DEFA14A: Fox Factory Urges Stockholders to Approve Executive Compensation Plan Amidst ISS Opposition

Fox Factory Holding Corp. is urging its stockholders to vote in favor of its executive compensation plan (Say-on-Pay Proposal) at the upcoming annual meeting, despite a recommendation against it from Institutional Shareholder Services (ISS).

Summary

• Fox Factory Holding Corp. is actively encouraging its stockholders to vote FOR Proposal 3, the advisory vote on executive compensation, at the May 3, 2024 annual meeting.
• The company highlights a strong history of aligning executive pay with performance, supported by a 97% average stockholder approval of the Say-on-Pay proposal over the last five years.
• Proxy advisory firm Glass Lewis has recommended voting FOR the proposal, while Institutional Shareholder Services (ISS) recommends voting against it, citing concerns about pay-for-performance misalignment.
• Fox Factory's Compensation Committee held management accountable to performance targets, resulting in no payout for the 2023 performance-based cash bonus.
• A permissible adjustment was made to the free cash flow (FCF) metric due to the UAW strike, increasing the CEO award value by less than $200,000, or about 3% of the CEO's 2023 total compensation.
• The CEO's compensation decreased by 22%, or $1.7 million, from $7.7 million in 2022 to $6.0 million in 2023.
• Long-term incentive awards for the 2021-2023 period were issued at 200% of target due to above-target financial results, although the underlying value of earned shares declined by 53.55% due to stock price changes.
• The CEO's 2023 target total direct compensation was heavily weighted towards at-risk pay (87%), with 70% in long-term equity incentives.
• CEO perquisites are limited, representing less than 1% of total compensation ($49,735 out of $6,033,703).
• The company disagrees with ISS's concerns about pay-for-performance misalignment and the size of perquisites, committing to improved disclosure of performance goals and committee discretion in the future.

Sentiment

Score: 6

Explanation: The document is primarily defensive, attempting to justify executive compensation practices in the face of criticism. While highlighting positive aspects, the need to address ISS concerns suggests underlying issues.

Positives

• Fox Factory has a strong history of aligning executive pay with performance, evidenced by high stockholder support.
• The Compensation Committee held management accountable to performance targets, resulting in no bonus payout for 2023.
• The CEO's compensation decreased significantly in 2023.
• Long-term incentive awards were tied to performance over a three-year period.
• CEO perquisites are a small percentage of total compensation.
• Glass Lewis recommends voting FOR the Say-on-Pay Proposal.

Negatives

• ISS recommends voting against the Say-on-Pay Proposal, citing concerns about pay-for-performance misalignment.
• The Compensation Committee applied discretion to adjust the FCF metric due to the UAW strike, which ISS may view negatively.
• The underlying value of earned shares declined significantly due to stock price changes.
• ISS considers the CEO's perquisites to be large.

Risks

• Stockholder rejection of the Say-on-Pay Proposal could negatively impact the company's reputation and relationship with investors.
• Continued scrutiny from ISS regarding executive compensation practices could lead to further negative recommendations.
• Future unforeseen events, such as strikes, could impact financial performance and executive compensation payouts.
• Fluctuations in the stock price could significantly impact the value of long-term incentive awards.

Future Outlook

The company commits to disclosing threshold, target, and maximum performance goals and actual performance levels, and application of committee discretion, for completed PSU cycles going forward.

Management Comments

• The Board of Directors unanimously recommends that stockholders vote FOR the Say-on-Pay Proposal.
• The company disagrees with ISS's classification of pay-for-performance misalignment.
• The company disagrees with ISS calling perquisites large.

Industry Context

In the broader context of corporate governance, Say-on-Pay votes are a common mechanism for shareholders to express their views on executive compensation. The divergence between ISS and Glass Lewis recommendations highlights the varying perspectives on what constitutes appropriate executive pay, even within the proxy advisory industry.

Comparison to Industry Standards

• Comparing Fox Factory's executive compensation practices to those of its peers in the consumer discretionary sector reveals a mix of approaches.
• Companies like Polaris and Brunswick also utilize performance-based equity awards, but the specific metrics and weighting may differ.
• The level of CEO perquisites at Fox Factory appears to be lower than some other companies in the sector, where perquisites can sometimes include items like personal use of company aircraft or security services.
• The adjustment made to the FCF metric due to the UAW strike is a less common practice, as most companies rely on pre-defined formulas without discretionary adjustments.

Stakeholder Impact

• The outcome of the Say-on-Pay vote could impact shareholder confidence and the company's reputation.
• Executive compensation practices can influence employee morale and motivation.
• The UAW strike impacted the company's financial performance and, consequently, executive compensation.

Next Steps

• Stockholders will vote on the Say-on-Pay Proposal at the May 3, 2024 annual meeting.
• The company will continue to engage with stockholders and proxy advisory firms to address concerns about executive compensation.

Key Dates

Keywords

executive compensation, Say-on-Pay, proxy statement, performance-based compensation, stockholders, ISS, Glass Lewis, UAW strike, FCF, ROIC