8-K: Fox Factory Revamps Executive Incentives with New Performance-Based Share Unit Agreements

Fox Factory Holding Corp. introduces new performance share unit agreements tied to adjusted EBITDA margin and revenue growth to better align executive compensation with company performance and shareholder value.

Summary

• Fox Factory Holding Corp.'s Compensation Committee has adopted two new forms of performance share unit (PSU) award agreements under the 2022 Omnibus Plan.
• One form of PSU agreement is based on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin percentage, aiming to align incentives with stockholder value and management retention.
• The other form of PSU agreement is based on revenue growth, designed to drive transformational revenue growth during the performance period.
• These PSUs will be granted to eligible participants in the 2022 Omnibus Plan in recognition of their service or expected service to the Company.
• The number of PSUs earned can range from 0% to 200% of the target, depending on the achievement of performance goals.
• The settlement date for the awards will be no later than March 15th following the end of the performance period.

Sentiment

Score: 7

Explanation: The document reflects a positive move towards aligning management incentives with company performance and shareholder value, which is generally viewed favorably by investors. The use of both EBITDA margin and revenue growth as metrics is a balanced approach. However, the lack of specific performance targets and the committee's discretion to adjust awards introduce some uncertainty.

Positives

• The new PSU agreements aim to better align management incentives with shareholder value.
• The introduction of revenue growth-based PSUs is intended to drive transformational revenue growth.
• The potential for awards to reach 200% of the target provides a strong incentive for high performance.
• The use of both EBITDA margin and revenue growth as metrics provides a balanced approach to performance evaluation.

Negatives

• PSUs can be forfeited if employment is terminated before the end of the performance period, except in specific circumstances such as termination without cause, death, or disability.
• The committee has discretion to adjust the awards based on unusual events or changes in accounting principles.

Risks

• The performance goals are determined by the committee and are not explicitly stated in the document, which could lead to uncertainty.
• The committee has the discretion to adjust the awards, which could impact the final payout.
• The vesting of the PSUs is contingent on continuous service, which could be a risk for employees considering leaving the company.

Future Outlook

The company intends to grant these new PSUs to eligible participants in the 2022 Omnibus Plan, with the goal of driving performance and aligning management with shareholder interests.

Management Comments

• The Compensation Committee adopted a new form of performance share unit award agreement to set the performance criteria for performance-based restricted stock units as the adjusted earnings before interest, taxes, depreciation and amortization margin percentage (Adjusted EBITDA Margin Percentage PSUs), to better achieve the objectives of aligning incentive awards to stockholder value and attracting and retaining management.
• The Compensation Committee adopted a new form of performance share unit award agreement with a performance criterion for the performance-based restricted stock units of revenue growth (Revenue Growth PSUs) to achieve the objective of driving transformational revenue growth during the performance period.

Industry Context

The move to tie executive compensation to both profitability (EBITDA margin) and growth (revenue) is a common practice in the industry, aiming to incentivize a balanced approach to business performance. This is in line with trends to align management interests with shareholder value.

Comparison to Industry Standards

• Many companies in the manufacturing and consumer discretionary sectors use a combination of financial metrics like EBITDA margin and revenue growth to determine executive compensation.
• Companies such as Polaris, Brunswick, and Thor Industries also use similar performance-based equity awards to incentivize their management teams.
• The specific performance targets and vesting schedules will vary by company, but the general approach of using both profitability and growth metrics is a common industry practice.
• The use of a 0-200% payout range is also fairly standard, providing a strong incentive for high performance.

Corporate Governance

Stakeholder Impact

• Shareholders may view the changes positively as they align management incentives with company performance and shareholder value.
• Employees eligible for the PSUs will be incentivized to achieve the performance goals.
• The changes are not expected to have a direct impact on customers or suppliers.

Next Steps

• The company will grant Adjusted EBITDA Margin Percentage PSUs and Revenue Growth PSUs to eligible participants in the 2022 Omnibus Plan.
• The Compensation Committee will determine the specific performance goals and vesting schedules for the PSUs.
• The company will monitor the performance of the participants against the set goals.

Key Dates

Keywords

performance share units, PSU, executive compensation, EBITDA margin, revenue growth, incentive awards, stock options, equity, management, compensation committee