operations and will be used for no other purpose. | |
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If we mailed you our proxy materials and you would like to sign up to receive them by e-mail in the future, you can choose this option by: • following the instructions on your Proxy Card or voting instruction form; or • following the instructions provided when you submit your proxy over the Internet. Your election to receive proxy materials by email will remain in effect until you terminate it. | ||
How can I examine a list of shareholders? | Shareholders at the close of business on the Record Date may examine a list of all shareholders as of the Record Date for any purpose germane to the 2020 Annual Shareholders' Meeting for 10 days preceding the meeting, at our offices at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117, and electronically during the meeting at www.virtualshareholdermeeting.com/CERN2020 when you enter the control number included on your Proxy Card, voting instruction form or Notice of Internet Availability of Proxy Materials. | |
Who should I call if I have questions? | If you have questions about the 2020 Annual Shareholders' Meeting or voting, please call our Corporate Secretary, Randy D. Sims, at (816) 221-1024. | |
Important Notice Regarding the Availability of Proxy Materials for the 2020 Annual Shareholders' Meeting to be held on May 22, 2020: The 2020 Proxy Statement and 2019 Annual Report to Shareholders are available at www.proxyvote.com and www.cerner.com under "Investor Relations, Financials, Proxy Materials."
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INFORMATION CONCERNING DIRECTORS AND NOMINEES
Our Board is currently comprised of ten Directors and is divided into three classes, with each of the classes serving staggered terms of three years. The terms of our Class I Directors will expire at this year's 2020 Annual Shareholders' Meeting. Those elected as Class I Directors this year will serve as Directors until the 2023 Annual Shareholders' Meeting. The terms of the Class II and Class III Directors will expire at the 2021 and 2022 Annual Shareholders' Meetings, respectively. Proxies cannot be voted for a greater number of persons than the number of nominees named for Class I.
The Board has determined that all nine current non-employee Directors of the Board are independent as required by the rules of the Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market LLC ("Nasdaq"). The names and biographies of the Company's current Directors and nominees for election as Class I Directors are set forth below. Ages provided are as of the date of our 2020 Annual Shareholders' Meeting.
If elected, each of the nominees named for Class I will hold office for a three-year term expiring at the 2023 Annual Meeting of Shareholders and until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Board is proposing to declassify the Board in Proposal #4. If the shareholders approve Proposal #4, all of the continuing Directors and all of the nominees for Class I Directors named in this Proxy Statement, if elected, will serve out their remaining terms, and all directors elected at the 2021 Annual Shareholders' Meeting and future annual meetings will be elected to serve one-year terms.
CLASS I (Serving for a Term to Expire at the 2020 Annual Shareholders' Meeting and Nominated for a Term to Expire at the 2023 Annual Shareholders' Meeting) | ||
 | Dr. Gerberding has been a member of the Board of Directors of the Company since March 2017. She has been the Executive Vice President and Chief Patient Officer, Strategic Communications, Global Public Policy and Population Health of Merck & Co., Inc. ("Merck") (NYSE: MRK) since July 2016. Merck is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products, which it markets directly and through its joint ventures. In this position, Dr. Gerberding is responsible for Merck's global public policy, corporate responsibility and communications functions, as well as the Merck Foundation and the Merck for Mothers program. Dr. Gerberding also leads new partnership initiatives that accelerate Merck's ability to contribute to improved population health, a measure of impact that is increasingly valued by governments and other global health organizations. Dr. Gerberding joined Merck as President of Merck Vaccines in January 2010 and was promoted to Executive Vice President for Strategic Communications, Global Public Policy and Population Health in December 2015. Prior to joining Merck, Dr. Gerberding served as Director of the U.S. Centers for Disease Control and Prevention ("CDC") from 2002-2009 and before that served as Director of the Division of Healthcare Quality Promotion. Before joining the CDC, Dr. Gerberding was a tenured faculty member in Infectious Diseases at the University of California at San Francisco ("UCSF"). She continues as an Adjunct Associate Clinical Professor of Medicine at UCSF. The following experience, qualifications, attributes and/or skills led the Board to conclude that Dr. Gerberding should serve and be nominated as a Director: her medical and science-based professional background and experience, current and previously held senior-executive level leadership positions at a global public company, her knowledge of and experience with global public policy, health care | |
Julie L. Gerberding, M.D., M.P.H. (Age 64) Member of the: • Compensation Committee • Nominating, Governance & Public Policy Committee | ||
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leadership and population health, her information protection (data privacy and cybersecurity) expertise, and her independence from the Company. | ||
 | Mr. Shafer joined the Company as Chairman of the Board and Chief Executive Officer in February 2018. Prior to joining the Company, he served as Chief Executive Officer of Philips North America, a health technology company and the North American division of Koninklijke Philips N.V. ("Philips") (NYSE: PHG), since February 2014. In that position, Mr. Shafer led an organization of 17,000 employees and oversaw a health technology portfolio that included a broad range of solutions and services covering patient monitoring, imaging, clinical informatics, sleep and respiratory care as well as a group of market-leading consumer-oriented brands. For 12 years, Mr. Shafer played a key role in helping Philips develop and strengthen its health care focus, increase its profitability and grow its market share. Prior to his most recent position, Mr. Shafer served as Chief Executive Officer of the global Philips' Home Healthcare Solutions business, a home healthcare services provider with 6,000 employees, from May 2010 until May 2014, as Chief Executive Officer of the North America region for Royal Philips Electronics from January 2009 until May 2010, and as President and Chief Executive Officer of the Healthcare Sales and Service business for Philips North America from May 2005 until May 2010. Prior to joining Philips, Mr. Shafer served in various senior leadership positions with other companies, including Hill-Rom (NYSE: HRC), GE Medical Systems (NYSE: GE) and Hewlett-Packard (NYSE: HPE). The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Shafer should serve and be nominated as a Director: his appointment as CEO of the Company, his significant experience in senior-executive level leadership positions of the health care technology division of a large, publicly traded company, his leadership in the growth and strategies of a complex, multinational organization over a number of years, his experience in global business, his commitment to innovation, and his knowledge of and experience from the provider and supplier side of the health care industry. | |
Brent Shafer (Age 62) | ||
 | Mr. Zollars has been a member of the Board of Directors of the Company since May 2005, and has been Lead Independent Director since April 2019. He is the former Chairman, President and Chief Executive Officer of YRC Worldwide (now known as YRC Freight) (Nasdaq: YRCW), which positions he held from November 1999 to July 2011. Prior to that, Mr. Zollars served as President of Yellow Transportation, Inc. from September 1996 through November 1999. From 1994 to 1996, Mr. Zollars was Senior Vice President of Ryder Integrated Logistics, and prior to that, Mr. Zollars held various executive positions with Eastman Kodak. Mr. Zollars also serves on the board of directors of Prologis, Inc. (NYSE: PLD) and served on the board of directors of CIGNA Corporation (NYSE: CI) until November 2019. The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Zollars should serve and be nominated as a Director: his professional background and experience in senior-executive leadership positions at public companies, his service on other public and private company boards, Cerner board experience, board attendance and participation, and his extensive experience with large employers, industry usage of information technology and | |
William D. Zollars (Age 72) Member of the: • Audit Committee • Compensation Committee • Nominating, Governance & Public Policy Committee • Finance & Strategy Committee | ||
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his extensive understanding of strategic planning, tactical business decision-making, risk management and corporate financial statements. | ||
CLASS II (Serving for a Term to Expire at the 2021 Annual Shareholders' Meeting) | ||
 | Mr. Daniels has been a member of the Board of Directors of the Company since December 2013. Mr. Daniels is the 12th President of Purdue University, a post he assumed in January 2013, at the conclusion of his term as Governor of Indiana. He was elected Indiana's 49th governor in 2004 in his first bid for any elected office. He was re-elected in 2008 to a second and final term, receiving more votes than any candidate for any public office in the state's history. As governor, Mr. Daniels spearheaded a host of reforms aimed at strengthening the Indiana economy, and improving the ethical standards, fiscal condition and performance of state government. Mr. Daniels came from a successful career in business and government, holding numerous top management positions in both the private and public sectors. He served as the Chief Executive Officer of the Hudson Institute and as President of Eli Lilly & Company's North American Pharmaceutical Operations (NYSE: LLY). He also served as Chief of Staff to Senator Richard Lugar, a senior advisor to President Ronald Reagan, and Director of the Office of Management and Budget under President George W. Bush. Mr. Daniels currently serves as a member of the boards of directors of Energy Systems Network, Norfolk Southern Corporation (NYSE: NSC) and Urban Institute. He served on the board of directors of Interactive Intelligence Group, Inc. (formerly Nasdaq: ININ) from 2015 to 2016. The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Daniels should serve as a Director: his government and public policy professional background and experience, his current and previously held leadership positions, his service on other public and private company boards, Cerner board experience, board attendance and participation, his health care business and operations experience, his extensive understanding of financial statements, and his experience with global business. | |
Mitchell E. Daniels, Jr., J.D. (Age 71) Member of the: • Audit Committee• Nominating, Governance & Public Policy Committee (Chairperson) | ||
 | Mr. Greisch has been a member of the Board of Directors of the Company since April 2019. He is the former President & Chief Executive Officer of Hill-Rom Holdings, Inc. ("Hill-Rom") (NYSE: HRC), a global medical technology company, a position he held from January 2010 until his retirement in May 2018. Prior to Hill-Rom, Mr. Greisch was President International Operations for Baxter International, Inc. ("Baxter") (NYSE: BAX), a position he held from 2006 until 2009. During his tenure with Baxter, he also served as Baxter's Chief Financial Officer and as President of its BioScience division. Before his time with Baxter, he was President and Chief Executive Officer for FleetPride Corporation. Prior to that, he held various positions at The Interlake Corporation, including serving as President of its Materials Handling Group. Mr. Greisch currently serves on the Board of Directors of Catalent, Inc. (NYSE: CTLT), Carrier Corporation, a spin-off from United Technologies Corp. (NYSE: UTX), and Idorsia Pharmaceuticals Ltd. (SIX Swiss Exchange: IDIA) and previously served on the boards of Hill-Rom (NYSE: HRC), Actelion Ltd, TomoTherapy, Inc. (formerly Nasdaq: TOMO), and The Advanced Medical Technology Association (AdvaMed). Additionally, he serves as a senior advisor to TPG Capital and is on | |
John J. Greisch, M.B.A. (Age 64) Member of the: • Audit Committee • Finance & Strategy Committee (Chairperson) | ||
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the board of directors for the Ann & Robert H. Lurie Children's Hospital of Chicago. The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Greisch should serve as a Director: his experience in multiple roles in global public health care companies, including serving as Chief Executive Officer and Chief Financial Officer, his health care business and operations experience, experience in preparing and analyzing complex public company financial statements, experience on the board of directors of private and public companies, and independence. | ||
 | Ms. Mount has been a member of the Board of Directors of the Company since April 2019. Ms. Mount most recently served as President of AliphCom, Inc. (d/b/a Jawbone), a consumer technology and wearable products company, which position she held from June 2013 until February 2014. Previously, she held various senior level positions at Microsoft Corporation ("Microsoft") (Nasdaq: MSFT), including Corporate Vice President and Chief Financial Officer of the Online Services Division, from 2010 until May 2013, and Corporate Vice President of Operations and Finance and Chief Financial Officer of the Entertainment and Device Division, from 2006 until 2010. Prior to joining Microsoft, Ms. Mount served as the Vice President of Strategy and Development at Time Warner, Inc. ("Time Warner") (formerly NYSE: TWX), from 1995 until 2001, and then as Executive Vice President and Co-Managing Director of the United Kingdom Division of AOL Inc. (formerly NYSE: AOL), a web portal and online service provider and a subsidiary of Time Warner, from 2001 until 2003. Prior to that, she served as Vice President of Mergers and Acquisitions at Morgan Stanley (NYSE: MS) from 1987 until 1995. Ms. Mount has served as a member of the board of directors of Technicolor S.A. (TCH: FP) since April 2016, and currently serves as Vice Chairman of the board, and has served as a member of the board of the directors of the Learning Care Group, Inc. since December 2014. The following experience, qualifications, attributes and/or skills led the Board to conclude that Ms. Mount should serve as a Director: her extensive financial and operations experience developing innovative solutions for driving growth and profit in both the start-up and Fortune 100 company settings, and her experience in senior leadership positions of global private and public companies. | |
Melinda J. Mount, M.B.A. (Age 60) Member of the: • Audit Committee • Finance & Strategy Committee | ||
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CLASS III (Serving for a Term to Expire at the 2022 Annual Shareholders' Meeting) | ||
 | Dr. Bisbee has been a member of the Board of Directors of the Company since February 1988. He is the co-founder and Executive Chairman of The Health Management Academy ("The Academy"), a network of executives from the nation's largest integrated health systems and the industry's most innovative companies striving to shape the future of health care. The Academy facilitates the exchange of best practices and benchmarking data, focused on increasing the quality, appropriateness and efficiency of care. Prior to assuming the role of Executive Chairman in September 2018, Dr. Bisbee served as Chairman and Chief Executive Officer of The Academy for more than five years. Dr. Bisbee was Chairman of the Board of Directors, Chief Executive Officer and President of ReGen Biologics, Inc. ("ReGen") (OTCMKTS: RGBOQ) from 1998 to September 2011. Dr. Bisbee was President, Chief Executive Officer and a Director of Aros Corporation (formerly known as APACHE Medical Systems, Inc.) commencing in December 1989, serving as Chairman of the Board from December 1989 to November 1997 and from December 2000 to June 2002, when ReGen and Aros Corporation merged. ReGen filed for protection under Chapter 11 of the United States Bankruptcy Code in April 2011 and substantially all of the business and assets of ReGen were purchased by Sports Medicine Holdings Company, LLC in June 2011. Prior to 1989, Dr. Bisbee was Director of the Healthcare Group at Kidder, Peabody & Co.; President of the Hospital Research and Educational Trust (the research and development arm of the American Hospital Association); and a faculty member in graduate management programs at Yale University and Northwestern University. The following experience, qualifications, attributes and/or skills led the Board to conclude that Dr. Bisbee should serve as a Director: his medical, financial and health care-based professional background and experience, current and previously held leadership positions in medical and health care-related entities, his service on research-related and academic boards, Cerner board experience, board attendance and participation, his extensive experience with health care research and specialized expertise in public company accounting and mergers and acquisitions. | |
Gerald E. Bisbee, Jr., Ph.D., M.B.A. (Age 77) Member of the: • Audit Committee (Chairperson) • Nominating, Governance & Public Policy Committee | ||
 | Ms. Dillman has been a member of the Board of Directors of the Company since May 2010. She is the former Chief Information Officer of QVC, Inc. (NYSE: QVCD), a role she held from January 2012 until she retired in January 2017. QVC, Inc. is one of the largest multimedia retailers in the world, broadcasting live 24 hours a day, 364 days a year. Prior to joining QVC, Inc., Ms. Dillman was Senior Vice President of Enterprise Services/Global Functions IT for Hewlett-Packard Company (NYSE: HPQ) from August 2009 through January 2012. From April 2006 through July 2009, Ms. Dillman was Executive Vice President of Benefits and Risk Management for Wal-Mart Stores, Inc. (NYSE: WMT), and prior to that, from August 2002 to April 2006, she held the position of Executive Vice President and Chief Information Officer of Wal-Mart Stores, Inc. She held various positions within Wal-Mart Stores, Inc. from 1991-2002. The following experience, qualifications, attributes and/or skills led the Board to conclude that Ms. Dillman should serve as a Director: her professional back- | |
Linda M. Dillman (Age 63) Member of the: • Compensation Committee (Chairperson) | ||
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ground and experience, current and previously held senior-executive level leadership positions at public companies, Cerner board experience, board attendance and participation, and her extensive knowledge of information technology, information protection (data privacy and cybersecurity), human resources and health care insurance and health care plans for large employers. | ||
 | Mr. Riedel has been a member of the Board of Directors of the Company since April 2019. Mr. Riedel has served on the Board of Directors of Xperi Corporation (NASDAQ:XPER) (f/k/a Tessera Holding Corporation ("Tessera Holding")), a creator, developer and licensor of innovative audio, computational imaging, computer vision and semiconductor packaging and interconnect technologies, since December 2016 when Tessera Technologies, Inc. ("Tessera") and DTS, Inc. became wholly owned subsidiaries of Tessera Holding pursuant to a merger. Prior to the merger, he had served on the Board of Directors of Tessera (formerly NASDAQ:TSRA) since May 2013. Mr. Riedel is also a professor at Harvard Business School, a position he has held since January 2018. Mr. Riedel previously served as the Chairman of the Board of Directors of Accedian Networks Inc., a performance assurance solution specialist for mobile networks and enterprise-to-data center connectivity, from 2010 until March 2017, when it was sold to Bridge Growth Partners. He also served as the Chairman and Chief Executive Officer of Cloudmark, Inc., a leader in security, protecting traffic, data and infrastructure from network threats ("Cloudmark"), until January 2017. Mr. Riedel joined the Cloudmark Board in June 2013, became Chairman in January 2014 and CEO in December 2014. He also previously served on the Boards of Directors of NextDocs Corporation, a clinical trial and compliance management software company from July 2013 to April 2015, PeerApp Ltd, an optimized video content delivery service to network operators and providers, from 2011 to September 2015, and Blade Network Technologies, a top of rack switch vendor, from 2009 until its sale to IBM in 2010. Mr. Riedel's career has also included various senior management positions at Nortel Networks Corporation, a then publicly traded, global telecommunications equipment manufacturer ("Nortel"). In March 2006, Mr. Riedel joined Nortel as part of the turnaround team as the Chief Strategy Officer. His role changed after Nortel initiated creditor protection under the respective restructuring regimes of Canada under the Companies' Creditors Arrangement Act, the U.S. under the Bankruptcy Code, and the United Kingdom under the Insolvency Act 1986, on January 14, 2009, and subsequently, Israel, to lead the sale/restructuring of various carrier and enterprise business units through a series of transactions to leading industry players such as Ericsson, Avaya and Ciena. Mr. Riedel led the efforts to create standalone business units, carve out the relevant P&L and balance sheet elements and assign predominately used patents to enable sales of the assets. In 2010, Mr. Riedel's role changed to President of Business Units and Chief Strategy Officer as he took leadership of the effort to monetize the remaining 6,500 patents and applications patents as well as manage the P&L for several business units that were held for sale. The 2011 patent sale led to an unprecedented transaction of $4.5 billion to a consortium of Apple, Ericsson, RIM, Microsoft and EMC. Prior to Nortel, Mr. Riedel was the Vice President of Strategy and Corporate Development of Juniper Networks, Inc. (NYSE:JNPR), a designer, developer and manufacturer of networking products, from 2003 until 2006, where he led the acquisition of Netscreen Technologies. Mr. Riedel was also previously a Senior Partner at McKinsey & Company, a global management consulting firm, where he spent | |
George A. Riedel, M.B.A. (Age 62) Member of the: • Compensation Committee • Finance & Strategy Committee • Nominating, Governance & Public Policy Committee | ||
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15 years serving clients in the telecom and technology sectors in Asia and North America on a range of strategy and growth issues. The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Riedel should serve as a Director: his extensive knowledge of the technology industry, both from a cloud and consumer perspective and an enterprise software perspective, and intellectual property licensing, his experience in senior leadership positions of global private and public companies, his independence, his service on public and private company boards, his extensive understanding of financial statements, and his knowledge of and experience in information protection (data privacy and cybersecurity). | ||
 | Mr. Wise has been a member of the Board of Directors of the Company since April 2019. Mr. Wise is the founder and chief executive of Lime Barrel Advisors, LLC, a private investment firm he founded in 2010. Since July 2016, Mr. Wise has served on the board of Aspen Technology, Inc. (Nasdaq: AZPN), a leading supplier of asset optimization software solutions. Since 2019, Mr. Wise has served on the board of WellSky Inc., a private health care information technology company advancing human wellness, and as a senior advisor to TPG Capital, a global private investment firm. He joined the board of MedAssets, Inc. (formerly Nasdaq: MDAS), a health care technology performance improvement company, in March 2014 and served as Chairman and Chief Executive Officer from February 2015 until the company was acquired by Pamplona Capital Management in January 2016. He served on the board of Cotiviti Holdings, Inc. (formerly NYSE: COTV), a provider of analytics-driven payment solutions focused on the health care sector, from December 2017 until the company was acquired by Verscend Technologies, Inc. in August 2018. From September 2006 to December 2011, Mr. Wise served on the board of Acxiom Corporation (formerly Nasdaq: ACXM), a provider of marketing technology and services. From 2003 through 2010, Mr. Wise was Chairman, President and Chief Executive Officer of Intergraph Corporation (formerly Nasdaq: INGR), a global provider of engineering and geospatial software. Prior to his service at Intergraph, Mr. Wise was President and Chief Executive Officer, North America of Solution 6 Holdings, Ltd., and President and Chief Operating Officer of Computer Management Sciences, Inc. (formerly Nasdaq: CMSX), a software and services company, which was acquired by Computer Associates International, Inc. (now named CA, Inc.). At Computer Associates, he served as the General Manager, North America, for Global Professional Services. Prior to that, Mr. Wise was engaged in investment banking at The Robinson-Humphrey Company (a division of Smith Barney), specializing in software and services. The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Wise should serve as a Director: his 30 years of strategic leadership and value creation experience in leading, operating and advising software and HCIT companies, his experience in global business, his experience in government contracting, his financial expertise, his independence, his health care business and operations experience, his health care technology experience, his business transformation experience, his current and previously held leadership positions, and his service on other public company boards. | |
R. Halsey Wise, M.B.A. (Age 55) Member of the: • Compensation Committee • Finance & Strategy Committee | ||
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MEETINGS OF THE BOARD AND COMMITTEES
The Board has established Audit, Compensation, Nominating, Governance & Public Policy ("NG&PP") and Finance & Strategy ("F&S") Committees. The Board has adopted a written charter for each of the Audit, Compensation, NG&PP and F&S Committees. The full text of the charters for the Audit, Compensation and NG&PP Committees are available on our website at www.cerner.com under "About Us, Leadership." The Board does not have an Executive Committee.
During 2019, the Board held nine regular meetings; the Audit Committee held eight regular meetings; the Compensation Committee held two regular meetings; the NG&PP Committee held three meetings; and the F&S Committee held seven meetings. Each current Director attended at least 75% of the aggregate of the total meetings of the Board and the Board Committees on which the Director served during the past fiscal year.
Under applicable Nasdaq Marketplace Rules ("Nasdaq Rules"), a Director of the Company will only qualify as an "independent director" if, in the opinion of the Board, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director. The Board has determined that none of the current non-employee Directors or nominees has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director and that each of the following current Directors and nominees are "independent" as defined under Rule 5605(a)(2) of the Nasdaq Rules: Gerald E. Bisbee; Mitchell E. Daniels; Linda M. Dillman; Julie L. Gerberding; Melinda J. Mount; George A. Riedel; John J. Greisch; R. Halsey Wise; and William D. Zollars. In making this determination with respect to Mr. Daniels and Mr. Zollars, the Board considered their directorships on the boards of several companies that have either purchased solutions and services from us, or from which we have procured certain products and services, all in the ordinary course of business. Additionally, in making this determination with respect to Dr. Gerberding, the Board considered her executive position with Merck & Co., Inc., which has purchased certain solutions and services from us in the ordinary course of business. The Board concluded that none of the noted Directors had a direct or indirect material interest in the transactions referred to above. Additionally, all current and proposed members of the Audit Committee satisfy the additional independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Except with respect to any first-time nominees, whose independence would be considered at the time of nomination, the independence determination is made by the full Board each May based on all available facts and circumstances of each Director. The "independence" finding is also reviewed and confirmed by the Company's Chief Legal Officer, Chief Financial Officer and outside legal counsel.
Pursuant to the Company's Corporate Governance Guidelines, all individuals nominated for election are expected to attend the 2020 Annual Shareholders' Meeting. All other Directors, barring unforeseen circumstances, are expected to attend the 2020 Annual Shareholders' Meeting as well. All of our current Directors who were Directors at the time of the 2019 Annual Shareholders' Meeting attended the 2019 Annual Shareholders' Meeting.
COMMITTEES OF THE BOARD
Audit Committee
The Audit Committee assists the Board in fulfilling its responsibilities with respect to our accounting and financial reporting practices, and in addressing the scope and expense of audit and related services provided by our independent registered public accounting firm. The Audit Committee has the authority to obtain advice and assistance from and receive appropriate funding from the Company for outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties. Audit Committee membership is reviewed annually by the Company's NG&PP Committee, which then recommends the Audit Committee membership to the full Board. Audit Committee members are generally approved by the full Board each May. The Board has determined that the composition of the Audit Committee, the attributes of its members and the responsibilities of the Audit Committee, as reflected in its charter, are in accordance with applicable SEC rules and Nasdaq Rules for audit committees. In particular, each member of the Audit Committee is an "independent director" as defined by Nasdaq Rules. All Audit Committee members possess the required level of financial literacy, and at least one member of the Audit Committee meets the current standard of requisite financial management expertise. The Board has determined that Gerald E. Bisbee, the Chairperson of the Audit Committee, is an "audit committee financial expert" as defined in Item 407(d)(5) of Regulation S-K of the Securities Act of 1933, as amended.
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Compensation Committee
The Compensation Committee's primary responsibilities are to review and approve our compensation policies and practices, review and recommend compensation for non-employee Directors, evaluate our Chief Executive Officer's performance and establish compensation accordingly, review and approve the total compensation of our Section 16 officers, review and approve executive performance-based compensation plan targets and earned payouts and equity grants to our Section 16 officers and adopt and approve major changes in our benefit plans and compensation philosophy. The Compensation Committee has the authority to obtain advice and assistance from and receive appropriate funding from the Company for outside compensation consultants, independent legal counsel and other consultants as the Compensation Committee deems necessary to carry out its duties.
The Compensation Committee of the Board is currently comprised of five Directors. Each member of the Compensation Committee is an "independent director" as defined by Nasdaq Rules. Compensation Committee membership is reviewed annually by the Company's NG&PP Committee, which then recommends the Compensation Committee membership to the full Board. Compensation Committee members are generally approved by the full Board each May.
The Compensation Committee meeting dates are reviewed and approved by the entire Compensation Committee in an effort to ensure attendance, and Compensation Committee agendas are reviewed and approved prior to distribution to the rest of the Compensation Committee by the Compensation Committee Chairperson.
The Compensation Committee reviews its Charter annually and any recommended amendments to the Charter are considered for approval by the full Board of Directors. The Compensation Committee's Charter was last updated in March 2019. The Compensation Committee's scope of authority is as set forth in its Charter. The Compensation Committee has delegated its authority as follows:
• | Section 16 Insider Equity and Incentive Compensation Subcommittee - this subcommittee of the Compensation Committee is appointed annually and consists of "non-employee directors" for purposes of Rule 16b-3 promulgated under the Exchange Act. It has authority to review recommendations and approve equity grants and incentive-based compensation (targets, metrics and payments) of our Section 16 officers; |
• | Equity-based Grant Policy - Quarterly Administration Subcommittee - this subcommittee of the Compensation Committee consists of "non-employee directors" for purposes of Rule 16b-3 promulgated under the Exchange Act and has authority to ensure timely administration of the Equity-based Grant Policy for matters that require action between regularly scheduled Compensation Committee meetings. The Equity-based Grant Policy - Quarterly Administration Subcommittee reports to the full Compensation Committee at the next Compensation Committee meeting on any action approved by such subcommittee; |
• | Incentive Compensation Plan - Quarterly Administration Subcommittee - this subcommittee of the Compensation Committee consists of "non-employee directors" for purposes of Rule 16b-3 promulgated under the Exchange Act and has authority to ensure timely administration of our performance-based compensation plan for matters that require action between regularly scheduled Compensation Committee meetings and to make decisions with regard to any discretionary second tier match contribution made by the Company under our 401(k) Plan. The Incentive Compensation Plan - Quarterly Administration Subcommittee reports to the full Compensation Committee at the next Compensation Committee meeting on any action approved by such subcommittee; and |
• | Cerner Corporation Foundations Retirement Plan Administrative and Investment Committee - this committee currently consists of the Chief Financial Officer, Chief Human Resources Officer, Vice President, Compensation & Benefits (or his successor) and one other corporate executive named by the first three members. The committee has authority to: i) select, monitor and manage the third party administrator, record-keeper, custodian and trustee of our 401(k) Plan; ii) monitor the 401(k) Plan's reporting to the IRS and Department of Labor, the 401(k) Plan's ERISA compliance, 401(k) Plan audits and the payment of 401(k) Plan expenses; iii) monitor the compensation received by the 401(k) Plan's service providers; iv) monitor and evaluate disclosures by the 401(k) Plan to participants and beneficiaries; v) ensure maintenance of fiduciary |
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liability insurance coverage and the ERISA fidelity bond coverage; vi) research and recommend 401(k) Plan amendments; vii) adopt, review and carry out investment policies and objectives for the 401(k) Plan; viii) review and select the investment options offered under the 401(k) Plan; ix) select and monitor the 401(k) Plan's investment managers and fund providers; x) supervise, monitor and evaluate on a semi-annual basis the performance of the investment options offered under the 401(k) Plan and periodically review the 401(k) Plan's investment performance as a whole; xi) carry out any special assignments given by the Compensation Committee; and xii) retain independent outside consultants.
Compensation Consultant
The Compensation Committee was advised in 2019 by an independent compensation consultant, Deloitte Consulting LLP, retained by the Compensation Committee. See "Compensation Discussion and Analysis - Compensation Structure."
Relationship between Compensation and Risk Management
The Compensation Committee utilized Cerner's Enterprise Risk Management ("ERM") team to perform a review of the Company's 2019 incentive compensation arrangements. More specifically, the ERM team reviewed and tested fifteen metrics, comprising over 54% of the total planned incentive compensation, for the following: segregation of duties between the associates setting the metric targets, providing the results, and being compensated on the metric; and the accuracy of the payout calculation. In addition, all metrics were evaluated for qualitative factors which may increase the risk of incenting unintended behaviors. Based on this evaluation, seven metrics were reviewed and tested for: appropriateness related to the roles compensated and existence of controls to prevent any unintended behaviors such metrics may incent. The ERM team also reviewed material plan changes for 2019. The most significant change was the redesign of the Section 16 and business incentive performance plans to be more focused on alignment, accountability and simplicity. The ERM team reviewed the philosophy around the changes and considered the impact to individual plans as part of the review. The Compensation Committee assessed the ERM team's report and concluded that our incentive compensation arrangements, coupled with internal controls and policies, do not encourage associates to: i) take excessive risks that are likely to cause material adverse harm to the Company, or ii) manipulate performance in order to increase incentive award payouts.
Specifically, the Compensation Committee noted the following design features of our incentive compensation program that mitigate risk:
• | stock ownership guidelines for executives may reduce the risk of executives making decisions that benefit them in the short-term at the expense of the Company's long-term performance; |
• | the design of annual incentives provides for the taking of a reasonable amount of risk in order to provide upside incentive compensation opportunity, while a payout cap on the incentives reduces risk by limiting the amount of short-term compensation that may be earned; |
• | incentive goals are established using a rigorous and time-tested process and are tied to the Company's annual financial plan; |
• | cash incentive plan metrics and goals for Section 16 officers were approved by the Compensation Committee within the first 90 days of the year for the 2019 quarterly and annual metrics, and performance-based equity incentive plan goals for Section 16 officers were approved by the Compensation Committee in April 2019, which were aligned to fourth quarter 2019, fourth quarter 2020 and full year 2021 metrics; |
• | the Company has a rigorous verification and review process to calculate the performance of each incentive plan; and |
• | performance-based cash and equity compensation is subject to "claw back" for all associates receiving such incentive compensation. |
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Nominating, Governance & Public Policy Committee
The NG&PP Committee provides assistance and recommendations to the Board and the Chairman and Chief Executive Officer of the Company in the areas of: i) Board membership nomination; ii) committee membership selection and rotation practices; iii) evaluation of the overall effectiveness of the Board; iv) review and consideration of developments in corporate governance practices; and v) review and consideration of current and emerging political, corporate citizenship and public policy issues that may affect our business operations, performance or public image. The Committee's goal is to ensure that the composition, practices and operation of the Board contribute to value creation and effective representation of the Company's shareholders and to foster Cerner's commitment to operate its business worldwide in a manner consistent with the rapidly changing demands of society.
The NG&PP Committee reviews its Charter annually and any recommended amendments to the Charter are considered for approval by the full Board of Directors. The NG&PP Committee's Charter was last updated in March 2014.
Finance & Strategy Committee
The F&S Committee coordinates and oversees management's review of our Company's operational efficiency and margin expansion efforts and capital deployment strategy, including taking into consideration recommendations from AlixPartners LLP, a leading outside consulting firm, the Company's risk profile and the potential impact of any recommended changes to the Company's business model, strategic plan and ability to meet commitments to clients. The F&S Committee is currently comprised of five Directors, with Mr. Greisch serving as the Chairperson of the F&S Committee. Each member of the F&S Committee is an "independent director" as defined by Nasdaq Rules.
DIRECTOR COMPENSATION
Our non-employee Directors are paid commensurate with the time served during the Board year in quarterly installments. For each of the 2018-2019 Board year (from the 2018 Annual Shareholders' Meeting to the 2019 Annual Shareholders' Meeting) and the 2019-2020 Board year (from the 2019 Annual Shareholders' Meeting to the 2020 Annual Shareholders' Meeting), non-employee Directors received an annual cash retainer of $66,000. Each member of each Board committee receives an additional annual cash retainer as follows: $12,500 for the Audit Committee, $12,500 for the F&S Committee, $7,500 for the Compensation Committee and $5,000 for the NG&PP Committee. In addition, each Committee Chairperson receives an additional annual cash retainer that causes their aggregate compensation, inclusive of the committee member retainer, to be as follows: $30,000 for the Audit Committee Chairperson, $30,000 for the F&S Committee Chairperson, $20,000 for the Compensation Committee Chairperson and $15,000 for the NG&PP Committee Chairperson. The Lead Independent Director also receives an additional $30,000 annual cash retainer. The Directors are not paid meeting fees.
Each non-employee Director also receives a grant of restricted stock of the Company for each year of service on the Board. The equity component of the Board compensation package is based on a target dollar amount, not a fixed share amount (in order to avoid unintended compensation fluctuations based on stock price fluctuations, stock-splits, combination or other changes in the number or type of the Company's shares outstanding). The target for the equity compensation component of the total annual Board compensation package for the 2019 - 2020 Board year was set at approximately $250,000. In May 2019, pursuant to the Board equity compensation program, 3,556 shares of restricted stock of the Company were granted to each of the then-current non-employee Directors: Dr. Bisbee, Mr. Daniels, Ms. Dillman, Dr. Gerberding, Mr. Greisch, Ms. Mount, Mr. Riedel, Mr. Wise and Mr. Zollars. These restricted stock grants will vest on the earlier of May 21, 2020 or the calendar day immediately preceding the date of the 2020 Annual Shareholders' Meeting.
Additionally, under the Board equity compensation program, each non-employee Director that is newly appointed or elected to the Board receives an initial grant of shares of restricted stock of the Company with a value equal to the annual equity grant value as discussed above, with a ratable vesting over three years provided such Director continuously serves as a member of the Cerner Board of Directors through such vesting dates. Mr. Greisch, Ms. Mount, Mr. Riedel and Mr. Wise were each granted an initial grant of 3,795 shares of restricted stock of the Company on April 29, 2019, and each were entitled to receive compensation consistent with the compensation payable to the Company's other Directors, beginning as of the new Board term that commenced immediately following the 2019 Annual Shareholders' Meeting.
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The independent compensation consultant retained by the Compensation Committee works with our human resources compensation team each year to review our current Board compensation package relative to our peer group. See discussion under "Compensation Discussion and Analysis - Compensation Structure" for more information on our 2019 peer group. Our Chief Human Resources Officer reviews this work and makes compensation recommendations to our Compensation Committee and Board with respect to the non-employee Directors. The Compensation Committee (or one of its subcommittees), after review and discussion of the items set forth above, makes the ultimate decision as to the total compensation and compensation components of our non-employee Directors.
The Directors are subject to the same Stock Ownership Guidelines that apply to the Company's officers. The guidelines are further discussed under "Compensation Discussion and Analysis" below. As of January 1, 2020, at the annual measurement date, all non-employee Directors who were Directors on such date were in compliance with these guidelines.
Under the Cerner Corporation 2011 Omnibus Equity Incentive Plan (as amended, the "Omnibus Plan"), the aggregate value of all compensation paid or granted to any individual for service as a non-employee Director (other than a non-employee Director who is also Chairman of the Board) with respect to any calendar year, including equity awards granted under the Omnibus Plan and cash fees paid by the Company to such non-employee Director outside of the Omnibus Plan, may not exceed six hundred thousand dollars ($600,000), calculating the value of any grants awarded during such calendar year based on the grant date fair value of such grants for financial reporting purposes, excluding special compensation paid to any non-employee Director when serving as a Committee Chair or as Lead Independent Director. For a non-employee director who is Chairman of the Board, the cap is nine hundred thousand dollars ($900,000). The foregoing limitations will not take into account any grant made in connection with the initial appointment of a non-employee Director; and any shares deferred pursuant to a nonqualified deferred compensation arrangement will count against the foregoing limitation only during the calendar year in which such grant is initially made and not in the calendar year in which the deferred shares are ultimately issued.
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2019 Director Compensation Table
The following table contains information regarding the compensation earned by non-employee Directors during our 2019 fiscal year.
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($) (2) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) (3) | Total ($) | ||||||||||||||
Gerald E. Bisbee, Jr., Ph.D., M.B.A. | 104,750 | 250,058 | — | — | — | 1,920 | 356,728 | ||||||||||||||
Denis A. Cortese, M.D. (4) | 39,250 | — | — | — | — | — | 39,250 | ||||||||||||||
Mitchell E. Daniels, Jr., J.D. | 93,500 | 250,058 | — | — | — | 1,920 | 345,478 | ||||||||||||||
Linda M. Dillman | 92,250 | 250,058 | — | — | — | 1,920 | 344,228 | ||||||||||||||
Julie L. Gerberding, M.D., M.P.H. | 84,750 | 250,058 | — | — | — | 2,730 | 337,538 | ||||||||||||||
John J. Greisch, M.B.A. (5) | 81,375 | 500,073 | — | — | — | 3,970 | 585,418 | ||||||||||||||
Melinda J. Mount, M.B.A. (5) | 68,250 | 500,073 | — | — | — | 3,970 | 572,293 | ||||||||||||||
George A. Riedel, M.B.A. (5) | 68,250 | 500,073 | — | — | — | 3,970 | 572,293 | ||||||||||||||
R. Halsey Wise, M.B.A. (5) | 64,500 | 500,073 | — | — | — | 3,970 | 568,543 | ||||||||||||||
William D. Zollars (6) | 119,750 | 250,058 | — | — | — | 1,920 | 371,728 | ||||||||||||||
(1) | These amounts reflect the aggregate grant date fair value of each award granted to the non-employee Director computed in accordance with FASB ASC Topic 718. Refer to Note 16 in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 28, 2019 for the relevant assumptions used to determine the grant date fair value of our stock awards. As of December 28, 2019, each then-current non-employee Director had the following number of restricted stock awards outstanding: Gerald E. Bisbee, 3,556; Mitchell E. Daniels, 3,556; Linda M. Dillman 3,556; Julie L. Gerberding, 5,056; John J. Greisch, 7,351; Melinda J. Mount, 7,351; George A. Riedel, 7,351; R. Halsey Wise, 7,351; and William D. Zollars, 3,556. |
(2) | As of December 28, 2019, none of the non-employee Directors who were Directors on such date had any stock options outstanding. |
(3) | Amounts include dividend equivalents on unvested restricted stock awards credited or paid to the non-employee Directors. |
(4) | Dr. Cortese retired from the Board effective immediately prior to Cerner's 2019 Annual Meeting of Shareholders held on May 30, 2019. |
(5) | Mr. Greisch, Ms. Mount, Mr. Riedel and Mr. Wise were appointed to the Board on April 8, 2019. |
(6) | Mr. Zollars was designated as the Lead Independent Director of the Directors of the Board on April 8, 2019. |
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AUDIT COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, the following report of the Audit Committee shall not be incorporated by reference into any such filings and shall not otherwise be deemed to be soliciting material or filed under such acts.
The Audit Committee of the Company is currently composed of five independent members of the Board of Directors (all of whom have been determined by the Board to meet the independence requirements of the SEC and Nasdaq) and operates under a written charter adopted by the Board of Directors that is available at the Company's website, www.cerner.com. The Audit Committee appoints and retains the Company's independent registered public accounting firm. The selection is subsequently submitted to the shareholders of the Company for ratification.
Management is responsible for the Company's internal controls and the financial reporting process. The Company's independent registered public accounting firm, KPMG LLP, is responsible for performing an independent audit of the Company's consolidated financial statements and issuing an opinion on the conformity of those audited consolidated financial statements with U.S. generally accepted accounting principles and on the effectiveness of the Company's internal control over financial reporting. The Audit Committee's responsibility is to monitor and oversee these processes and to report to the Board of Directors on its findings.
In this context, the Audit Committee has met and held discussions with management and the Company's independent registered public accounting firm. Management represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent registered public accounting firm. The Audit Committee discussed with the Company's independent registered public accounting firm matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the Securities and Exchange Commission.
The Company's independent registered public accounting firm also provided to the Audit Committee the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm's communications with the Audit Committee concerning independence, and the Audit Committee has discussed with the independent registered public accounting firm that firm's independence.
Based upon the Audit Committee's discussions with management and the independent registered public accounting firm and the Audit Committee's review of the audited financial statements, the representation of management and the report of the independent registered public accounting firm to the Audit Committee, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 28, 2019 for filing with the Securities and Exchange Commission.
Members of the Audit Committee:
Gerald E. Bisbee, Jr., Ph.D., M.B.A.
Mitchell E. Daniels, Jr., J.D.
John J. Greisch, M.B.A.
Melinda J. Mount, M.B.A.
William D. Zollars
____________________
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GUIDELINES OF CERNER CORPORATION'S AUDIT COMMITTEE
FOR PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES
The Audit Committee has adopted guidelines regarding the engagement of KPMG, LLP ("KPMG"), our independent registered public accounting firm, to perform services for the Company. For audit services, audit-related services and permissible non-audit services, the independent auditor will provide the Audit Committee with an engagement letter during the first quarter of each year outlining the scope of services proposed to be performed during the fiscal year. If agreed to by the Audit Committee, this engagement letter will be formally accepted by the Audit Committee at its first quarterly Audit Committee meeting of the year.
Upon receiving an unforeseen request for audit, audit-related or non-audit services or a change in the fee range, the independent registered public accounting firm will provide our management a detailed scope of service description and fee range. A request is then made for pre-approval of such services or fees from the Chairperson of the Audit Committee. To ensure prompt handling of unexpected matters, the Chairperson of the Audit Committee has been delegated authority from the Audit Committee to amend or modify the scope of pre-approved permissible audit, audit-related or non-audit services and the fees related thereto.
All action taken with respect to pre-approval of audit, audit-related or non-audit services and fees will be included in the independent registered public accounting firm's materials shared with the Audit Committee as part of their required communications with the Audit Committee. With respect to any such pre-approval of non-audit services, the independent registered public accounting firm will confirm to the Audit Committee Chairperson that such non-audit services are permissible under all applicable legal requirements and do not impair the independent registered public accounting firm's independence under applicable professional standards.
The independent registered public accounting firm must ensure that all audit, audit-related and non-audit services provided to the Company have been approved by the Audit Committee (or the Chairperson, as applicable).
COMPENSATION COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, the following report of the Compensation Committee shall not be incorporated by reference into any such filings and shall not otherwise be deemed to be soliciting material or filed under such acts.
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and set forth below, and, based upon that review and discussion, recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
Members of the Compensation Committee:
Linda M. Dillman
Julie L. Gerberding, M.D., M.P.H.
George A. Riedel, M.B.A.
R. Halsey Wise, M.B.A.
William D. Zollars
____________________
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COMPENSATION DISCUSSION AND ANALYSIS
This section explains our executive compensation program and specifically describes the application of that program to the following Named Executive Officers ("NEOs") whose compensation information is presented in the tables and narrative discussion below in accordance with Securities and Exchange Commission rules.
Title at fiscal year-end (FYE) 2019 | ||
Brent Shafer | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | |
Marc G. Naughton | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |
Michael R. Nill | Executive Vice President and Chief Operating Officer(1) | |
John T. Peterzalek | Executive Vice President and Chief Client Officer(2) | |
Jeffrey A. Townsend | Former Executive Vice President and Chief of Innovation(3) | |
Donald D. Trigg | Executive Vice President, Strategic Growth(4) | |
(1) | Mr. Nill served as an executive officer until his departure from the Company on January 10, 2020. |
(2) | Mr. Peterzalek was promoted to Executive Vice President and Chief Client and Services Officer effective February 18, 2020. |
(3) | Mr. Townsend served as an executive officer until his retirement from the role of Executive Vice President and Chief of Innovation effective November 1, 2019. On the same date, he transitioned to Executive Senior Advisor. He is included as a NEO for 2019 because disclosure would have been provided pursuant to Item 402 of Regulation S-K but for the fact that he was not serving as an executive officer at the end of 2019. |
(4) | Mr. Trigg was promoted to President effective February 18, 2020. |
In addition, as discussed in Proposal #3 below, we are conducting our annual advisory "say-on-pay" vote requesting your non-binding advisory approval of the compensation to our NEOs as outlined in this Compensation Discussion and Analysis and the tables and narrative discussion that follow. In this discussion, we summarize our executive compensation programs and objectives and provide an overview of how and why the Compensation Committee of our Board of Directors made specific compensation decisions regarding our NEOs.
References to the Compensation Committee in this Compensation Discussion and Analysis also refer to its subcommittees, where applicable.
This Compensation Discussion and Analysis includes discussion of the following non-GAAP financial measures: Adjusted Operating Margin, Adjusted Net Earnings, Adjusted Diluted Earnings Per Share, and Free Cash Flow. Definitions of, and further details regarding these non-GAAP financial measures, including reconciliations to their most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), can be found in Appendix I.
Executive Summary
2019 Business Results. A significant portion of the total compensation of our NEOs is linked to our performance. Highlights of the year and fourth quarter 2019 include:
• | A 6% increase in our revenues to $5.69 billion in 2019 compared to $5.37 billion in 2018. The increase in revenues reflects ongoing demand from new and existing clients for Cerner's solutions and technology-enabled services driven by their needs to keep up with regulatory requirements, adapt to changing reimbursement models, and deliver safer and more efficient care. |
• | An 11% decrease in bookings to $5.99 billion in 2019 compared to $6.72 billion in 2018, with the decrease primarily reflecting a more selective approach to adding low-margin, long-term contracts that typically represent large booking values. Bookings represents the value of executed contracts for software, hardware, professional services and managed services. |
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• | A fourth quarter 2019 GAAP operating margin of 12.68% compared to 12.02% in the fourth quarter of 2018. On a non-GAAP basis, a fourth quarter 2019 Adjusted Operating Margin of 20.28% compared to 18.66% in the fourth quarter of 2018. The increase is primarily the result of our ongoing operational improvement initiatives. |
• | A 16% decrease in GAAP net earnings and a 13% decrease in GAAP diluted earnings per share in 2019 compared to 2018. On a non-GAAP basis, our Adjusted Net Earnings and Adjusted Diluted Earnings per share increased 5% and 9%, respectively, in 2019 compared to 2018. |
• | Cash collections of receivables of $5.79 billion in 2019 compared to $5.49 billion in 2018. Days sales outstanding was 72 days for the 2019 fourth quarter compared to 79 days for the 2018 fourth quarter. |
• | Operating cash flows were $1.31 billion in 2019 compared to $1.45 billion in 2018. Free Cash Flow for financial reporting purposes was $568 million in 2019 compared to $733 million in 2018. |
As part of our company-wide transformation, we have undertaken a project to redesign our workforce architecture and to re-examine our employment practices to ensure best-in-class selection, advancement and rewards practices are utilized across our workforce. Cerner is also committed to pay equity as part of that work and will confirm parity in compensation across similar jobs in the new architecture.
Rewards Strategy. Our rewards strategy is designed to offer competitive, comprehensive recognition, compensation and benefits packages to attract, motivate, reward and retain individuals within talent segments of capabilities who contribute significant value and to reward performance, such as attainment of business and individual associate goals, business results, leadership, and strong relationships with clients, and is not solely based on rewarding seniority but also enables cultural reinforcement. Our rewards strategy is also linked to our performance management (both "what" and "how") philosophy, which is designed to identify and reward associate performance through compensation related levers. We received a greater than 90% vote of support from shares entitled to vote on the matter in favor of our executive compensation in our say-on-pay vote at the 2019 Annual Shareholders' Meeting. Given the say-on-pay vote and the results achieved with our compensation policies, the Compensation Committee has determined that our approach to compensation is appropriate and our 2020 compensation policies should generally remain consistent with our 2019 approach, except to the extent of any modifications deemed appropriate in connection with our pay equity analysis. We also believe in pay for performance and linking executive compensation with shareholder value, as represented by our NEO pay mix. For 2019, 91% of Mr. Shafer's total compensation mix was at-risk. In addition, for 2019, 86% of the total compensation mix for our other NEOs combined was at-risk. Our at-risk compensation consists of our performance-based cash incentive plan and equity award grants. In 2019, our NEOs' performance-based compensation consisted of performance-based cash incentive awards and performance-based restricted stock units ("PSUs"). The use of PSUs in our equity program is designed to encourage continued focus on long-term value and growth for our shareholders and provide meaningful alignment to our corporate imperatives and financial performance. During 2019, we continued practices established to link pay to performance, to more closely align our compensation practices with the market through the increased emphasis on performance-based awards, while balancing the need to ensure the retention value of our long-term incentive awards granted to our NEOs. We continued to use a quarterly performance review process to provide quarterly assessments of executives on their performance and attainment of our goals. During 2020, we intend to place continued emphasis on linking pay to performance by again granting equity with performance-based vesting conditions and utilizing multiple performance metric targets under our performance-based cash compensation plan.
Other aspects of our compensation program are intended to further align our executives' interests with shareholders. These include:
• | An Equity-based Grant Policy, which is designed to ensure equity award grant dates will be outside of trading blackout periods except for new hires and as specifically approved by the Compensation Committee. |
• | Performance-based compensation paid to our NEOs is subject to "claw back" pursuant to performance plan agreements with our NEOs. |
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• | Stock ownership guidelines that require the retention of a percentage of the equity awards made to our executives and outside non-employee Directors, except that the ownership guidelines apply in decreasing percentages based on tenure, upon retirement or upon hardship. |
• | Our internal pay equity guidelines provide that the total cash compensation for the CEO shall not be more than three times that of the next highest executive officer's total cash compensation. |
• | A Hedging and Pledging Policy that prohibits our Section 16 officers (including our NEOs) and directors from (i) entering into hedging or monetization transactions with respect to Company stock, including, but not limited to, through the use of financial instruments such as exchange funds, prepaid variable forwards, equity swaps, puts, calls, collars, forwards and other derivative instruments, or through the establishment of a short position in, or engaging in any short sale of, the Company's securities, or (ii) pledging more than 50% of Company stock acquired pursuant to a bonus or benefit plan without prior approval from the Company's Securities Watch Team. |
Compensation Structure. Compensation for our NEOs may include: i) base salary, ii) performance-based cash incentive compensation, iii) long-term incentive plan equity award compensation, which consisted of PSUs and time-based restricted stock units ("RSUs") for our NEOs in 2019, and iv) certain perquisites, as discussed below. To provide incentives to attain our business goals, a significant portion of executive compensation is at-risk and tied to individual and Company performance.
We also offer medical, dental, vision, 401(k) and associate stock purchase plans in which the NEOs may elect to participate. The cost of these plans and opportunity for benefits thereunder are the same for the NEOs as for all other eligible associates and any Company contributions are made to the NEOs on the same basis as all other eligible associates. We analyze the total compensation for our NEOs compared to the compensation of the corresponding NEOs in our peer group to support alignment with our strategy of paying aggregate compensation that approximates the median (50th percentile) of our peer group, with top performers able to earn above the median. We believe this strategy keeps us competitive in the marketplace.
The independent compensation consultant retained by the Compensation Committee works with our human resources compensation team each year to develop, analyze and compare peer group companies whose annual revenue, revenue growth, operating margin, total shareholder return (one year and three year), market capitalization, market capitalization as a multiple of revenue, and business model are similar to that of Cerner's. The Compensation Committee then reviews and approves our peer group for the upcoming year based upon one or more of the factors above as selected by the Compensation Committee. The companies included in our 2019 peer group for compensation comparison were selected based on standard industrial classifications ("SIC") and/or financial measures. The SICs used were computer programming and data processing, computer programming services, prepackaged software, computer integrated system design and computer processing and data preparation services. The financial measures used to obtain information for our 2019 peer group were market capitalization of between $3.8 billion and $37.9 billion, market capitalization to revenue multiple of at least two times and revenues of between $2.6 billion and $15.6 billion. Our peer group for 2019 changed slightly from 2018 to more closely align the group with Cerner based on these factors; therefore, Adobe Systems, Inc. and Salesforce.com, Inc. were removed from the peer group as their market capitalizations exceeded our size parameters and Broadridge Financial Solutions, Inc., Square, Inc., SS&C Technologies Holdings, Inc. and Worldpay, Inc. were added to the peer group as their profiles fell within our parameters.
The 20 companies included in our 2019 peer group were:
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2019 Compensation Peer Group | ||
Company Name | Ticker | |
Akamai Technologies, Inc. | AKAM | |
Autodesk, Inc. | ADSK | |
Broadridge Financial Solutions, Inc. | BR | |
Cadence Design Systems, Inc. | CDNS | |
Citrix Systems, Inc. | CTXS | |
Cognizant Technology Solutions Corporation | CTSH | |
Equinix, Inc. | EQIX | |
Fidelity National Information Services, Inc. | FIS | |
Fiserv, Inc. | FISV | |
Genpact Limited | G | |
Global Payments, Inc. | GPN | |
Intuit, Inc. | INTU | |
Open Text Corporation | OTEX | |
Red Hat, Inc. | RHT | |
Square, Inc. | SQ | |
SS&C Technologies Holdings, Inc. | SSNC | |
Symantec Corporation | SYMC | |
Synopsys, Inc. | SNPS | |
VMWare, Inc. | VMW | |
Worldpay, Inc. | WP | |
At the beginning of each fiscal year, the Compensation Committee reviews our peer group and the history of all the elements of each NEO's total compensation, including base salary, performance-based cash incentive compensation and long-term incentive plan compensation, over each of the past three years in relation to the total compensation and compensation elements of the corresponding executive officers of the companies in our peer group. Typically, our CEO, along with our Chief Human Resources Officer, makes compensation recommendations to the Compensation Committee with respect to the NEOs (excluding the CEO's compensation). The Compensation Committee Chairperson reviews the peer group comparisons with the Chief Human Resources Officer and makes compensation recommendations to the Compensation Committee with respect to the CEO. The Compensation Committee (or an authorized subcommittee), after review and discussion of the items set forth above, makes the ultimate decision as to the total compensation and compensation components for our CEO and the other NEOs.
The Compensation Committee has authority to secure the services of advisers both internal and external to the Company, including the retention of outside consultants to review executive compensation, Board of Directors compensation and to perform any other analysis the Compensation Committee deems appropriate. Historically, the Compensation Committee has worked with our internal resources, such as the Chief Human Resources Officer and the human resources compensation team, along with an outside consultant to carry-out its responsibilities. The Compensation Committee engaged Deloitte Consulting LLP ("Deloitte Consulting"), an independent compensation consultant, to assist it in fulfilling its responsibility during 2019. Deloitte Consulting was retained directly by the Compensation Committee and worked with the Compensation Committee for eleven years through 2011 and since the beginning of 2015. During 2019, Deloitte Consulting was engaged to advise the Compensation Committee regarding executive and Board compensation matters, including competitive pay analysis, peer group selection, updates on trends in executive and director compensation, performance metric plan design, and review of the Compensation Discussion and Analysis and related tables included in our 2019 Proxy Statement.
The fees charged by Deloitte Consulting for compensation consulting services and resources during 2019 were $188,271. During 2019, affiliates of Deloitte Consulting provided other services to Cerner that were unrelated to executive compensation matters. The decision to engage affiliates of Deloitte Consulting for these other services was made by
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our management. For these non-compensation related consulting services, we paid Deloitte Consulting and its affiliates $216,148. The Compensation Committee and the Board have been informed of this ongoing work and the use of affiliates of Deloitte Consulting for services unrelated to executive compensation matters, but neither the Board nor the Compensation Committee specifically approved these services.
After considering the independence of Deloitte Consulting by applying the factors required by SEC and Nasdaq rules and determining that no conflict of interest exists, the Compensation Committee engaged Deloitte Consulting as its independent compensation consultant for 2020.
Aligning Pay with Performance
During 2019, we continued practices established to link pay to performance and more closely align our compensation practices with those of our peers through the increased emphasis on performance-based awards, while balancing the need to ensure the retention value of our long-term incentive awards through the use of service-based awards. As a result, we incorporated PSUs in our long-term incentive plan mix in addition to RSUs, which we believe helped to encourage continued focus on long-term value and growth for our shareholders and provide meaningful alignment to our corporate imperatives and financial performance. We also added additional performance metric targets under our performance-based cash compensation plan to further align pay with performance. We continued to use a quarterly performance review process to provide regular assessments of executives (including the NEOs) on their performance and attainment of Company goals. Under this program, any executive whose performance was evaluated as being in the bottom 10% of all executives was not generally eligible for pay increases or additional equity grants. In addition, such executive's performance-based cash incentive compensation award, if earned, may be reduced or eliminated due to the individual's performance rating. During 2020, we intend to place continued emphasis on linking pay to performance by again granting equity with performance-based vesting conditions and utilizing multiple performance metric targets under our performance-based cash compensation plan. We believe that this approach will closely align compensation with our near and long-term performance objectives as discussed below.
Compensation Elements
Compensation for our NEOs includes: i) base salary, ii) performance-based cash incentive compensation, iii) long-term incentive plan equity award compensation and iv) certain perquisites as discussed below. In 2019, equity award compensation granted to our NEOs consisted of PSUs and RSUs. To provide incentives to attain our business goals, a significant portion of executive compensation is at-risk and tied to individual and Company performance. Our goal for allocating between short-term and long-term compensation is to ensure adequate base salaries and cash bonus opportunities to attract and retain executives, while providing incentives to maximize long-term value for us and our shareholders. We determine the mix of base salary and performance-based cash incentive compensation by balancing the needs of providing adequate guaranteed cash compensation while at the same time providing a meaningful incentive to motivate the executive to achieve the established performance targets. In 2019, cash compensation (i.e. base salary and annual bonus) approved for our CEO was 40% in base salary and 60% in targeted performance-based cash incentive compensation. In 2019, cash compensation (i.e. base salary and annual bonus) approved for our other NEOs ranged from 43% to 48% in base salary and 52% to 57% in targeted performance-based cash incentive compensation. In 2019, 50% of approved targeted equity compensation for our CEO and our other NEOs, other than Mr. Trigg, was in the form of PSUs and 50% was in the form of RSUs. Mr. Trigg’s approved targeted equity compensation in 2019 consisted of 28% in PSUs and 72% in RSUs, due primarily to an additional RSU grant in connection with his promotion to Executive Vice President, Strategic Growth in January 2019. In 2019, our total approved targeted compensation package mix for our CEO was 16% in cash compensation and 84% in equity compensation and for our other NEOs ranged from 20% to 33% in cash compensation and 67% to 80% in equity compensation. We granted PSUs and RSUs to all of our NEOs in order to more closely align our compensation practices to those of our peer group, provide meaningful alignment to our corporate imperatives and financial performance and improve the retention value of our equity awards.
Base Salary. As set forth above, the Compensation Committee reviews peer group data and recommendations proposed by the CEO, Chief Human Resources Officer and human resources compensation team prior to approving the base salary of our NEOs during the first quarter of each calendar year. Base salary is based on the duties and responsibilities that each NEO is expected to discharge during the current year and on the NEO's performance during the prior year. We also perform external market comparisons for the NEOs, relative to industry-specific peers as disclosed above, based on individual job responsibility. This comparison data helps ensure that the proposed NEO's compensation
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is within reasonable market comparison ranges and in line with our compensation strategy, detailed above. The Compensation Committee determined that for 2019, base salaries would not be increased for the NEOs, other than Mr. Trigg whose base salary was increased in connection with his promotion to Executive Vice President, Strategic Growth in January 2019.
Performance-Based Cash Incentive Compensation. Our performance-based cash incentive compensation plans are designed to provide a meaningful incentive on both a quarterly and annual basis to key associates, including the NEOs, and to motivate them to assist in achieving short-term Company goals. In March 2018, the Compensation Committee adopted the Cerner Corporation 2018 Performance Compensation Plan, effective as of January 1, 2018 (the "Performance Compensation Plan"), to provide for incentive awards granted in 2018 and beyond following passage of The Tax Cuts and Jobs Act, which eliminated the exception under Section 162(m) of the Internal Revenue Code for qualified performance-based compensation payable to "covered employees." The Performance Compensation Plan permits the Company to grant awards of incentive compensation to a participant upon satisfaction of specified performance goals for a particular performance period. Each of our NEOs is eligible to participate in the Performance Compensation Plan. The Compensation Committee has discretion to increase or decrease any calculated performance metric payout under the Performance Compensation Plan based on a subjective performance factor rating for the NEO; provided, however, that the maximum performance-based cash incentive opportunity for an NEO may not exceed 200% of the NEO's annual target incentive amount.
Individual payments vary, depending on individual performance and, in some cases, business unit operational achievements.
Performance targets for an upcoming year are initially developed and recommended by management in connection with our annual financial planning process during the last quarter of the year. The Compensation Committee reviews the performance targets proposed by management for the NEOs to ensure they reflect appropriate business growth and return to our shareholders.
The Compensation Committee established the financial performance measures ("Performance Measures") for our cash incentive awards granted to our Section 16 officers within the first 90 days of the year for the 2019 quarterly and annual metrics. The measurement of the achievement of such Performance Measures is determined under pre-established objective formulas and confirmed by the Compensation Committee. Metrics such as earnings measures, operating/profit margin, cash flow, agreement margin or other metrics specifically permitted by the plan, which may include GAAP and non-GAAP financial measures, may be selected as the Performance Measures. The Compensation Committee selects Performance Measures that it believes will help drive business growth and return to our shareholders, while providing a meaningful incentive on both a quarterly and annual basis to the participants.
Between Compensation Committee meetings, the Incentive Compensation Plan - Quarterly Administration Subcommittee may approve quarterly Performance Measures and determine whether one or more Performance Measures have been satisfied, prior to payment to any NEO.
During 2019, the Performance Measures for our NEOs consisted of Adjusted Diluted Earnings Per Share ("adjusted EPS"), revenue and Free Cash Flow. We believe the use of adjusted EPS aligns well with our internal financial imperatives to expand operating margin and grow bottom line earnings, and the Compensation Committee believes this performance metric helps drive business growth and return to our shareholders while providing a meaningful incentive on both a quarterly and annual basis to our NEOs. Adjusted EPS reflects how much value is being made for shareholders, while also taking into account the impact of certain items that we believe may not directly correlate to the underlying performance of our business operations, or that were not originally contemplated in setting plan targets. The Compensation Committee believes the use of revenue and Free Cash Flow as Performance Measures are important to drive focus on growing the top-line and cash flow in addition to earnings. We believe Free Cash Flow is important to enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance, because Free Cash Flow takes into account certain capital expenditures necessary to operate our business. As a result, our calculations of adjusted EPS and Free Cash Flow for compensatory purposes may vary from year to year and be different from those used for financial reporting purposes.
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The 2019 Performance Measure targets were derived from the 2019 financial plan approved by the Board of Directors. The 2019 adjusted EPS and revenue performance targets for incentive compensation purposes were 7% growth over 2018 for both metrics. The 2019 Free Cash Flow performance target for incentive compensation purposes differed from that used for financial reporting purposes and represented a decrease of 18% compared to 2018. The reason for the decreased Free Cash Flow target was because 2018 Free Cash Flow included a significant tax refund, which was not expected in 2019, and lower capital expenditures than what was expected in 2019.
As a result of our aggregate 2019 performance relative to the attainment of the established Performance Measures, we made cash awards to our NEOs under the Performance Compensation Plan above the established target level for NEOs receiving awards for all four quarters of 2019. Aggregate incentives paid to our NEOs in the 2019 fiscal year were 103% of the target incentive amount and 52% of the maximum cash incentive opportunity. Payouts were based solely on attainment of the established targets and no discretionary changes based on individual performance were made to the amounts earned. The following tables detail the payouts by Performance Measure for our NEOs in 2019 and the related Performance Measure attainment by quarter.
NEO | Performance Metric (1) | Performance Plan Target ($) (2) | Results Relative to Performance Plan Target ($) (2) | Target Attain-ment % | Target Incentive Amount ($) | Actual Amount Earned ($) (4) | % Earned Relative to Target Incentive Amount | Maximum Cash Incentive Oppor-tunity ($) | % Earned of Maximum Cash Incentive Oppor-tunity | |||
Brent Shafer | Adjusted EPS | 2.62 | 2.68 | 102% | 600,000 | 684,000 | 114% | 1,200,000 | 57% | |||
Revenue | 5,750,000,000 | 5,692,598,000 | 99% | 300,000 | 236,250 | 79% | 600,000 | 39% | ||||
Free Cash Flow | 600,000,000 | 720,874,000 | 120% | 300,000 | 326,250 | 109% | 600,000 | 54% | ||||
Total | 1,200,000 | 1,246,500 | 104% | 2,400,000 | 52% | |||||||
Marc G. Naughton | Adjusted EPS | 2.62 | 2.68 | 102% | 385,000 | 438,900 | 114% | 770,000 | 57% | |||
Revenue | 5,750,000,000 | 5,692,598,000 | 99% | 192,500 | 151,594 | 79% | 385,000 | 39% | ||||
Free Cash Flow | 600,000,000 | 720,874,000 | 120% | 192,500 | 209,344 | 109% | 385,000 | 54% | ||||
Total | 770,000 | 799,838 | 104% | 1,540,000 | 52% | |||||||
Michael R. Nill | Adjusted EPS | 2.62 | 2.68 | 102% | 455,500 | 519,270 | 114% | 911,000 | 57% | |||
Revenue | 5,750,000,000 | 5,692,598,000 | 99% | 227,750 | 179,353 | 79% | 455,500 | 39% | ||||
Free Cash Flow | 600,000,000 | 720,874,000 | 120% | 227,750 | 247,678 | 109% | 455,500 | 54% | ||||
Total | 911,000 | 946,301 | 104% | 1,822,000 | 52% | |||||||
John T. Peterzalek | Adjusted EPS | 2.62 | 2.68 | 102% | 350,000 | 399,000 | 114% | 700,000 | 57% | |||
Revenue | 5,750,000,000 | 5,692,598,000 | 99% | 175,000 | 137,813 | 79% | 350,000 | 39% | ||||
Free Cash Flow | 600,000,000 | 720,874,000 | 120% | 175,000 | 190,312 | 109% | 350,000 | 54% | ||||
Total | 700,000 | 727,125 | 104% | 1,400,000 | 52% | |||||||
Jeffrey A. Townsend(3) | Adjusted EPS | 2.62 | 2.68 | 102% | 204,975 | 218,640 | 107% | 409,950 | 53% | |||
Revenue | 5,750,000,000 | 5,692,598,000 | 99% | 102,488 | 85,406 | 83% | 204,975 | 42% | ||||
Free Cash Flow | 600,000,000 | 720,874,000 | 120% | 170,812 | 167,966 | 98% | 341,625 | 49% | ||||
Total | 478,275 | 472,012 | 99% | 956,550 | 49% | |||||||
Donald D. Trigg | Adjusted EPS | 2.62 | 2.68 | 102% | 325,000 | 372,000 | 114% | 650,000 | 57% | |||
Revenue | 5,750,000,000 | 5,692,598,000 | 99% | 162,500 | 126,563 | 78% | 325,000 | 39% | ||||
Free Cash Flow | 600,000,000 | 720,874,000 | 120% | 162,500 | 177,812 | 109% | 325,000 | 55% | ||||
Total | 650,000 | 676,375 | 104% | 1,300,000 | 52% | |||||||
Totals of Named Executive Officers | 4,709,275 | 4,868,151 | 103% | 9,418,550 | 52% | |||||||
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(1) | The weighting for these Performance Measures against the total incentive amount available is 50% adjusted EPS, 25% revenue and 25% Free Cash Flow. |
(2) | The adjusted EPS and Free Cash Flow targets and results we use for our Performance Compensation Plan are non-GAAP financial measures. Our calculation of adjusted EPS and Free Cash Flow for purposes of determining executive compensation may differ from similarly-titled financial measures that we publicly disclose. The adjusted EPS and Free Cash Flow results have been adjusted for performance-based cash incentive calculation purposes as detailed and reconciled to GAAP in Appendix I. |
(3) | Mr. Townsend retired from his role of Executive Vice President and Chief of Innovation effective November 1, 2019 and transitioned to Executive Senior Advisor. Mr. Townsend was eligible to receive his performance-based cash compensation earned through Q3 2019. |
(4) | Amounts earned were based solely on attainment of the established Performance Measures and do not include any adjustments related to individual performance ratings. The following tables show 2019 quarterly targets and results by Performance Measure: |
Performance Metric Summary (Adjusted EPS) | |||||
Measurement Period | Target (1) | Results | Attainment % | Payout % | Quarterly Weighting |
Q1 | $0.61 | $0.61 | 100% | 100% | 15% |
Q2 YTD | $1.25 | $1.27 | 102% | 120% | 15% |
Q3 YTD | $1.92 | $1.93 | 101% | 100% | 15% |
Q4 YTD | $2.62 | $2.68 | 102% | 120% | 55% |
(1) Target reflects the 100% performance payout level.
Performance Metric Summary (Revenue) | |||||
Measurement Period | Target (1) | Results | Attainment % | Payout % | Quarterly Weighting |
Q1 | $1,390,000,000 | $1,389,877,000 | 100.0% | 100% | 15% |
Q2 YTD | $2,824,000,000 | $2,820,938,000 | 99.9% | 75% | 15% |
Q3 YTD | $4,266,000,000 | $4,250,366,000 | 99.6% | 75% | 15% |
Q4 YTD | $5,750,000,000 | $5,692,598,000 | 99.0% | 75% | 55% |
(1) Target reflects the 100% performance payout level.
Performance Metric Summary (Free Cash Flow) | |||||
Measurement Period | Target (1) | Results | Attainment % | Payout % | Quarterly Weighting |
Q1 | $117,000,000 | $123,454,000 | 106% | 100% | 25% |
Q2 YTD | $170,000,000 | $164,273,000 | 97% | 75% | 25% |
Q3 YTD | $376,000,000 | $404,108,000 | 107% | 120% | 25% |
Q4 YTD | $600,000,000 | $720,874,000 | 120% | 140% | 25% |
(1) Target reflects the 100% performance payout level.
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During 2019, the NEOs, except for Mr. Shafer who is discussed separately below, earned total cash compensation as follows:
NEO | Base Salary Earned ($) | Performance Compensation Plan Payments Earned ($) | Total Cash Compensation Earned ($) | |||
Marc G. Naughton | 600,000 | 799,838 | 1,399,838 | |||
Michael R. Nill | 690,000 | 946,301 | 1,636,301 | |||
John T. Peterzalek | 650,000 | 727,125 | 1,377,125 | |||
Jeffrey A. Townsend | 596,961 | 472,012 | 1,068,973 | |||
Donald D. Trigg | 609,615 | 676,375 | 1,285,990 | |||
Performance-based compensation paid to our NEOs for all years beginning with 2008 is subject to "claw back" provisions pursuant to performance plan agreements with our NEOs. These agreements have language stating that in the event we implement a Mandatory Restatement (as defined in the Performance Compensation Plan), which restatement relates to the respective fiscal year, some or all of any amounts paid as an incentive payment earned by the participant and related to such restated period(s) will be recoverable and must be repaid as determined appropriate by our Board of Directors, in most cases within 90 days of such restatement(s). The amount to be repaid will be up to the amount by which the incentive compensation paid or received exceeds the amount that would have been paid or received based on the financial results reported in the restated financial statement(s). Additionally, if the NEO is individually found by our Board of Directors to have engaged in fraud or misconduct that caused or partially caused the need for a Mandatory Restatement, then all amounts paid as an incentive payment earned and related to the restated period(s) will be fully recoverable. And, commencing in 2016, all incentive compensation payments earned under our incentive compensation plans that are forfeitable or recoverable by Cerner pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") and in accordance with any Cerner policies and procedures adopted by the Compensation Committee in order to comply with Dodd-Frank (even if such policies or procedures are adopted in the future), will also be forfeitable.
In 2020, our human resources compensation team, together with executive management, reviewed and considered with the Compensation Committee alternatives related to cash compensation, consisting of base salary and performance-based cash incentive compensation. Based on this review, the Compensation Committee determined that our framework for cash compensation generally meets the needs and serves the purposes as set forth in this Compensation Discussion and Analysis. As a result, the Compensation Committee approved the continued use of adjusted EPS, revenue and Free Cash Flow as Performance Measures for our NEOs under the Performance Compensation Plan.
Long-Term Incentive Plan Compensation. Our Cerner Corporation 2011 Omnibus Equity Incentive Plan (the "Long-Term Incentive Plan" or the "Omnibus Plan") is designed to drive long-term shareholder value and retain valuable associates and executives by: i) positioning us competitively as an employer, ii) creating an incentive for associates to contribute to our sustained, long-term growth, iii) creating a mutuality of interest between our associates and shareholders, and iv) providing financial incentives for associates. The program encourages associate stock ownership in an effort to align associates' interests with the interests of shareholders. Awards under our Omnibus Plan may consist of stock options, restricted stock, PSUs, RSUs and performance shares, as well as other awards including stock appreciation rights, phantom stock and performance unit awards, which may be payable in the form of Common Stock or cash at the Compensation Committee's discretion. The Compensation Committee annually approves an aggregate value target for all eligible associates excluding the NEOs, other executive officers and members of the Board, and specific grant levels for the NEOs, other executive officers and members of the Board. Equity grants are typically made to an executive upon commencement of employment with us or upon an associate's promotion to an executive role. Executives are also eligible for additional Long-Term Incentive Plan grants on an annual basis as individual and Company performance warrants. Grants are also made to the top 20% performers below the executive level based upon individual achievements. The type and size of the grant is based on the individual's level of responsibility; the individual's contributions to the achievement of our financial and strategic objectives; anticipated future contributions to the
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Company; market pay; and, for our NEOs and other executive officers, consideration of the individual's current Cerner equity wealth accumulation.
The Board of Directors has adopted an Equity-based Grant Policy, which outlines the grant practices with respect to equity-based grants awarded under our Long-Term Incentive Plan. This policy establishes grant dates for our equity awards that ensures grant dates will be outside of trading blackout periods except in the case of new hires and as approved by the Compensation Committee. Under the policy, the Board of Directors, the Compensation Committee or an authorized subcommittee of the Compensation Committee approves: i) the equity grant type, ii) the grant date and iii) the number of shares or an objective formula for calculation of the number of shares on the grant date of the annual performance review equity grants made to our NEOs and Section 16 officers. Stock option grants are made at an exercise price that is equal to the closing market price of our Common Stock on the date of grant. Under the Equity-based Grant Policy, the date of grant of an annual performance review equity grant must be a date set at the time of grant approval, which date: a) will be on or after the grant approval date, b) will not be during a quarterly blackout period as defined in our trading policy, and c) if the Board of Directors or the Compensation Committee is aware of any material, non-public information at the time it approves the grant, will be a date that is at least one full trading day after the public disclosure of such material, non-public information. Equity grants for new hires that will be Section 16 officers will be the associate's first day of employment or a later equity grant program date or such other date after the associate's first day of employment as determined by the Board of Directors or Compensation Committee.
In accordance with our overall compensation philosophy and to align the executives' focus on our long-term performance, we granted PSUs and RSUs to our NEOs in April 2019. As discussed above, the Compensation Committee sought to more closely align our compensation practices with the market, provide meaningful alignment to our corporate imperatives and financial performance and improve the retention value of our long-term incentive awards granted to our NEOs. Individual grants for NEOs were based on job responsibilities, performance during 2018 and contributions to the achievement of our financial and strategic objectives, anticipated future contributions to the Company, market pay and equity wealth accumulation - all factors the Compensation Committee believes help ensure we are rewarding such executives competitively and fairly. The other considerations in determining the equity granted to each NEO included the value of the grants and the market position of our compensation within our peer group. Although the size of each NEO's equity grant is based on the factors described above, we do not weight these factors or use a formula to determine the current year's award. The decision is based on the judgment of our CEO (for the other NEOs' awards) and Compensation Committee members who have extensive experience in setting motivating and reasonable compensation arrangements for our NEOs. RSUs granted to our NEOs in 2019 vest ratably over a three-year period. PSUs granted to our NEOs in 2019 vest three years from the date of grant based on the achievement of performance targets.
On April 16, 2019, the Compensation Committee approved the performance target levels for the 2019 PSUs granted to our NEOs. The PSUs will be earned based on Adjusted Operating Margin performance targets established at the beginning of the three-year performance period. Adjusted Operating Margin is measured for each of the three years of the performance period and shares available to be earned are weighted equally at 33% for each of these periods. Each annual measurement period is calculated independently and shares earned will be banked until the vest date, which will occur on the third anniversary of the grant date, subject to continued employment through the vest date.
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Performance Period | 2019 Targets | 2020 Targets | 2021 Targets | ||||||||||||
Q4 2019 | Q4 2020 | Full Year 2021 | |||||||||||||
Performance Level | Adjusted Operating Margin Targets | Award Earned (as a % of Target | Adjusted Operating Margin Targets | Award Earned (as a % of Target | Adjusted Operating Margin Targets | Award Earned (as a % of Target) | |||||||||
Threshold | 19.0 | % | 50 | % | 20.0 | % | 50 | % | 20.5 | % | 50 | % | |||
19.5 | % | 75 | % | 21.0 | % | 75 | % | 21.5 | % | 75 | % | ||||
Target | 20.0 | % | 100 | % | 22.0 | % | 100 | % | 22.5 | % | 100 | % | |||
21.0 | % | 150 | % | 22.5 | % | 150 | % | 23.0 | % | 150 | % | ||||
Maximum | 22.0 | % | 200 | % | 23.0 | % | 200 | % | 24.0 | % | 200 | % | |||
As a result of our Q4 2019 performance relative to the attainment of the established Adjusted Operating Margin performance targets, the following shares were earned and will be banked until the vest date, subject to continued employment through the vest date.
NEO(1) | Grant Date | Vest Date | Available Shares | Performance Metric | 100% Target | Actual | Award Earned (as a % of Target) | Shares Earned | ||
Brent Shafer | 4/29/2019 | 4/29/2022 | 25,849 | Q4 2019 Adjusted Operating Margin | 20.0% | 20.3% | 100% | 25,849 | ||
Marc G. Naughton | 4/29/2019 | 4/29/2022 | 6,968 | Q4 2019 Adjusted Operating Margin | 20.0% | 20.3% | 100% | 6,968 | ||
John T. Peterzalek | 4/29/2019 | 4/29/2022 | 7,514 | Q4 2019 Adjusted Operating Margin | 20.0% | 20.3% | 100% | 7,514 | ||
Donald D. Trigg | 4/29/2019 | 4/29/2022 | 7,514 | Q4 2019 Adjusted Operating Margin | 20.0% | 20.3% | 100% | 7,514 | ||
(1) | As discussed in "Potential Payments Upon Termination or Change in Control", all of Mr. Nill's outstanding PSUs were accelerated in connection with his departure. Mr. Townsend forfeited all outstanding PSUs upon his retirement from the role of Executive Vice President and Chief of Innovation effective November 1, 2019. |
During 2020, the Compensation Committee intends to place continued emphasis on linking pay to performance and has approved equity grants in the form of PSUs and RSUs to our NEOs for 2020 to encourage continued focus on long-term value and growth for our shareholders, provide meaningful alignment to our corporate imperatives and financial performance and promote retention. For 2020, the Compensation Committee has approved the continued use of Adjusted Operating Margin as the performance metric under the PSUs to be granted to our NEOs. Details of these grants to NEOs are discussed in "Compensation of the other NEOs" and "Compensation of the Chief Executive Officer."
Perquisites. We offer certain perquisites to our NEOs to help them effectively use their limited personal time and in recognition that they are on call 24 hours a day, seven days a week.
We utilize Company aircraft (whether owned, leased or otherwise made available via fractional leasehold or ownership interest or charter, herein referred to as "Corporate Aircraft") to, among other things, increase the number of client visits our key associates can make, respond quickly to clients (or partners) for meetings, client development or other business reasons, to permit efficiency and productivity in route to business meetings and to reduce costs of hotel rooms, rental cars and other expenses required when associates travel for business purposes. In certain circumstances, Corporate Aircraft are available for personal use by certain Cerner executives as approved by the Compensation Committee or executive management. During 2019, the Compensation Committee only approved a personal use value for Mr. Shafer (described below). Personal use of the Corporate Aircraft by the approved NEOs, other executive officers and Directors over or in lieu of any personal use value approved by the Compensation Committee is prohibited unless such use is pursuant to a written aircraft time sharing agreement with us. Notwithstanding the foregoing, however, if there is an empty seat on a business flight, personal use by an NEO, executive officer or Director may be permitted if there is zero
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additional incremental cost to Cerner and such personal use is approved by a designated executive officer or the Compensation Committee. Business travel needs override all personal use requests.
In certain circumstances, we provide financial assistance to facilitate a move when we request an associate to relocate for Cerner business purposes. The Compensation Committee previously approved a relocation package for Mr. Townsend for his temporary relocation from Kansas City, Missouri to Salt Lake City, Utah. He received his final payments related to his relocation package in January 2020 for expenses incurred in 2019, consisting of $79,412 plus a reimbursement to cover the taxes on his return to origin package. This tax reimbursement is consistent with our broad-based relocation policy and market practice.
The Compensation Committee believes that the perquisites provided to our NEOs are reasonable. Except as specifically noted, we generally do not pay any tax gross-ups with regard to the taxable income related to these perquisites.
Compensation of the Chief Executive Officer
The Compensation Committee generally determines compensation for the CEO using the same criteria it uses for other NEOs; provided, that the Compensation Committee may deviate from this approach in certain situations, such as in connection with a CEO transition. The Compensation Committee meets each year in executive session to evaluate the performance of the CEO and determine his compensation package, including base salary, performance-based cash incentive compensation, long-term incentive compensation, benefits and perquisites, if any.
For 2019, the Compensation Committee determined that Mr. Shafer's cash compensation would remain the same as 2018 and approved his continued base salary of $800,000 and a performance-based cash incentive compensation target of $1,200,000. Mr. Shafer's maximum performance-based cash incentive opportunity for 2019 under the terms of our Performance Compensation Plan was $2,400,000 (which represents the maximum possible payout opportunity for him under the Performance Compensation Plan). As approved by the Compensation Committee, Mr. Shafer received a grant on April 29, 2019, of PSUs equivalent to 77,547 shares, with a grant date fair value of $5,108,796. These PSUs will vest on April 29, 2022, subject to meeting the Adjusted Operating Margin performance metrics approved by the Compensation Committee and continued employment through the vest date. Also as approved by the Compensation Committee, Mr. Shafer received a grant on April 29, 2019 of RSUs equivalent to 77,547 shares, with a grant date fair value of $5,108,796. These RSUs will vest in equal portions on April 29, 2020, 2021 and 2022, subject to continued employment through the applicable vesting dates.
The Compensation Committee also approved Mr. Shafer's personal use of Corporate Aircraft in 2019 up to a value of $100,000. We convert the Compensation Committee approved value of personal use of Corporate Aircraft value into hours of flight time in accordance with corporate policies based on the incremental cost to use Cerner's Corporate Aircraft and excluding any "deadhead" hours and any additional incremental cost incurred in connection with Cerner's decision to require an executive to use third party aircraft made available to Cerner under a fractional ownership or leasehold program or charter instead of Company leased aircraft when business needs dictate.
In 2019, Mr. Shafer earned total cash compensation of $2,046,585 which included i) $800,000 in base salary, ii) $1,246,500 in payments earned under our Performance Compensation Plan, and iii) an immaterial amount in payments relating to Mr. Shafer's Corporate Aircraft benefit discussed below. Mr. Shafer's earned Performance Compensation Plan payment equaled 104% of the target incentive amount and 52% of the maximum cash incentive opportunity available to him under the Performance Compensation Plan during 2019.
During 2019, Mr. Shafer's personal use of the Corporate Aircraft was below the Compensation Committee approved value, and therefore we paid him an immaterial amount which was the difference between the approved value and the value of his personal use. However, for SEC reporting purposes, the approved value of $100,000 plus deadhead costs of $57,292 (which were not counted against his personal use limit) must be aggregated and reported as a perquisite. Therefore, the incremental cost to us of Mr. Shafer's personal use of our Corporate Aircraft was $157,292.
For 2020, the Compensation Committee approved for Mr. Shafer an increase in base salary to $850,000 effective March 29, 2020 and an increase in performance-based cash incentive compensation target to $1,275,000 effective April 1, 2020. His maximum performance-based cash incentive opportunity for 2020 under the terms of our Performance
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Compensation Plan will be $2,512,500 (which represents the maximum possible payout opportunity for him under the Performance Compensation Plan). The Compensation Committee also approved Mr. Shafer's personal use of the Corporate Aircraft in 2020 up to a value of $100,000, calculated consistently with past practice (which is no change from Mr. Shafer's allotted personal use in 2019). The Compensation Committee also approved a grant to Mr. Shafer of PSUs with a grant date fair value of $3,850,000 and RSUs with a grant date fair value of $3,850,000, both of which will be granted to Mr. Shafer on April 30, 2020. The RSUs will vest in equal portions on April 30, 2021, April 29, 2022 and April 28, 2023, subject to continued employment through such vesting dates. Mr. Shafer's PSUs will vest on April 28, 2023, subject to meeting the Adjusted Operating Margin performance metrics approved by the Compensation Committee and continued employment through the vesting date.
Compensation of the other NEOs
The Compensation Committee approved the 2019 compensation packages, effective March 31, 2019 for base salaries and performance-based cash incentive compensation, and April 29, 2019 for annual equity grants, as follows:
NEO | Base Salary ($) | Performance-based Cash Incentive Target ($) | Maximum Performance-based Cash Incentive Opportunity ($) | Equity Grant (PSUs and RSUs) (#) | Equity Grant ($) (2) |
Marc G. Naughton | 600,000 | 770,000 | 1,540,000 | 20,906(3) | 1,377,287 |
20,906(4) | 1,377,287 | ||||
Michael R. Nill | 690,000 | 911,000 | 1,822,000 | 27,773(3) | 1,829,685 |
27,773(4) | 1,829,685 | ||||
John T. Peterzalek | 650,000 | 700,000 | 1,400,000 | 22,543(3) | 1,485,133 |
22,543(4) | 1,485,133 | ||||
Jeffrey A. Townsend | 690,000(1) | 911,000(1) | 1,822,000(1) | 27,773(3) | 1,829,685 |
27,773(4) | 1,829,685 | ||||
Donald D. Trigg | 650,000 | 700,000 | 1,300,000 | 22,543(3) | 1,485,133 |
22,543(4) | 1,485,133 | ||||
36,068(5) | 2,376,160 | ||||
(1) | Mr. Townsend served as an executive officer until his retirement from the role of Executive Vice President and Chief of Innovation of Cerner effective November 1, 2019, at which time he transitioned to an Executive Senior Advisor and his salary was reduced to $100,000 annually and his performance-based cash incentive was removed. His pro-rated maximum performance-based cash incentive opportunity for 2019 was $956,550. |
(2) | These amounts reflect the grant date fair value of the PSU or RSU awards granted under our Long-Term Incentive Plan as described under "Compensation Elements - Long-Term Incentive Plan Compensation." Refer to Note 16 in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for fiscal year ended December 28, 2019 for the relevant assumptions used to determine the valuation of these awards. |
(3) | PSUs. The PSUs were granted on April 29, 2019 and will vest on April 29, 2022, subject to meeting the Adjusted Operating Margin performance metrics approved by the Compensation Committee and continued employment through the applicable vest date. |
(4) | RSUs. The RSUs were granted on April 29, 2019 and will vest in equal portions on April 29, 2020, April 29, 2021 and April 29, 2022, subject to continued employment through the vesting date. |
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(5) | RSUs. The RSUs were granted to Mr. Trigg on April 29, 2019 in connection with his promotion to Executive Vice President, Strategic Growth. The RSUs will vest in equal portions on April 29, 2021 and April 29, 2022, subject to continued employment through the applicable vesting date. |
The Compensation Committee approved increases to the base salaries and performance-based cash incentive compensation targets for the NEOs for 2020. Base salary increases are effective March 29, 2020 and performance-based cash increases are effective April 1, 2020. Mr. Trigg and Mr. Peterzalek's increases are reflective of their promotions to President and Executive Vice President and Chief Client and Services Officer, respectively. The following reflects the 2020 compensation for the NEOs who continue to be employed by the Company as executive officers as approved by the Compensation Committee:
NEO | Base Salary ($) | Performance-based Cash Incentive Target ($) | Maximum Performance-based Cash Incentive Opportunity ($) | Equity Grant ($) |
Marc G. Naughton | 620,000 | 785,000 | 1,562,500 | 1,422,500(1) |
1,422,500(2) | ||||
John T. Peterzalek | 675,000 | 875,000 | 1,662,500 | 2,000,000(1) |
2,000,000(2) | ||||
Donald D. Trigg | 700,000 | 750,000 | 1,475,000 | 3,000,000(1) |
3,000,000(2) | ||||
(1) | PSUs. The PSUs will be granted to the NEOs on April 30, 2020 and will vest on April 28, 2023, subject to meeting the Adjusted Operating Margin performance metrics approved by the Compensation Committee and continued employment through the vesting date. The amounts reflect the grant date fair value of the PSU awards that will be granted under our Long-Term Incentive Plan as described under "Compensation Elements - Long-Term Incentive Plan Compensation." |
(2) | RSUs. The RSUs will be granted to the NEOs on April 30, 2020 and will vest in equal portions on April 30, 2021, April 29, 2022 and April 28, 2023, subject to continued employment through the applicable vesting date. The amounts reflect the grant date fair value of the RSU awards that will be granted under our Long-Term Incentive Plan as described under "Compensation Elements - Long-Term Incentive Plan Compensation." |
Internal Pay Equity
Our internal pay equity guidelines provide that the CEO's total cash compensation shall not be more than three times that of the next highest executive officer's total cash compensation. Our Board must approve any exception to these guidelines. Compensation decisions for 2019 and 2020 were in line with these guidelines.
Stock Ownership Guidelines
Under our stock ownership guidelines, our non-employee Directors and every associate that is a vice president or higher in rank, are required to have a certain level of stock ownership in our Company. Ownership in our Company demonstrates a long-term commitment and ensures strong alignment of interests of Directors and our leadership with the interests of shareholders. The stock ownership guidelines establish an annual measurement date of January 1st of each year. The Compensation Committee reviewed the guidelines in March 2020 to be sure they remain reasonable and meet the intended purpose.
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Unlike typical ownership guidelines that are based on a multiple of salary or fixed number of shares, our guidelines (referred to as an "Ownership Percentage") require the retention of 45% to 75% of equity awards made to our executives and non-employee Directors.
Ownership Percentage Requirement | |||
Board of Directors (non-employees) | 75 | % | |
Chief Executive Officer | 75 | % | |
President and Executive Vice President | 65 | % | |
Senior Vice President | 55 | % | |
Vice President | 45 | % | |
Ownership Percentage Formula = Ownership Position (defined below) divided by the number of shares underlying stock options granted during the seven years immediately preceding the annual measurement date + 50% of restricted stock, PSU awards and RSU awards granted during the seven years immediately preceding the annual measurement date.
The "Ownership Position" includes any shares fully owned, including shares owned by a spouse, dependent children or a trust; outstanding stock options (unexercised vested and non-vested); fully vested shares held in our 401(k) plan; shares purchased through, and subject to restriction under, our Associate Stock Purchase Plan ("ASPP"); 50% of non-vested restricted stock, PSU awards and RSU awards; and shares held in our deferred compensation plan.
A reduced ownership requirement scale is applied based on tenure. For non-employee Directors, a 10% per year reduced ownership requirement scale after the first year of service will be applied based on years of service with the Board, with a minimum ownership requirement of five times the annual cash retainer (as set for a given year), regardless of tenure. For our management subject to the guidelines, a 2% per year reduced ownership requirement scale will be applied after ten years of service with a minimum ownership requirement of one-half of the Ownership Percentage Requirement noted above regardless of tenure. The guidelines also include hardship and retirement provisions in order to allow executives to diversify a portion of their stock holdings as they approach retirement.
At the annual measurement date on January 1, 2020, all of the NEOs and non-employee Directors who were subject to the guidelines on that date were compliant with the applicable stock ownership guidelines. The guidelines allow any officer or Director who is not compliant to submit a plan to the CEO and Chief Human Resources Officer indicating how compliance will be achieved within a five-year timeframe.
Retirement
We have a 401(k) retirement plan in which contributions are made to the NEOs on the same basis as all other associates. We offer this plan as part of our overall benefits and compensation package to remain competitive in the market and retain talent. We make matching contributions to the plan, on behalf of participants, in an amount equal to 33% of the first 6% of the participant's salary contribution. We also have the option to make a second tier discretionary match to participants' accounts deferring at least 2% of their base salary, if approved by the Compensation Committee or its Incentive Compensation Plan - Quarterly Administration Subcommittee. The discretionary match is calculated as a percentage of paid base salary to plan participants based on performance against established financial metric targets, such as adjusted EPS targets used in our Performance Compensation Plan. A second tier match was paid at 2% of eligible paid base salary for 2019.
Associate Stock Purchase Plan
We have an Associate Stock Purchase Plan under which participants may elect to contribute 1% to 20% of eligible compensation to the plan, subject to annual limitations determined in accordance with the Internal Revenue Code. Participants may purchase our Common Stock at a 15% discount on the last trading day of the purchase period. All associates that meet the eligibility requirements under the Associate Stock Purchase Plan, including the NEOs, are allowed to participate with the exception of those who own an aggregate of 5% or more of the total outstanding shares of our stock.
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Health and Welfare Benefits and Insurance
We also offer medical, dental, vision, group term life, accidental death and dismemberment and travel accident insurance plans in which our NEOs may elect to participate. The cost of these plans and opportunity for benefits thereunder are the same for the NEOs as for all other U.S. based associates and any Company contributions are made to the NEOs on the same basis as to all other U.S. based associates. We offer these plans as part of our overall benefits and compensation package to remain competitive in the market and retain talent.
Employment Agreements
We enter into employment agreements with all of our associates, including all of the NEOs. The material terms of the NEOs' employment agreements (and, as applicable, as supplemented and amended by a Cerner Executive Severance Agreement) provide:
i) | for at-will employment; |
ii) | for Mr. Shafer, an annual base salary, a potential annual bonus and specified use of our Corporate Aircraft, all as determined annually by the Board; |
iii) | for severance payments and benefits upon certain termination events, as discussed in detail below under "Potential Payments Upon Termination or Change in Control"; |
iv) | for assignment to us of all discoveries, inventions, improvements or other work product related to our business; |
v) | for a nondisclosure provision that survives in perpetuity; |
vi) | for each of the NEOs other than Mr. Townsend, non-competition and non-solicitation provisions that are effective during the term of the executive's employment and for two years following termination of employment for any reason; for Mr. Townsend, non-competition provisions that are effective during the term of Mr. Townsend's employment and for three years following the termination of employment for any reason; and |
vii) | for Mr. Shafer general mutual indemnification obligations with us. |
Additionally, all of our NEOs have voluntarily executed a Cerner mutual arbitration supplement to their employment agreements, the form of which is substantially similar to that executed by most of our U.S. based associates, whereby the associate voluntarily agrees to mutual arbitration in the event of a dispute with Cerner.
Severance Arrangements
Because employment with Cerner is at-will, Cerner has no obligation to compensate any associate upon termination from his or her employment other than as may be provided in that associate's employment agreement (including as amended by a Cerner Executive Severance Agreement) or as specifically set forth in our Enhanced Severance Pay Plan, which was first approved in 2005. All of our NEOs have entered into and have the benefit of the contractual severance set forth in their employment agreements, and, as applicable, their Cerner Executive Severance Agreements, which supersede any benefits that may have otherwise been available to the NEOs under the Enhanced Severance Pay Plan. We provide the enhanced contractual severance benefits to promote the retention of our NEOs and to ensure continuity and stability in Cerner's business.
Our Enhanced Severance Pay Plan applies to all of our U.S.-based permanent, full-time associates (other than those associates who we have granted contractual severance benefits) and offers severance pay upon certain termination without cause events or qualifying terminations or resignations for good reason following a change in control. We recognize that business needs, an associate's work performance or other reasons may require termination of employment. Our Enhanced Severance Pay Plan, as well as our limited contractual severance arrangements, are intended to: show that we value our associates; help recruit and retain qualified associates; and encourage continued attention and dedication to duties without distraction arising from the possibility of a change in control of the Company. We do not pay tax gross-ups on any severance payments.
Mr. Townsend served as an executive officer until his retirement from the role of Executive Vice President and Chief of Innovation effective November 1, 2019. On the same date, he transitioned to Executive Senior Advisor. Mr. Nill served as an executive officer until his departure from the Company on January 10, 2020. Refer to "Potential Payments Upon Termination or Change in Control" for further details.
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Deductibility of Executive Compensation
Prior to January 1, 2018, any amounts that qualified under the "performance-based compensation" exception under Section 162(m) were excluded from the $1 million per fiscal year deduction limit for qualifying compensation paid to "covered employees". Pursuant to the tax reform legislation passed in December 2017, commonly referred to as The Tax Cuts and Jobs Act, this "performance-based compensation" exception was eliminated, effective for taxable years beginning after December 31, 2017, such that compensation paid to a public company's "covered employees" in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017 (the "Section 162(m) Grandfather"). We intend to administer outstanding arrangements and plans to the extent compatible with business needs to preserve potential deductions that may be available under the Section 162(m) Grandfather.
Although deductibility of compensation is preferred, tax deductibility is not the primary objective of our compensation programs. The Compensation Committee considers the impacts of all relevant tax provisions in developing, implementing, and administering our compensation programs. However, the Compensation Committee balances this consideration with our primary goal of structuring compensation programs to attract, motivate, reward and retain qualified associates. In addition, there can be no assurance that compensation intended to satisfy the requirements for deductibility under the Section 162(m) Grandfather will in fact be deductible. Further, the Compensation Committee reserves the right to modify compensation that was initially intended to be exempt under the Section 162(m) Grandfather if it determines that such modifications are consistent with our strategies and goals.
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation earned by our NEOs for the Company's last three fiscal years.
Name and Principal Position at 2019 FYE (1) | Year | Salary ($) | Bonus ($) | Stock Awards ($) (2) | Option Awards ($) (3) | Non-Equity Incentive Plan Compensation ($) (4) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compen- sation ($) (5) | Total ($) | ||||||||
Brent Shafer Chairman of the Board and Chief Executive Officer | 2019 | 800,000 | — | 10,217,593 | — | 1,246,500 | — | 274,704(6) | 12,538,797 | ||||||||
2018 | 729,231 | — | 3,700,014 | 4,000,014 | 895,055 | — | 308,687 | 9,633,001 | |||||||||
Marc G. Naughton Executive Vice President and Chief Financial Officer | 2019 | 600,000 | — | 2,754,575 | — | 799,838 | — | 45,971(7) | 4,200,384 | ||||||||
2018 | 582,500 | — | 550,725 | 1,621,772 | 586,875 | — | 7,508 | 3,349,380 | |||||||||
2017 | 530,000 | — | 2,937,714 | 1,606,137 | 431,513 | — | 5,346 | 5,510,710 | |||||||||
Michael R. Nill Executive Vice President and Chief Operating Officer | 2019 | 690,000 | — | 3,659,370 | — | 946,301 | — | 60,118(8) | 5,355,789 | ||||||||
2018 | 683,750 | — | 735,139 | 2,165,320 | 740,100 | — | 7,508 | 4,331,817 | |||||||||
2017 | 665,000 | — | 4,923,966 | 2,569,819 | 668,650 | — | 5,346 | 8,832,781 | |||||||||
John T. Peterzalek Executive Vice President and Chief Client Officer | 2019 | 650,000 | — | 2,970,266 | — | 727,125 | — | 65,614(9) | 4,413,005 | ||||||||
2018 | 516,183 | — | 2,409,038 | 1,204,616 | 447,077 | — | 7,508 | 4,584,422 | |||||||||
Jeffrey A. Townsend Former Executive Vice President and Chief of Innovation | 2019 | 596,961 | — | 3,659,370 | — | 472,012 | — | 146,082(10) | 4,874,425 | ||||||||
2018 | 683,750 | — | 735,139 | 2,165,320 | 740,100 | — | 61,100 | 4,385,409 | |||||||||
2017 | 665,000 | — | 4,923,966 | 2,569,819 | 668,650 | — | 43,046 | 8,870,481 | |||||||||
Donald D. Trigg Executive Vice President, Strategic Growth | 2019 | 609,615 | — | 5,346,426 | — | 676,375 | — | 70,271(11) | 6,702,687 | ||||||||
(1) | Mr. Shafer joined the Company as Chairman of the Board and Chief Executive Officer in February 2018. Mr. Nill departed the Company on January 10, 2020. Mr. Townsend served as an executive officer until his |
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retirement from the role of Executive Vice President and Chief of Innovation of Cerner effective November 1, 2019, at which time he transitioned to Executive Senior Advisor. Mr. Trigg was promoted to President and Mr. Peterzalek was promoted to Executive Vice President and Chief Client and Services Officer on February 18, 2020.
(2) | These amounts reflect the grant date fair value of the PSUs and RSUs granted under our Long-Term Incentive Plan as described under "Compensation Elements - Long-Term Incentive Plan Compensation" and "Compensation of the Chief Executive Officer" in our Compensation Discussion and Analysis, computed in accordance with FASB ASC Topic 718. Refer to Note 16 in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 28, 2019 for the relevant assumptions used to determine the grant date fair value of our stock awards. The PSU grant date fair value included in the table above reflects the probable outcome of the performance metrics being achieved at 100% target as of the date of grant. The actual amounts that will be earned are dependent upon the achievement of pre-established performance goals. The PSU grant date fair value at the highest level of achievement of the performance metrics (200%) would equal the following amounts: Mr. Shafer, $10,217,593; Mr. Naughton, $2,754,575; Mr. Nill, $3,659,370; Mr. Peterzalek, $2,970,266; Mr. Townsend, $3,659,370; and Mr. Trigg, $2,970,266. Mr. Townsend forfeited the PSUs and RSUs granted to him in 2019 upon his retirement from the role of Executive Vice President and Chief of Innovation effective November 1, 2019. |
(3) | These amounts reflect the grant date fair value of the option awards granted under our Long-Term Incentive Plan as described under "Compensation Elements - Long-Term Incentive Plan Compensation" and "Compensation of the Chief Executive Officer" in our Compensation Discussion and Analysis, computed in accordance with FASB ASC Topic 718. Refer to Note 16 in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended December 28, 2019 for the relevant assumptions used to determine the grant date fair value of our option awards. |
(4) | Reflects payments earned under our Performance Compensation Plan as described above under "Compensation Elements - Performance-Based Cash Incentive Compensation" and "Compensation of the Chief Executive Officer" in our Compensation Discussion and Analysis. |
(5) | This column includes the aggregate incremental cost to us of providing perquisites and other personal benefits to the NEOs, as well as our matching contributions (both fixed and discretionary) to the NEOs' accounts pursuant to our 401(k) retirement plan and dividend equivalents on unvested PSUs and RSUs credited in 2019 that will be paid out upon vest. |
(6) | This amount includes perquisites and other personal benefits for Mr. Shafer consisting of personal use of our Corporate Aircraft by Mr. Shafer, which had an incremental cost to us in the amount of $157,292 in 2019. The incremental cost to us of Mr. Shafer's personal use of Corporate Aircraft was calculated by combining the variable operating costs of such travel, including the cost of fuel and oil, engine reserves, auxiliary power unit reserves, on-board catering and deicing fluids when applicable, the costs of deadhead hours, and the amount of $85 in cash paid to Mr. Shafer because his personal use did not exceed the Compensation Committee approved value. This amount also includes: $760 of expense incurred by the Company for Mr. Shafer's wife to accompany him to business functions; and $11,144 in matching contributions (both fixed and discretionary) to Mr. Shafer's account pursuant to our 401(k) retirement plan as well as $105,508 in dividend equivalents on unvested PSUs and RSUs credited to Mr. Shafer in 2019. |
(7) | This amount includes $11,144 in matching contributions (both fixed and discretionary) to Mr. Naughton's account pursuant to our 401(k) retirement plan, as well as $34,827 in dividend equivalents on unvested PSUs and RSUs credited to Mr. Naughton in 2019. |
(8) | This amount includes $11,144 in matching contributions (both fixed and discretionary) to Mr. Nill's account pursuant to our 401(k) retirement plan, as well as $48,974 in dividend equivalents on unvested PSUs and RSUs credited to Mr. Nill in 2019. Refer to "Potential Payments Upon Termination or Change in Control" for information about severance payable to Mr. Nill in connection with his departure. |
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(9) | This amount includes $11,144 in matching contributions (both fixed and discretionary) to Mr. Peterzalek's account pursuant to our 401(k) retirement plan, as well as $54,470 in dividend equivalents on unvested PSUs and RSUs credited to Mr. Peterzalek in 2019 and personal use of the Corporate Aircraft with no incremental cost. |
(10) | This amount includes $11,144 in matching contributions (both fixed and discretionary) to Mr. Townsend's account pursuant to our 401(k) retirement plan, as well as $12,672 in dividend equivalents on unvested RSUs credited to Mr. Townsend in 2019. It also includes perquisites and other personal benefits to Mr. Townsend consisting of (i) $79,412 owed to Mr. Townsend pursuant to his final payment under his relocation package approved by the Compensation Committee for Mr. Townsend's return to Kansas City, Missouri from a short term assignment to Salt Lake City, Utah to lead our partnership with Intermountain Healthcare, and (ii) $42,854 in tax gross ups related to such relocation package. Refer to "Potential Payments Upon Termination or Change in Control" for information about compensation payable to Mr. Townsend in connection with his retirement and transition to Executive Senior Advisor. |
(11) | This amount includes $11,144 in matching contributions (both fixed and discretionary) to Mr. Trigg's account pursuant to our 401(k) retirement plan, as well as $59,127 in dividend equivalents on unvested RSUs credited to Mr. Trigg in 2019. |
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2019 GRANTS OF PLAN-BASED AWARDS
The following table provides information about grants of plan-based awards to the NEOs in 2019, including the estimated possible payouts under non-equity and equity incentive plan awards. During 2019, our non-equity incentive awards were granted to participants of our Performance Compensation Plan based upon pre-established performance targets set annually by the Compensation Committee and approved by the Compensation Committee or its Incentive Compensation Plan - Quarterly Administration Subcommittee. For more detailed information regarding our Performance Compensation Plan, see "Compensation Elements - Performance-Based Cash Incentive Compensation" in our Compensation Discussion and Analysis. Our equity incentive awards, consisting of PSUs and RSUs, were granted under our shareholder approved Long-Term Incentive Plan. For more detailed information regarding our Long-Term Incentive Plan, see "Compensation Elements - Long-Term Incentive Plan Compensation" in our Compensation Discussion and Analysis.
Name | Grant Date | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards | Estimated Possible Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) (5) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) (6) | |||||||||||||||
Threshold ($) (1) | Target ($) | Maximum ($) (2) | Threshold (#) (3) | Target (#) | Maximum (#) (4) | |||||||||||||||||
Brent Shafer | 4/29/2019 | 600,000 | 1,200,000 | 2,400,000 | 38,774 | 77,547 | 155,094 | — | — | — | 5,108,796 | |||||||||||
4/29/2019 | — | — | — | — | — | — | 77,547 | — | — | 5,108,796 | ||||||||||||
Marc G. Naughton | 4/29/2019 | 385,000 | 770,000 | 1,540,000 | 10,453 | 20,906 | 41,812 | — | — | — | 1,377,287 | |||||||||||
4/29/2019 | — | — | — | — | — | — | 20,906 | — | — | 1,377,287 | ||||||||||||
Michael R. Nill | 4/29/2019 | 455,500 | 911,000 | 1,822,000 | 13,887 | 27,773 | 55,546 | — | — | — | 1,829,685 | |||||||||||
4/29/2019 | — | — | — | — | — | — | 27,773 | — | — | 1,829,685 | ||||||||||||
John T. Peterzalek | 4/29/2019 | 350,000 | 700,000 | 1,400,000 | 11,272 | 22,543 | 45,086 | — | — | — | 1,485,133 | |||||||||||
4/29/2019 | — | — | — | — | — | — | 22,543 | — | — | 1,485,133 | ||||||||||||
Jeffrey A. Townsend | 4/29/2019 | 239,138 | 478,275 | 956,550 | 13,887 | 27,773 | 55,546 | — | — | — | 1,829,685 | |||||||||||
4/29/2019 | — | — | — | — | — | — | 27,773 | — | — | 1,829,685 | ||||||||||||
Donald D. Trigg | 4/29/2019 | 325,000 | 650,000 | 1,300,000 | 11,272 | 22,543 | 45,086 | — | — | — | 1,485,133 | |||||||||||
4/29/2019 | — | — | — | — | — | — | 58,611 | — | — | 3,861,293 | ||||||||||||
(1) | These amounts represent the lowest level of payout, if any payout is triggered, for each metric under the Performance Compensation Plan. |
(2) | These amounts represent the maximum available payout under the Performance Compensation Plan. Actual fiscal year 2019 amounts earned under the Performance Compensation Plan are included in the Summary Compensation Table. |
(3) | These amounts represent the lowest number of PSUs available to be earned, subject to meeting performance metrics. |
(4) | These amounts represent the highest number of PSUs available to be earned, subject to meeting performance metrics. |
(5) | These amounts reflect the number of shares underlying RSUs subject to time-based vesting. |
(6) | These amounts reflect the grant date fair value of the PSUs and RSUs granted computed in accordance with FASB ASC Topic 718. The PSU grant date fair value included in the table above reflects the probable outcome of the performance metrics being achieved at 100% target as of the date of grant. Refer to Note 16 in the Notes |
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to Consolidated Financial Statements included in the Annual Report on Form 10-K for fiscal year ended December 28, 2019 for the relevant assumptions used to determine the valuation of our equity awards.
OUTSTANDING EQUITY AWARDS AT 2019 FISCAL YEAR-END
The following table provides information regarding outstanding awards to the NEOs as of December 28, 2019.
Option Awards | Stock Awards | ||||||||||||||||||
Name | Grant Date (1) | Number of Securities Underlying Unexercised Options | Option Exercise Price ($) | Option Expiration Date | Number of Shares/ Units That Have Not Vested (#) (2) | Market Value at December 28, 2019 of Shares/Units That Have Not Vested ($) | Equity Incentive Plan Awards | ||||||||||||
Exercisable (#) | Unexercisable (#) | Number of Unearned Shares/Units That Have Not Vested (#) (3) | Market Value at December 28, 2019 of Unearned Shares/Units That Have Not Vested ($) | ||||||||||||||||
Brent Shafer | 2/8/2018 | — | 182,006 | 61.22 | 2/8/2028 | (5) | — | — | — | — | |||||||||
2/8/2018 | — | — | — | — | 40,292 | 2,952,598 | — | — | |||||||||||
4/29/2019 | — | — | — | — | 77,547 | 5,682,644 | — | — | |||||||||||
4/29/2019 | — | — | — | — | — | — | 77,547 | 5,682,644 | |||||||||||
Marc G. Naughton | 3/11/2011 | 56,000 | — | 25.80 | 3/11/2021 | (5) | — | — | — | — | |||||||||
2/24/1997 | 70,000 | — | 1.88 | 2/24/2022 | (6) | — | — | — | — | ||||||||||
3/9/2012 | 50,000 | — | 38.43 | 3/9/2022 | (5) | — | — | — | — | ||||||||||
3/1/2013 | 50,000 | — | 44.62 | 3/1/2023 | (5) | — | — | — | — | ||||||||||
3/7/2014 | 44,000 | — | 60.37 | 3/7/2024 | (5) | — | — | — | — | ||||||||||
3/12/2015 | 35,200 | 8,800 | 70.91 | 3/12/2025 | (5) | — | — | — | — | ||||||||||
3/11/2016 | 52,500 | 35,000 | 54.01 | 3/11/2026 | (5) | — | — | — | — | ||||||||||
3/3/2017 | 35,000 | 52,500 | 55.74 | 3/3/2027 | (5) | — | — | — | — | ||||||||||
3/2/2018 | — | 73,100 | 62.94 | 3/2/2028 | (5) | — | — | — | — | ||||||||||
3/2/2018 | — | — | — | — | 8,750 | 641,200 | — | — | |||||||||||
4/29/2019 | — | — | — | — | 20,906 | 1,531,992 | — | — | |||||||||||
4/29/2019 | — | — | — | — | — | — | 20,906 | 1,531,992 | |||||||||||
Michael R. Nill | 3/7/2014 | 73,000 | — | 60.37 | 3/7/2024 | (5) | — | — | — | — | |||||||||
3/12/2015 | 58,400 | 14,600(4) | 70.91 | 3/12/2025 | (5) | — | — | — | — | ||||||||||
3/11/2016 | — | 56,000(4) | 54.01 | 3/11/2026 | (5) | — | — | — | — | ||||||||||
3/3/2017 | — | 84,000(4) | 55.74 | 3/3/2027 | (5) | — | — | — | — | ||||||||||
3/2/2018 | — | 97,600(4) | 62.94 | 3/2/2028 | (5) | — | — | — | — | ||||||||||
3/2/2018 | — | — | — | — | 11,680(4) | 855,910 | — | — | |||||||||||
4/29/2019 | — | — | — | — | 27,773(4) | 2,035,205 | — | — | |||||||||||
4/29/2019 | — | — | — | — | — | — | 27,773(4) | 2,035,205 | |||||||||||
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John T. Peterzalek | 5/12/2015 | 40,000 | 10,000 | 67.24 | 5/12/2025 | (5) | — | — | — | — | |||||||||
5/10/2016 | — | 32,800 | 55.24 | 5/10/2026 | (5) | — | — | — | — | ||||||||||
5/1/2017 | 32,800 | 49,200 | 65.27 | 5/1/2027 | (5) | — | — | — | — | ||||||||||
5/4/2018 | — | 61,247 | 57.24 | 5/4/2028 | (5) | — | — | — | — | ||||||||||
5/4/2018 | — | — | — | — | 7,145 | 523,586 | |||||||||||||