DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

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   Soliciting Material Pursuant to § 240.14A-12

 

LOGO

 

 

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LOGO

Dear Stockholder,

We cordially invite you to attend the ResMed Inc. annual stockholders meeting on Thursday, November 15, 2018, at 10:00 a.m. Australian Eastern Time (Wednesday, November 14, 2018, at 3:00 p.m. US Pacific Time) in ResMed’s Australian corporate office located at 1 Elizabeth Macarthur Drive, Bella Vista, New South Wales 2153, Australia.

Your vote is important. We are promoting the use of the internet to provide proxy materials to stockholders, as we believe this is an efficient, cost-effective and environmentally responsible method for facilitating our annual meeting. Please read “VOTING INSTRUCTIONS AND GENERAL INFORMATION – Voting by Attending our Annual Meeting” in the proxy statement.

Very truly yours,

 

LOGO

 

Peter C. Farrell

Chairman of the Board


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LOGO

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF RESMED INC.

 

 

Date:

  

Thursday, November 15, 2018, at 10:00 a.m. Australian Eastern Time

Wednesday, November 14, 2018, at 3:00 p.m. US Pacific Time

Location:

  

ResMed’s Australian corporate office

1 Elizabeth Macarthur Drive

Bella Vista, New South Wales 2153

Australia

Items of business:

   1.   

Elect three directors, each to serve until our 2021 annual meeting and until their successors are elected and qualified. The nominees for election as directors at the 2018 annual meeting are Peter Farrell, Harjit Gill, and Ron Taylor.

   2.   

Ratify our selection of KPMG LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2019.

   3.   

Approve an amendment to the ResMed Inc. 2009 Employee Stock Purchase Plan, which increases the number of shares authorized for issue under the plan by 2 million shares, from 4.2 million shares to 6.2 million shares, and extends the term of the plan through November 15, 2028.

   4.   

Approve, on an advisory basis, the compensation paid to our named executive officers, as disclosed in this proxy statement (“say-on-pay”).

   5.   

Transact other business that may properly come before the meeting.

Record date:

  

You are entitled to vote only if you were a ResMed stockholder at the close of business on September 17, 2018, at 4:00 p.m. US Eastern Time.

Meeting admission:

  

Stockholders are cordially invited to attend the annual meeting. If you plan to attend the meeting, you will need proof of share ownership as of 4:00 p.m. US Eastern Time on Tuesday, September 17, 2018, together with photo identification. If your shares are not registered in your name, you must bring proof of share ownership (such as a recent bank or brokerage firm account statement, together with proper identification) to be admitted to our annual meeting. Please also note that if your shares are not registered in your name and you wish to vote at our annual meeting, you must bring to our annual meeting a legal proxy from the record holder of the shares, which is the broker or other nominee, authorizing you to vote at our annual meeting.

  

If you cannot attend the meeting in person, you may vote your shares by toll-free number, by internet, or, if this proxy statement was mailed to you, by completing and signing the accompanying proxy card and promptly returning it in the envelope provided. Please read Voting instructions and general information in the proxy statement.

 

By order of the board of directors,

 

LOGO

 

David Pendarvis

Secretary


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TABLE OF CONTENTS

 

 

Voting instructions and general information

     1  

Voting instructions

     1  

General information

     3  

Proposals

     6  

Proposal 1: Election of directors

     7  
Proposal 2: Ratification of selection of KPMG LLP as our independent registered public accounting firm for fiscal year ending June 30, 2019      16  

Proposal 3: Approve amendments to the ResMed Inc. 2009 Employee Stock Purchase Plan

     17  

Proposal 4: Advisory vote to approve named executive officer compensation

     23  

Company information

     24  

Corporate governance

     25  

Board independence

     25  

Meetings and director attendance

     25  

Board oversight of risk

     26  

Board leadership structure

     26  

Committees of our board of directors

     27  

Communications with our board of directors

     30  

Code of ethics

     31  

Pledging and hedging company stock prohibited

     31  

Director compensation – 2018

     32  

Fiscal year 2018 program – cash

     32  

Fiscal year 2018 program – equity

     32  

No changes for fiscal year 2018

     32  

Compensation philosophy

     32  

Compensation process – peer group companies

     33  

Equity ownership guidelines

     33  

New directors

     33  

Executive directors

     33  

No changes for fiscal year 2019

     33  

Non-executive chairman’s compensation

     34  

Fiscal year 2018 director compensation table

     35  

Executive officers

     37  

Executive officers bios

     37  

Compensation discussion and analysis (CD&A)

     40  

Introduction

     40  

Overview of fiscal year 2018 – executive summary

     40  

Philosophy and objectives of our executive compensation program

     46  

Compensation process

     48  

Elements of compensation

     50  

Terms of performance stock units

     57  

Terms of stock options and restricted stock units

     59  

Equity compensation award policies

     60  

Equity ownership guidelines

     60  

Change of control, termination, and retirement arrangements

     60  

Perquisites and other benefits

     62  

Deferred compensation plan

     62  

Tax considerations

     63  

Executive compensation tables

     64  

Summary compensation table

     64  

Grants of plan-based awards

     66  

Outstanding equity awards at fiscal year end

     67  

Option exercises and stock vested

     69  

Nonqualified deferred compensation

     70  

Potential payments on termination or change of control

     71  


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Risk considerations in compensation programs

     75  

Chief executive officer pay ratio

     75  

Compensation committee report

     75  

Audit committee report

     76  

Audit fees

     77  

Pre-approval policy

     77  

Common stock ownership of principal stockholders and management

     78  

Equity compensation plan information

     80  

Section 16(a) beneficial ownership reporting compliance

     81  

Transactions with related persons

     82  

Transaction of other business that may properly come before the meeting

     83  

Stockholder proposals for 2019 annual meeting

     84  

Proposals included in the proxy statement

     84  

Proposals not included in the proxy statement

     84  

Cautionary note regarding forward-looking statements

     85  

Appendix A

     86  

Reconciliation of non-GAAP financial measures

     86  

Appendix B

     87  

Appendix C

     103  


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VOTING INSTRUCTIONS AND GENERAL INFORMATION

 

 

Why am I receiving these materials?

ResMed’s board of directors is soliciting your proxy to vote at our 2018 annual meeting of stockholders and any continuation, postponement or adjournment of the meeting. The meeting is scheduled for Thursday, November 15, 2018, at 10:00 a.m. Australian Eastern Time (Wednesday, November 14, 2018, at 3:00 p.m. US Pacific Time) in ResMed’s Australian corporate office located at 1 Elizabeth Macarthur Drive, Bella Vista, New South Wales 2153, Australia. If you held shares of our stock on September 17, 2018, we invite you to attend the annual meeting and vote on the proposals described below under the heading “What am I voting on?” You do not need to attend the annual meeting to vote your shares. Instead, you may vote over the internet, by telephone, or complete, sign, date, and return the enclosed proxy card by mail.

When and where are proxy materials available?

We expect to first make this proxy statement available to our stockholders and our holders of Clearing House Electronic Subregister System, or CHESS, Units of Foreign Securities, on the internet, and to mail notice and access materials on or about October 2, 2018. Our annual report on Form 10-K was filed with the US Securities and Exchange Commission, or SEC, on August 17, 2018. You can review our 10-K on our website, at investor.resmed.com, and at the website where our proxy materials are posted, at www.proxyvote.com and www.investorvote.com.au.

Please access and review the proxy materials before voting.

 

Voting instructions 

Voting matters and board recommendations:

 

 

Matter

   Vote recommendation

 

Elect the 3 nominees identified in this proxy statement to the board of directors (page 7)

 

   FOR each director nominee

 

Ratify selection of independent registered public accountants (page 16)

 

   FOR

 

Approve an amendment to the ResMed Inc. 2009 Employee Stock Purchase Plan (page 17)

 

   FOR

 

Advisory vote to approve executive compensation (page 23)

 

   FOR

Who can vote at the annual meeting?

You are entitled to vote or direct the voting of your ResMed shares if you were a stockholder of record, a beneficial owner of shares held in street name, or a holder of CHESS Units of Foreign Securities, as of 4:00 p.m. US Eastern Time, on September 17, 2018, the record date for our annual meeting. As of the record date, there were 142,691,815 shares of ResMed common stock outstanding, excluding treasury shares. Treasury shares will not be voted. Each stockholder has one vote for each share of common stock held on the record date. As summarized below, there are some distinctions between shares held of record, those owned beneficially in street name, and those held through CHESS Units of Foreign Securities.

What does it mean to be a stockholder of record?

If, on the record date, your shares of common stock were registered directly in your name with our transfer agent, Computershare, then you are a “stockholder of record.” As a stockholder of record, you may vote in person at the annual meeting or vote by proxy. Whether or not you plan to attend the annual meeting, we urge you to vote by the internet, by telephone, or to fill out and return the enclosed proxy card, to ensure your vote is counted.

What does it mean to beneficially own shares in “street name?”

If, on the record date, your shares of common stock were held in an account at a broker, bank, or other financial institution (we will refer to those organizations collectively as a “broker”), then you are the beneficial owner of shares held in “street name,” and these proxy materials are being forwarded to you by your broker. The broker holding your account is considered the stockholder of record for purposes of voting at our annual meeting. As the beneficial owner, you have the right to direct

 

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your broker on how to vote the shares in your account. As a beneficial owner, you are invited to attend the annual meeting. But because you are not a stockholder of record, if you want to vote your shares in person at the annual meeting, you must request and obtain a valid proxy from your broker giving you that right, and must satisfy the annual meeting admission criteria described below.

Your broker is not permitted to vote on your behalf on any matter to be considered at the annual meeting (other than ratifying our appointment of KPMG LLP as our independent registered public accounting firm) unless you specifically instruct the broker how to vote. We encourage you to communicate your voting decisions to your broker before the annual meeting date to ensure that your vote will be counted.

What does it mean to be a holder of CHESS Units of Foreign Securities?

CHESS Units of Foreign Securities are depositary interests issued by ResMed through CHESS, and traded on the Australian Securities Exchange, or ASX. The depositary interests are frequently called “CUFS”, or “CDIs.” If you own ResMed CUFS or CDIs, then you are the beneficial owner of one ResMed common share for every ten CUFS or CDIs you own. Legal title is held by CHESS Depositary Nominees Pty Limited. CHESS Depositary Nominees is considered the stockholder of record for purposes of voting at our annual meeting. As the beneficial owner, you have the right to direct CHESS Depositary Nominees on how to vote the shares in your account. As a beneficial owner, you are invited to attend the annual meeting. But because you are not a stockholder of record, if you want to vote your shares in person at the annual meeting, you must request and obtain a valid proxy from CHESS Depositary Nominees giving you that right, and must satisfy the annual meeting admission criteria described below.

You will receive a notice from Computershare allowing you to deliver your voting instructions over the internet. In addition, you may request paper copies of the proxy statement and voting instructions by following the instructions on the notice provided by Computershare.

Under the rules governing CUFS and CDIs, CHESS Depositary Nominees are not permitted to vote on your behalf on any matter to be considered at the annual meeting unless you specifically instruct CHESS Depositary Nominees how to vote. We encourage you to communicate your voting decisions to CHESS Depositary Nominees before the annual meeting date to ensure that your vote will be counted.

How do I vote my shares before the annual meeting?

Holders of common stock listed on the New York Stock Exchange, or NYSE. If you are a holder of common stock listed on the NYSE, you may vote before the meeting by submitting a proxy. The method of voting by proxy differs (1) depending on whether you are viewing this proxy statement on the internet or on a paper copy, and (2) for shares held as a record holder and shares held in “street name.” You may request paper copies of the proxy statement and proxy card by following the instructions on the notice described below.

 

 

Holder

  

 

Method of voting

Holders of record    If you hold your shares of common stock as a record holder and you are viewing this proxy statement on the internet, you may vote by submitting a proxy over the internet or by telephone by following the instructions on the website referred to in the notice of internet availability of proxy materials previously mailed to you. If you hold your shares of common stock as a record holder and you are reviewing a paper copy of this proxy statement, you may vote your shares by completing, dating and signing the proxy card that was included with the proxy statement and promptly returning it in the pre-addressed, postage-paid envelope provided to you, or by using the toll-free number, or by submitting a proxy over the internet using the instructions on the proxy card.
Shares held in “street name”    If you hold your shares of common stock in street name, you will receive a notice from your broker with instructions on how to vote your shares. Your broker will allow you to deliver your voting instructions over the internet.
Holders of CUFS or CDIs listed on the ASX    If you hold our CUFS or CDIs, you will receive a notice from Computershare, which will allow you to make your voting instructions over the internet. In addition, you may request paper copies of the proxy statement and voting instructions from Computershare by following the instructions on the notice provided by Computershare.

Internet voting closes in the US at 11:59 p.m., November 14, 2018 US Eastern Time for shares traded on the NYSE, and 10:00 a.m., November 14, 2018 Australian Eastern Time for holders of CHESS Units of Foreign Securities listed on the ASX.

 

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How do I vote in person at the annual meeting?

If you attend our annual meeting and want to vote in person, you may vote your shares in person by requesting a ballot at our annual meeting. You will need to have proof of ownership and valid photo identification with you for admission to our annual meeting. Please note, however, that if your shares are held in street name, or if you hold CUFS or CDIs, you must bring a legal proxy from the record holder of the shares (which is the broker, other nominee, or CHESS nominee), authorizing you to vote at our annual meeting.

How can I revoke my proxy or change my vote?

You may revoke your proxy and change your vote at any time before the proxy is exercised by any of the following methods:

 

Holder  

 

Method of voting

Holders of record      

    Delivering written notice of revocation to our secretary at our principal executive office located at 9001 Spectrum Center Boulevard, San Diego, California 92123 USA;

    

 

    Delivering another timely and later dated proxy to our secretary at our principal executive office located at 9001 Spectrum Center Boulevard, San Diego, California 92123 USA;

    

 

    Revoking by internet or by telephone before 11:59 p.m. US Eastern Time on November 14, 2018, for shares traded on the NYSE and 10:00 a.m. Australian Eastern Time on November 14, 2018, for holders of CHESS Units of Foreign Securities listed on the ASX; or

    

 

    Attending the 2018 annual meeting and voting in person by written ballot. Please note that your attendance at the meeting will not revoke your proxy unless you actually vote at the meeting.

 

Stock held by brokers, banks and nominees; and CUFS or CDIs  

You must contact your broker, bank or other nominee to obtain instructions on how to revoke your proxy or change your vote. You may also obtain a “legal proxy” from your broker, bank or other nominee to attend our annual meeting and vote in person by written ballot.

What happens if I return the proxy card to ResMed but do not make specific choices?

If you return a signed, dated proxy card to us with a choice specified on a voting matter, we will vote your shares according to your choice. If you return a signed, dated proxy card to us but do not make specific choices, we will vote your shares as follows: (1) FOR each of the three nominees to our board identified in this proxy statement; (2) FOR ratifying our selection of KPMG; (3) FOR amending the ResMed Inc. 2009 Employee Stock Purchase Plan; and (4) FOR approving, on a non-binding, advisory basis, the compensation we paid our named executive officers.

What does it mean if I received more than one proxy card?

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

 

General information  

What are broker non-votes and how are they counted?

If your broker holds your common stock in street name and you have not provided your broker with voting instructions, your broker may vote your shares in its discretion on proposals NYSE rules consider “routine.” The only proposal considered “routine” in our meeting is the proposal to ratify the selection of our independent registered public accounting firm. If you do not provide direction to your broker for that proposal, your broker may exercise its discretion to vote your shares. The election of directors, the approval of the amendments to the ResMed Inc. 2009 Employee Stock Purchase Plan, and the advisory votes on executive compensation are not considered “routine”, and brokers do not have discretionary authority to vote on these matters without your direction. You must indicate to your broker how you wish to vote on any non-routine matter with respect to any shares you hold in street name or they will be considered a “broker non-vote.”

Broker non-votes will not affect the outcome of the election of our directors, the advisory vote to approve our executive compensation, the approval of the amendment to the ResMed Inc. 2009 Employee Stock Purchase Plan, as these matters are determined based on the number of votes cast and broker non-votes are not considered votes cast.

 

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Your vote is important. Please submit your proxy, or provide instructions to your brokerage firm, bank or the CHESS Depositary Nominees. This will ensure that your shares are voted at our annual meeting.

How many shares must be present or represented to conduct business at the annual meeting?

A quorum of stockholders is necessary to hold a valid annual meeting. A quorum will be present if a majority of the outstanding shares entitled to vote are represented at our annual meeting. Shares represented by proxies that reflect abstentions or broker non-votes will be counted as shares represented at our annual meeting for purposes of determining a quorum. If there are insufficient votes to constitute a quorum at the time of the annual meeting, we may adjourn the annual meeting to solicit additional proxies.

On the record date we had outstanding 142,691,815 shares of common stock (excluding treasury shares), the holders of which are entitled to one vote per share. Accordingly, an aggregate of 142,691,815 votes may be cast on each matter to be considered at our annual meeting, and at least 71,345,908 shares must be represented at the meeting to have a quorum.

What is the voting requirement to approve each of the proposals?

Proposal 1 – Directors will be elected by a majority of the votes cast in person or by proxy, which means that the number of votes cast “for” a candidate for director must exceed the number of votes cast “against” that candidate. Abstentions and broker non-votes do not count as a vote cast either “for” or “against” and will not affect the outcome of the election.

Under our board’s policy, in uncontested elections, an incumbent director nominee who does not receive the required votes for re-election will continue to serve, but is expected to tender a resignation to the board. The nominating and governance committee, or another duly authorized committee of the board, will decide whether to accept or reject the tendered resignation, generally within 90 days after the election results are certified. We will publicly disclose the board’s decision on the tendered resignation and the rationale behind the decision.

Proposal 2 – The proposal to ratify our selection of KPMG LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2019 requires the affirmative vote of a majority of the aggregate votes cast in person or by proxy. Abstentions will not affect the outcome of this proposal. Brokers generally have discretionary authority to vote on the ratification of our independent registered public accounting firm, so we do not expect broker non-votes to result from the vote on proposal 2. Any broker non-votes that may result will not affect the outcome of this proposal.

Proposal 3 –The proposal to approve an amendment to the ResMed Inc. 2009 Employee Stock Purchase Plan requires the affirmative vote of a majority of shares cast in person or by proxy. Abstentions and broker non-votes will not affect the outcome of this proposal.

Proposal 4 – The advisory vote to approve our executive compensation, (“say-on-pay” vote), requires the affirmative vote of a majority of shares cast in person or by proxy. Abstentions and broker non-votes will not affect the outcome of this proposal. As an advisory vote, the results of this vote will not be binding on the board or the company. However, the board values the opinions of our stockholders and will consider the outcome of the vote when making future decisions on our named executive officers’ compensation, and on our executive compensation principles, policies and procedures.

Who pays the costs of proxy solicitors?

The cost of soliciting proxies will be borne by us. After the original delivery of the notice and other proxy soliciting material, further solicitation of proxies may be made by mail, telephone, facsimile, electronic mail, and personal interview by our regular employees, who will not receive additional compensation for the solicitation. We will also request that brokerage firms and other nominees or fiduciaries deliver the notice and proxy soliciting material to beneficial owners of the stock held in their names, and we will reimburse them for reasonable out-of-pocket expenses they incur.

How can I see a list of stockholders?

Under Delaware law, a list of stockholders entitled to vote at our annual meeting will be available at the meeting and for ten days before our annual meeting in our principal executive office, located at 9001 Spectrum Center Boulevard, San Diego, California, 92123 USA, between the hours of 9:00 a.m. and 4:00 p.m. US Pacific Time.

How will I receive my proxy materials?

We are furnishing proxy materials (proxy statement and annual report on Form 10-K) to our stockholders by the internet, instead of mailing printed copies of proxy materials to each stockholder. Accordingly, we are sending a notice of internet

 

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availability of proxy materials to our stockholders of record. If your shares are listed in street name on the NYSE, brokers who hold shares on your behalf will send you their own similar notice. If you hold CUFS or CDIs listed on the ASX, you will receive your notice from Computershare. If you received the notice by mail, you will not automatically receive a printed copy of the proxy materials in the mail. Instead, the notice tells you how to use the internet to access and review this proxy statement, our annual report on Form 10-K, and proxy voting card. The notice also tells you how you may submit your proxy via the internet.

Our proxy materials explain how you may request to receive your materials in printed form on a one-time or ongoing basis. Certain stockholders who have previously given us a permanent request to receive a paper copy of our proxy materials will be sent paper copies in the mail.

 

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PROPOSALS

 

 

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

Our bylaws authorize a board of directors with between one and thirteen members, with the exact number to be specified by the board from time to time. Our board currently authorizes eight directors.

Our board is divided into three classes. One class is elected every year at our annual meeting for a term of three years. The class of directors whose term expires in 2018 has three members: Peter Farrell, Gary Pace, and Ron Taylor. Gary Pace will not stand for re-election at the annual meeting. On the nominating and governance committee’s recommendation, our board has nominated Peter Farrell and Ron Taylor, and a new nominee, Harjit Gill, as directors for election at this annual meeting. The directors to be elected at this annual meeting will hold office until the 2021 annual meeting or until the director’s earlier death, disability, resignation, or removal.

We are soliciting proxies in favor of these nominees and proxies will be voted for them unless the proxy otherwise specifies. If Peter Farrell, Harjit Gill, or Ron Taylor becomes unable or unwilling to serve as director, the proxies will be voted for the election of another person, if any, that the board designates.

Information concerning the nominees for director and the other directors who will continue in office after our annual meeting is set forth below:

 

Director  

Current term

expiration

 

Age as of

September 17, 2018

  Position

 

Peter Farrell

 

  2018   76   Founder, chairman of the board, and nominee for re-election

 

Harjit Gill

 

 

-

  53   Nominee for election as director

 

Ron Taylor

 

  2018   70   Lead director, and nominee for re-election

 

Carol Burt

 

  2019   60   Director

 

Rich Sulpizio

 

  2019   68   Director

 

Michael Farrell

 

  2020   46   Chief executive officer and director

 

Karen Drexler

 

  2020   58   Director

 

Jack Wareham

 

  2020   77   Director

 

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The following biographical information is furnished with regard to our directors (including nominees) as of September 17, 2018.

Nominees for election at our annual meeting to serve for a three-year term expiring at the 2021 annual meeting:

 

LOGO  

Peter Farrell is the founder and chairman of the board of ResMed and has been chairman and a director since its inception in June 1989.

 

Dr. Farrell also served as chief executive officer from July 1990 until December 2007, and from February 2011 until March 2013. Dr. Farrell served as executive chairman of the board from December 2007 until February 2011, and from March 2013 through December 2013. Since January 1, 2014, he has been a non-officer employee of ResMed.

 

From July 1984 to June 1989, Dr. Farrell served as vice president, research and development at various subsidiaries of Baxter International, Inc.; and from August 1985 to June 1989, he also served as managing director of the Baxter Center for Medical Research Pty Ltd., a Baxter subsidiary. From January 1978 to December 1989, he was foundation director of the Graduate School for Biomedical Engineering at the University of New South Wales, where he currently serves as a visiting professor and as chairman of the UNSW Centre for Innovation and Entrepreneurship. He also serves on the Visiting Committee of the Health Sciences & Technology Program at the Massachusetts Institute of Technology and on the MIT Dean of Engineering’s Advisory Council.

 

In May 2018, Dr. Farrell was named chairman of the board at Arcturus Therapeutics Ltd (NASDAQ: ARCT), an RNA therapeutics company. He currently serves on two faculty advisory boards at the University of California, San Diego: the Rady Business School and the Jacobs Engineering School. He holds a B.E. in chemical engineering with honors from the University of Sydney, an S.M. in chemical engineering from the Massachusetts Institute of Technology, a Ph.D. in chemical engineering and bioengineering from the University of Washington, Seattle and a D.Sc. from the University of New South Wales for research contributions in the field of treatment with the artificial kidney.

 

From 2005 through May 2018, Dr. Farrell was a director of NuVasive, Inc., a NASDAQ-listed company which develops and markets products for the surgical treatment of spine disorders. From 2007 through 2014, he was the non-executive chairman of the board of QRx Pharma, a specialty pharmaceutical company.

 

Dr. Farrell is a fellow or honorary fellow of several professional bodies, including being a member of the National Academy of Engineering, to which he was elected in 2012. Dr. Farrell was named 1998 San Diego Entrepreneur of the Year for Health Sciences, Australian Entrepreneur of the Year in 2001 and US National Entrepreneur of the Year for Health Sciences in 2005. Dr. Farrell joined the Executive Council of the Division of Sleep Medicine at Harvard Medical School in 1998, served as vice chairman from 2000 until 2010 when he became chairman; he served in that capacity until May 2013. In 2012, he joined the board of trustees of the Scripps Research Institute.

 

Dr. Farrell’s son, Michael Farrell, is ResMed’s chief executive officer and one of its directors.

 

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LOGO

 

Dr. Farrell’s role as our founder and chief executive officer for over 20 years provides him with a unique and deep understanding of our operations, technology and industry. In addition, his background reflects significant executive experience with other publicly-held medical technology companies and public company governance experience and training. This experience and training includes more than seven years of experience on the nominating and governance committee and one year of experience on the compensation committee of NuVasive, as well as coursework specific to corporate governance from the Harvard Business School.

 

Dr. Farrell’s experience and skills led our board to the conclusion that he should serve as a director.

 

Harjit Gill is a newly-nominated candidate for director.

 

Since 2016 Ms. Gill is Advisor to Delmedica Investments, a Singapore-based company focused on respiratory healthcare and inventors of the X-Halo breath thermometer. She is also a member of the board of directors of Apollo Education and Training, Vietnam, a private company providing English teaching in Vietnam, where she has served since 2017. She is also the current Chapter Chair Gold of the YPO Singapore Chapter.

 

From 2015-2016 she served as Chief Operations and Marketing HTC, Taiwan.

 

From 1990-2015, she worked for Royal Philips in various roles. From 2012-2015, she was executive vice president and chief executive officer for Philips ASEAN & Pacific, based in Singapore responsible for Healthcare/Lighting and Consumer Lifestyle. From 2009-2012, she was senior vice president – international sales, and from 2006-2009, was vice president – Asia, both for Philips Consumer Lifestyle Products. Before 2006, she held progressive roles in the Netherlands, Hong Kong, Dubai, and Singapore for Consumer Electronics

 

From 2012 to January 2018, she served as a board member of the National University of Singapore, Entrepreneurship Committee. From 2012 to 2015, she was a board member of the Singapore International Chamber of Commerce. She is also a former member of the World Economic Forum South East Asia Council 2014/2015

 

Ms. Gill has a bachelor of arts (honors) in combined studies from the University of Manchester.

 

Ms. Gill was first recommended to us by a search firm retained by the nominating and governance committee. Her executive and operational experience and skills led our board to the conclusion that she should serve as a director, particularly her background in consumer healthcare, her experience in Asia, and her executive experience.

 

 

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LOGO  

Ron Taylor has served as our director since January 2005 and our independent lead director since July 1, 2013. He is chair of our nominating and governance committee and a member of our audit committee.

 

In 1987, Mr. Taylor founded Pyxis Corporation, a manufacturer of automated drug dispensers for hospitals, where he served as chairman, president, and chief executive officer until its purchase by Cardinal Health, Inc., in 1996. For six years before founding Pyxis, Mr. Taylor was responsible for operations and international sales at Hybritech, Inc., a biotechnology company. Before joining Hybritech, he served over 10 years in management roles at Allergan Pharmaceuticals.

 

Mr. Taylor served as a director of Allergan plc, a NYSE-listed specialty pharmaceutical company from 1994 until May 2018. During his tenure he served on the audit, compensation, and nominating and governance committees. From 1998 through 2014, he served as a director of Red Lion Hotels Corporation and was at various times a member of the nominating and governance, compensation and audit committees. From 2002 until his appointment to the ResMed board in 2005, he served as chairman of the ResMed Foundation.

 

Mr. Taylor received a B.A. from the University of Saskatchewan and an M.A. from the University of California, Irvine.

 

Mr. Taylor’s background reflects significant executive and operational experience with publicly-held medical technology and pharmaceutical companies, including experience in evaluating and investing in healthcare companies as a partner in a venture capital firm, and public company governance experience. He has been a director of approximately 20 publicly and privately held companies over the past 27 years. In addition, he has more than 15 years of experience as a member of the Red Lion Hotel’s governance, compensation and audit committees, and more than 20 years of experience as a member of the Allergan (formerly Watson and Actavis) audit, compensation and governance committees.

 

Mr. Taylor’s experience and skills led the board to the conclusion that he should serve as a director.

 

BOARD RECOMMENDATION

 

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF THE THREE NOMINEES TO

THE BOARD OF DIRECTORS.

 

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Directors continuing in office until our 2019 annual meeting:

 

LOGO  

Carol Burt has served as our director since November 2013. She is chair of our audit committee.

 

Ms. Burt has been a principal of Burt-Hilliard Investments since 2008, and since January 2013, serves on the operating council and acts as a senior advisor to Consonance Capital Partners, a New York-based private equity firm focused on investing in the US healthcare industry.

 

In addition to ResMed, Ms. Burt serves on the boards of Envision Healthcare, a publicly-held company providing integrated facility-based physician services, ambulatory surgery and comprehensive patient care management and WellDyne RX, a privately-held pharmacy benefit management company. Ms. Burt chairs Envision’s nominating and governance committee and serves on the audit committee. In addition, Ms. Burt chairs WellDyne’s audit committee. Previously, Ms. Burt served on the public boards of WellCare Health Plans, Inc., Vanguard Health Systems, Inc., Transitional Hospitals Corporation, and privately-held KEPRO.

 

Ms. Burt was formerly an executive of WellPoint, Inc. (now Anthem, Inc.), where she served from 1997 to 2007, most recently as WellPoint’s senior vice president, corporate finance and development. Ms. Burt was a member of the executive team that built WellPoint from a small single state Blue Cross plan to one of the country’s leading health benefits companies with nationwide reach, revenues of $61 billion and market cap of $50 billion. In her time at WellPoint, Ms. Burt was responsible for, among other things, corporate strategic planning and execution, mergers and acquisitions, strategic investments, finance, treasury, and real estate management. In addition, WellPoint’s financial services and international insurance business units reported to her.

 

Prior to joining WellPoint, Ms. Burt was senior vice president and treasurer of American Medical Response overseeing its sale to Laidlaw, Inc. Ms. Burt spent 16 years at Chase Securities, Inc. (now JP Morgan), most recently as managing director and head of the Health Care Investment Banking Group. Ms. Burt founded and built Chase’s Health Care Group into the industry leader in healthcare financing.

 

Ms. Burt is a member of Women Corporate Directors and NACD where she is a board fellow. She most recently served as Chair of the Fortune 1000 Working Group for the Women’s Leadership Foundation of Colorado. Over the years, Ms. Burt has served in leadership positions on numerous not-for-profit boards including currently as the chair for The Nature Conservancy of Colorado.

 

Ms. Burt graduated magna cum laude, from the University of Houston, earning a Bachelor of Business Administration.

 

Ms. Burt’s skills and experience, particularly her over 35 years of experience in executive management, operations, strategy, mergers and acquisitions, corporate finance, accounting, and investment banking in the health insurance, healthcare services and financial services industries, combined with her board experience, led the board to the conclusion that she should serve as a director.

 

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LOGO  

Rich Sulpizio has served as our director since August 2005. He is chair of our compensation committee.

 

Mr. Sulpizio retired as president and chief operating officer of Qualcomm, Inc. in 2001. He served on Qualcomm’s board of directors from 2000 until 2007. Mr. Sulpizio joined Qualcomm in 1991 and in 1994, was appointed president of Qualcomm Wireless Business Solutions. Four years later, he became Qualcomm’s president and chief operating officer. In 2002, he re-joined Qualcomm to serve as interim president of Qualcomm China and then took the helm of Qualcomm Europe in 2004. He was appointed as interim president in 2005 of MediaFLO USA, Inc. (now FLO TV Incorporated), a wholly-owned subsidiary of Qualcomm, and was chartered with overseeing the development and deployment of MediaFLO technology and bringing multimedia services to the wireless industry. Mr. Sulpizio’s last assignment, from December 2009 to November 2013, was president and chief executive officer of Qualcomm Enterprise Services (QES), a division of Qualcomm, Inc., which was sold to a private equity firm.

 

Before joining Qualcomm, Mr. Sulpizio worked at Unisys Corporation and Fluor Corporation.

 

Mr. Sulpizio currently serves as a director of CA, Inc., an information technology management software company. He also serves as an honorary board member of the advisory board of the University of California San Diego’s Sulpizio Family Cardiovascular Center. Mr. Sulpizio holds a B.A. from California State University, Los Angeles, and an M.S. in Systems Management from the University of Southern California.

 

Mr. Sulpizio’s background reflects significant executive and operational experience with publicly-held technology companies, including his service as the president and chief operating officer of Qualcomm, and seven years as a member of the Qualcomm board’s strategic committee. In addition, Mr. Sulpizio also serves as the chair of the compensation committee and is a member of the governance committee of CA Technologies. In 2015 the Corporate Directors Forum honored Mr. Sulpizio as “Director of the Year in Corporate Governance.”

 

Mr. Sulpizio’s experience and skills led the board to the conclusion that he should serve as a director.

 

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Directors continuing in office until our 2020 annual meeting:

 

LOGO  

Michael Farrell has served as our director since March 2013.

 

Mr. Farrell has been our chief executive officer and a director since March 1, 2013. Before that appointment, he served as our president – Americas from May 2011; our senior vice president, strategic business unit – sleep from July 2007 to May 2011; our vice president, marketing for the Americas from June 2005 through July 2007; and before that was our vice president, business development. Before joining ResMed in September 2000, Mr. Farrell worked in management consulting, biotechnology, chemicals and steel manufacturing at Arthur D. Little, Genzyme Corporation, Dow Chemical, and BHP Billiton.

 

Mr. Farrell serves on the board of directors of Zimmer Biomet (NYSE: ZBH), a multi-billion-dollar public company that provides implantable musculoskeletal medical devices for patients globally. Mr. Farrell is a member of the Compensation and Management Development committee as well as the Nominating and Governance committee at Zimmer Biomet. Mr. Farrell also serves on the board of directors of the Advanced Medical Technology Association (AdvaMed), based in Washington, DC. Mr. Farrell volunteers as a trustee for non-profit organizations: UC San Diego Foundation, Rady Children’s Hospital, the La Jolla Playhouse, and the Museum of Man.

 

Mr. Farrell holds a bachelor of engineering, with first-class honors, from the University of New South Wales, a master of science in chemical engineering from the Massachusetts Institute of Technology, and an M.B.A. from the MIT Sloan School of Management.

 

Mr. Farrell’s father, Peter Farrell, is our founder and chairman of the board.

 

Mr. Farrell was appointed to serve as a director on the board effective March 1, 2013, at the same time he was appointed as chief executive officer. Mr. Farrell does not serve on any of the ResMed board committees.

 

Mr. Farrell’s skills and more than 18 years’ experience with ResMed and over 23 years’ experience with healthcare and manufacturing industries provides him with a unique and deep understanding of our operations, technology and market, and led the board to the conclusion that he should serve as a director. In addition, the board believes it appropriate for the chief executive officer to serve as a member of the board.

 

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LOGO  

Karen Drexler has served as our director since November 2017. She is a member of our compensation committee.

 

Ms. Drexler is currently president, chief executive officer and a board member of Sandstone Diagnostics, Inc., a private company developing instruments and consumables for point-of-care medical testing. She has been on its board since 2014, and became CEO in 2016. Ms. Drexler also serves on the board of directors of AP360, a for-profit subsidiary of Medicines360, a women’s health company. From 2011 to 2017, Ms. Drexler served as chairman of the board of directors of Hygieia, Inc., a private digital insulin therapy company. She remains involved as an advisor to the CEO. Ms. Drexler also acts as a senior strategic advisor for several other early stage companies and is on the board of directors for the Keller Center for Innovation in Engineering Education at Princeton University.

 

Ms. Drexler has served on numerous private company boards in the past in the fields of diagnostics, medical devices and digital health. Ms. Drexler is an active mentor and advisor with Astia, a global nonprofit that supports high potential female founders. She is a founding member of Astia Angels, a network of individual investors who fund such founders. Ms. Drexler is also a lead mentor with StartX, the Stanford University incubator. She is also on the Life Science Council for Springboard, an accelerator for women-led technology-oriented companies. Through her work with Astia, Springboard and StartX, Ms. Drexler interacts with many promising young medtech companies.

 

Ms. Drexler was the president and chief executive officer of Amira Medical Inc., a private company focused on minimally invasive glucose monitoring technology, from 1996 until it was sold to Roche Holding AG in 2001. From 1984 to 1995, she held various positions in marketing, sales, manufacturing, business development, and research and development at LifeScan. She played a key role in the sale of LifeScan to Johnson & Johnson in 1986.

 

Ms. Drexler holds a B.S.E. in Chemical Engineering from Princeton University and an M.B.A. from Stanford University Graduate School of Business.

 

Ms. Drexler’s executive and board experience in the medical diagnostics and medical device industries, particularly her experience in technology and data security, and out-of-hospital care models, led our board to conclude she should serve as a director.

 

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LOGO  

Jack Wareham has served as our director since January 2005. He is a member of our audit committee and our nominating and governance committee.

 

From September 1993 to January 2004, Mr. Wareham was the president of Beckman Coulter, Inc., a NYSE-listed biomedical company that develops and markets instruments, chemistries, software and supplies to simplify and automate laboratory processes. Mr. Wareham also served as chief executive officer from August 1998 to February 2005 and chairman from January 1999 to April 2005. Before joining Beckman Coulter in 1984, Mr. Wareham was president of Norden Laboratories, Inc., a wholly-owned subsidiary of SmithKline Beckman. He first joined a predecessor of SmithKline Beckman Corporation in 1968.

 

From January 2005 to July 2018, Mr. Wareham served as a director and non-executive chairman of STERIS plc, a NYSE-listed market leader in infection prevention, decontamination and health science technologies, products and services. Mr. Wareham previously served as a director on the boards of Beckman Coulter, Inc., Greatbatch, Inc. and Accuray Incorporated. From 2000-2001, Mr. Wareham served as chairman of the Advanced Medical Technology Association, or AdvaMed, a medical device industry trade association.

 

Mr. Wareham holds a B.S. cum laude, in pharmacy, from Creighton University in Omaha, Nebraska, and an M.B.A., with honors, from Washington University in St. Louis, Missouri.

 

Mr. Wareham’s background reflects significant executive and operational experience with publicly-held medical technology companies, including president, chief executive officer, and chairman of Beckman Coulter, as well as governance experience on other public companies’ boards. In particular, this experience includes more than five and ten years of service on the STERIS compliance and compensation committees, respectively, six years of experience on the Greatbatch technology and audit committee and two years of experience on the Accuray governance committee.

 

Mr. Wareham’s experience and skills led our board to the conclusion that he should serve as a director.

 

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PROPOSAL 2: RATIFICATION OF SELECTION OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR ENDING JUNE 30, 2019

 

 

The audit committee has appointed the firm of KPMG LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2019. KPMG has served as our independent registered public accounting firm since 1994. Neither the firm nor any of its members has any relationship with us or any of our affiliates except in the firm’s capacity as our independent registered public accounting firm.

Stockholder ratification of the selection of KPMG LLP as our independent registered public accounting firm is not required by our bylaws or otherwise. However, the board is submitting the selection of KPMG LLP to the stockholders for ratification as a matter of corporate practice. If the stockholders fail to ratify the selection, the audit committee will reconsider whether to retain KPMG. Even if the selection is ratified, the audit committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the audit committee determines that the change would be in our and our stockholders’ best interests.

We expect representatives of KPMG LLP to be present at the meeting. They will be able to make statements if they so desire and to respond to appropriate questions from stockholders.

 

 

BOARD RECOMMENDATION

 

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE RATIFICATION OF THE SELECTION OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING JUNE 30, 2019.

 

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PROPOSAL 3: APPROVAL OF AN AMENDMENT TO THE RESMED INC. 2009 EMPLOYEE STOCK PURCHASE PLAN, WHICH INCREASES THE NUMBER OF SHARES AUTHORIZED FOR ISSUE UNDER THE PLAN BYMILLION SHARES, FROM 4.2 MILLION SHARES TO 6.2 MILLION SHARES, AND EXTENDS THE PLANS TERM UNTIL NOVEMBER 15, 2028.

 

 

We are asking our stockholders to approve an amendment (the “ESPP Amendment”) to the ResMed Inc. 2009 Employee Stock Purchase Plan, originally adopted on November 13, 2003 and most recently amended on August 17, 2018 (the “Current ESPP”). The Current ESPP, as proposed to be amended by the ESPP Amendment is referred to in this proposal as the ESPP. The ESPP is designed to provide employees with the opportunity to purchase our common stock at a discount through accumulated payroll deductions during successive offering periods. The ESPP Amendment will make the following changes:

 

   

Increase the number of shares of our common stock available for future awards under the Current ESPP by 2 million shares, from 4.2 million shares to 6.2 million shares.

 

   

Extend the term of the Current ESPP so that the ESPP will remain in effect until November 15, 2028 (previously September 29, 2019).

 

   

Rename the Current ESPP as the “ResMed Inc. 2018 Employee Stock Purchase Plan.” If our stockholders approve the ESPP Amendment, we will incorporate the ESPP Amendment and restate the Current ESPP in full, in the form attached as Appendix B to this proxy statement.

On August 17, 2018, based on the recommendation of the compensation committee, the board approved and adopted the ESPP Amendment (subject to approval by our stockholders). The ESPP Amendment became effective on adoption by our board (subject to our stockholders’ approval). Also on August 17, 2018, the board approved certain administrative changes to the ResMed Inc. 2009 Employee Stock Purchase Plan, which do not require stockholder approval, and which therefore became effective on adoption by our board.

As a broad-based plan, our ESPP is intended to provide equity grant compensation to many employees who are not eligible for discretionary equity grants, as well as to supplement option grants for management. As a compensation tool, the ESPP will continue to assist us in: (1) retaining the services of our employees; (2) securing the services of new employees; (3) providing incentives for our employees to exert maximum efforts for our success; and (4) aligning the interests of our employees with the interests of our stockholders.

The ESPP Amendment is intended to increase the number of shares of our common stock that may be issued or transferred by awards under the ESPP by 2 million shares, from 4.2 million shares to 6.2 million shares, and to enable us to continue offering the ESPP until November 15, 2028. As of September 17, 2018, there were 537,876 shares remaining available for future awards under the ESPP. We estimate that approximately 400,000 shares will remain available for future awards at the time of the annual stockholders meeting. Accordingly, the ESPP Amendment would increase the number of shares available for future awards to approximately 2.4 million shares, but no greater than 2,537,876.

If the ESPP Amendment is not approved by our stockholders, it will have no effect. However, the Current ESPP will remain in full force and effect through September 29, 2019. No shares will be sold under the increase in shares being proposed under the ESPP Amendment unless our stockholders approve the ESPP Amendment under this proposal.

MATERIAL CHANGES TO THE CURRENT ESPP

As noted above, the aggregate number of shares of our common stock reserved for issuance under the ESPP has been increased by 2 million shares to 6.2 million shares, the expiration of the term of the ESPP has been extended from September 29, 2019 to November 15, 2028, and the Current ESPP has been renamed as the “ResMed Inc. 2018 Employee Stock Purchase Plan.”

SUMMARY OF THE MATERIAL FEATURES OF THE ESPP

The principal features of the ESPP are summarized below, but the summary is qualified in its entirety by (1) the ESPP, as amended and restated to incorporate amendments through August 17, 2018, including the ESPP Amendment, which is included as Appendix B to this proxy statement; and (2) the ESPP Amendment, which is included as Appendix C to this proxy statement. We encourage you to read the ESPP and the ESPP Amendment carefully.

The ESPP is intended to qualify under Section 423 of the US Internal Revenue Code, which affords certain tax benefits under US law to US participants. The ESPP also authorizes the grant of options that are not intended to qualify under

 

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Section 423 of the US Internal Revenue Code under “Non-423 Offerings” of the plan, which will generally be made to non-US employees.

Plan administration

The compensation committee administers the ESPP. The compensation committee has discretionary authority to administer and interpret the ESPP, including authority to: (1) determine when rights (or options) to purchase our common stock are granted and the terms and conditions of each offering period; (2) designate from time to time which of our subsidiaries are participating subsidiaries, so that employees of those participating subsidiaries may be eligible to participate in the ESPP; (3) construe and interpret the ESPP and the rights offered under the ESPP; (4) establish, amend and revoke rules and regulations for ESPP administration; (5) amend the ESPP, as explained below; and (6) exercise other powers and perform other acts deemed necessary to carry out the intent of the ESPP. To the extent not prohibited by applicable laws, the compensation committee may delegate some or all of its authority to a subcommittee, to company officers, or to other persons or groups as it deems necessary, appropriate or advisable. Our board, in its sole discretion, may assume the responsibilities and duties of the compensation committee under the ESPP.

Shares available under the ESPP.

The ESPP Amendment increases the maximum number of shares authorized for sale under the ESPP, from 4.2 million to 6.2 million. This total number of shares is equal to approximately 4.3% of the total number of our shares of common stock outstanding on September 17, 2018. But, as mentioned above, only approximately 2.4 million of these would be available for future awards, representing approximately 1.7% of the stock outstanding. The common stock available for sale under the ESPP may be authorized, but unissued shares, treasury shares or shares purchased in the open market or in private transactions.

Eligible employees

Employees eligible to participate in the ESPP generally include our employees and employees of our subsidiaries that have been designated from time to time by the compensation committee as participating subsidiaries in the ESPP. As of June 30, 2018, we had approximately 5,700 employees who are eligible to participate in the ESPP, including all seven of our executive officers. The compensation committee may, in its sole discretion and consistent with Section 423 of the US Internal Revenue Code, exclude employees who, as of the first date of the offering period, (1) have been employed by us or by a designated subsidiary for less than two years, (2) customarily work five months or less in a calendar year or are customarily scheduled to work less than 20 hours per week, (3) are a highly compensated employee of ResMed Inc. or any participating subsidiary (within the meaning of Section 414(q) of the US Internal Revenue Code), or (4) are a citizen or resident of a non-US jurisdiction, where the grant of an option under the ESPP would be prohibited under the laws of that jurisdiction, or compliance with the laws of that jurisdiction would cause the ESPP to violate the requirements of Section 423 of the US Internal Revenue Code. Any exclusion of employees under offerings of the ESPP that are intended to qualify under Section 423 of the US Internal Revenue Code (“Section 423 Offerings”) will be applied in an identical manner to all employees of the company and its participating subsidiaries whose employees are granted options under those Section 423 Offerings, in accordance with Section 423 of the US Internal Revenue Code. In the case of a Non-423 Offering, eligible employees may be excluded from participation in the ESPP or an offering if the compensation committee has determined that participation of such eligible employees is not advisable or practicable for any reason. An employee who owns (or is deemed to own through attribution) 5% or more of the combined voting power or value of all of the classes of our stock or the stock of one of our subsidiaries is not allowed to participate in the ESPP.

Non-US Sub-plans

The ESPP authorizes the compensation committee to adopt rules, procedures, agreements, appendices, or sub-plans (collectively, “Sub-Plans”) to ensure that the terms of the ESPP, as applicable to non-US subsidiaries designated as participating subsidiaries, accommodate the requirements of applicable local laws, customs and procedures. These Sub-Plans may vary the terms of the ESPP, other than with respect to the number of shares reserved for issuance under the ESPP. To the extent inconsistent with the requirements of Section 423 of the US Internal Revenue Code, any such Sub-Plan will be considered part of a Non-423 Offering.

Offering

Under the ESPP, participants are offered the right to purchase shares of our common stock at a discount during successive offering periods. Each offering period under the ESPP will be for a period of time determined by the compensation committee of no less than three months and no more than 27 months. Currently, the compensation committee has approved successive six-month offering periods for the ESPP. The first trading day of an offering period is referred to as the date of grant. On the date of grant, participants are granted the right to acquire shares of our common stock on the last trading day of the offering period. The last trading day during an offering period is referred to as the date of purchase. Unless a participant has previously cancelled participation in the ESPP, the participant will be deemed to have exercised the right to purchase shares in full as of each date of purchase. At exercise, the participant will purchase the number of shares of common stock that the participant’s accumulated payroll deductions during that offering will buy at the purchase price for that offering period. The

 

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purchase price for our common stock under the ESPP will be the lesser of 85% of the fair market value of our common stock on the date of grant or 85% of the fair market value of our common stock on the date of purchase. The fair market value of our common stock on the current period’s grant date (May 1, 2018) was $95.12 and on September 17, 2018, was $112.76.

We expect future offering periods to begin on the conclusion of each offering period and continue for a period of six months, unless otherwise determined by the compensation committee.

Participation

Eligible employees can enroll under the ESPP by completing a participation agreement within the time specified by the compensation committee. Each participation agreement must authorize the deduction of at least 1%, but not more than 50%, of the eligible employee’s ESPP-eligible compensation towards the purchase of our common stock, unless the compensation committee sets a different maximum percentage. A participant’s authorized payroll deduction will be deducted on each payday during an offering period.

In no case may a participant be granted an option to purchase shares of common stock under the ESPP that, together with the other options to purchase shares of common stock under all other employee stock purchase plans (if any) of the company or its subsidiary, accrues at a rate that exceeds $25,000 of the fair market value of the shares of common stock for any calendar year in which the option is outstanding, in accordance with Section 423 of the US Internal Revenue Code. In addition, the compensation committee will place a limit on the maximum number of shares any participant can acquire in a single offering period (this limit is currently 5,000 shares and is also subject to the annual $25,000 limit discussed above). If the aggregate subscriptions by all participants exceed the number of authorized shares of common stock available for purchase under the ESPP, all subscriptions will be reduced on a pro-rata basis.

Except as otherwise provided by the compensation committee in the terms of an offering period, a participant may cancel his or her payroll deduction authorization at any time before the end of the offering period, subject to the ESPP’s notice requirements. On cancellation, the balance of the participant’s account will be refunded in cash, without interest. The compensation committee may provide that a participant can increase, decrease, or suspend a payroll deduction authorization during an offering period, in accordance with Section 423 of the US Internal Revenue Code. Additionally, if a participant ceases to be an eligible employee during an offering period, that person’s participation in the ESPP will cease and the balance of that participant’s account will be refunded in cash, without interest. In the event of a death of a participant, if the participant’s option is transferred to the participant’s estate by will or the laws of descent or distribution, the decedent’s balance may continue to be applied for the acquisition of shares at the end of the relevant offering period. Other than upon a participant’s death, options granted under the ESPP are not transferable by a participant and are exercisable only by the participant.

Subject to the discretion of the compensation committee, if a participant is on a paid leave of absence, the participant’s payroll deductions will continue and amounts credited to the participant’s account may be used to purchase shares under the ESPP. If a participant is on an unpaid leave of absence, the participant’s payroll deductions will be discontinued and no other contributions will be permitted, but any amounts credited to the participant’s account may be used to purchase shares on the next applicable purchase date. In any event, where the period of leave exceeds three months and the participant’s right to reemployment is not guaranteed by statute or by contract, the participant will be deemed to have terminated employment under the ESPP three months and one day following the commencement of leave.

Unless otherwise determined by the compensation committee, a participant whose employment transfers between companies participating in the ESPP will not be treated as having terminated employment under the plan.

Adjustments on changes in capitalization, dissolution, liquidation, merger or asset sale

In the event of any dividend or other distribution, recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, sale, transfer, exchange or other disposition of all or substantially all of our assets, or exchange of shares of our common stock or other securities, issuance of warrants or other rights to purchase shares of our common stock or other securities, or other similar corporate transactions or events, then if the compensation committee determines that it is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the ESPP or with respect to any right under the ESPP, the compensation committee will adjust the number and kind of shares of securities with respect to which options may be granted, the number and kind of shares of stock subject to outstanding options, and the option price with respect to any option.

 

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In the event of any transaction or event described above that is an unusual or nonrecurring transaction or event affecting us, any of our affiliates, or our financial statements or those of any of our affiliates, or of changes in applicable laws, regulations, or accounting principles, the compensation committee may take any one or more of the following actions whenever the compensation committee determines that it is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the ESPP or with respect to any right under the ESPP, to facilitate the transactions or events or to give effect to the changes in laws, regulations or principles:

 

   

provide that all rights then outstanding under the ESPP will terminate without being exercised on a date the compensation committee determines in its sole discretion;

 

   

provide that all rights then outstanding under the ESPP will be exercised and terminate immediately after the exercise;

 

   

provide for either the purchase of any rights then outstanding under the ESPP for an amount of cash equal to the amount that could have been obtained on the exercise of that right had the right been currently exercisable, or the replacement of the right with other rights or property selected by the compensation committee in its sole discretion;

 

   

provide that rights then outstanding under the ESPP will be assumed by the successor or survivor corporation, or a parent or subsidiary of the successor or survivor corporation, or will be substituted for by similar rights for the stock of the successor or survivor corporation, or a parent or subsidiary of the successor or survivor corporation, with appropriate adjustments as to the number and kind of shares and prices; and

 

   

make adjustments in the number and type of shares of common stock (or other securities or property) subject to outstanding rights, or in the terms and conditions of outstanding rights, or rights which may be granted in the future.

Amendment and termination

The compensation committee may amend, suspend or terminate the ESPP. However, without obtaining stockholder approval within 12 months before or after the action, the compensation committee may not amend the ESPP to either increase the number of shares that may be purchased under the ESPP or to amend the ESPP in a way that requires stockholder approval under the US Internal Revenue Code. Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the board or the compensation committee, as applicable, may change the offering periods, limit the frequency and number of changes in the amount withheld during an offering period, establish the exchange ratio applicable to amounts withheld in a currency other than US dollars, permit payroll withholding in excess of the amount designated by a participant to adjust for delays or mistakes in our processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and accounting and crediting procedures to ensure that amounts applied toward the purchase of stock for each participant properly correspond with amounts withheld from the participant’s compensation, and establish other limitations or procedures the board or the compensation committee, as applicable, determines in its sole discretion advisable which are consistent with the ESPP and Section 423 of the US Internal Revenue Code. The ESPP will be in effect until November 15, 2028, unless sooner terminated by our board in accordance with the ESPP.

CERTAIN US FEDERAL INCOME TAX CONSEQUENCES OF THE EMPLOYEE STOCK PURCHASE PLAN

The following discussion is required by rules of the Securities and Exchange Commission, and summarizes the US federal income tax consequences of an employee’s participation in the ESPP. It does not summarize tax consequences for any employees who are not US taxpayers. This summary does not address federal employment taxes, state, local and non-US income taxes and other taxes that may apply, and is not intended to completely describe the tax consequences of participation in the ESPP.

Section 423 Offerings

The ESPP is intended to be an employee stock purchase plan within the meaning of Section 423 of the US Internal Revenue Code. Under a plan that so qualifies, no taxable income is recognized by a participant, and no deductions are allowed to us, in connection with the grant of the option under the plan that occurs on the date of grant (first trading day) of an offering period or the automatic exercise of the option and acquisition of shares under the plan that occurs on the last trading day of an offering period.

Taxable income will not be recognized until there is a sale or other disposition of the shares acquired under the ESPP or if the participant dies while still owning the purchased shares.

 

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If a participant sells or otherwise disposes of the purchased shares less than two years after the grant date, or within one year after the purchase date for those shares, then the participant generally will recognize ordinary income equal to the amount by which the fair market value of the shares on the purchase date exceeds the purchase price paid for those shares, and we generally will be entitled to an income tax deduction equal in amount to the excess (subject to applicable limits under the US Internal Revenue Code). The income is recognized by the participant, and the deduction taken by us, for the taxable year in which the sale or disposition occurs. The amount of this ordinary income will be added to the participant’s basis in the shares, and any resulting gain or loss recognized upon the sale or disposition will be a capital gain or loss. If the shares have been held for more than one year since the date of purchase, the gain or loss will be long-term. For purposes of the US Internal Revenue Code, the purchase date means the date the shares are issued on automatic exercise of the option on the last trading day of the offering period.

If the participant sells or disposes of the purchased shares more than two years after the grant date and more than one year after the purchase date for those shares, then the participant will recognize ordinary income equal to the lesser of: (1) the amount by which the fair market value of the shares on the sale or disposition exceeds the purchase price paid for those shares; or (2) 15% of the fair market value of the shares on the grant date for the offering period in which the shares were acquired, and any additional gain on the disposition generally will be taxed as a long-term capital gain. The income is recognized by the participant for the taxable year in which the sale or disposition occurs. We generally will not be entitled to any income tax deduction with respect to the sale or disposition.

If the participant still owns the purchased shares at death, the lesser of: (1) the amount by which the fair market value of the shares on the date of death exceeds the purchase price; or (2) 15% of the fair market value of the shares on the date of grant for the offering period in which those shares were acquired, will constitute ordinary income in the year of death.

Non-423 Offerings

If an option is granted under a Non-423 Offering of the ESPP, then to the extent a participant is subject to US federal income tax, the amount equal to the difference between the fair market value of the shares on the purchase date and the purchase price is taxed as ordinary income at the time of the purchase and is subject to tax withholding. The amount of ordinary income will be added to the participant’s basis in the shares, and any resulting gain or loss recognized on the sale or disposition of the shares will be a capital gain or loss. If the shares have been held for more than one year since the date of purchase, the gain or loss will be long-term. We generally will be entitled to an income tax deduction in the year of purchase equal to the amount of ordinary income realized by the participant (subject to applicable limits under the US Internal Revenue Code).

PLAN BENEFITS FOR DIRECTORS

Directors who are not employees will not receive any benefits under the ESPP and may not participate in the ESPP. Peter Farrell, our chairman of the board and non-officer employee, will not participate in the ESPP. Dr. Farrell previously irrevocably elected not to participate in the ESPP. If Dr. Farrell were to elect to participate in the ESPP, we would seek stockholder approval, and would not issue any shares to Dr. Farrell under the ESPP before obtaining stockholder approval. Because the number of shares that may be purchased under the ESPP will depend on each employee’s voluntary election to participate and on the fair market value of our ordinary shares at various future dates, the actual number of shares that may be purchased by any individual cannot be determined in advance.

SHARES PURCHASED UNDER THE ESPP

The following table shows the number of shares of our common stock purchased by employees, including our named executive officers, and the other identified individuals and groups under options granted under the ESPP from its inception through September 17, 2018.

 

Name          Options  (a)         

 

Weighted average
exercise price (a)

 

Named executive officers

 

         

 

Michael Farrell

 

   3,297    $35.41

 

Rob Douglas

 

   3,440    $39.33

 

Jim Hollingshead

 

   3,291    $41.22

 

David Pendarvis

 

   14,121    $21.29

 

Brett Sandercock

 

   2,748    $41.79

 

All current executive officers as a group

 

  

30,564

   $28.98

 

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All current directors or nominees, who are not executive officers, as a group

 

   -      -  

 

Current directors or nominees, who are not executive officers

 

         

 

Carol Burt

 

   -      -  

 

Karen Drexler

 

   -      -  

 

Peter Farrell

 

   -      -  

 

Harjit Gill

 

   -      -  

 

Gary Pace

 

   -      -  

 

Rich Sulpizio

 

   -      -  

 

Ron Taylor

 

   -      -  

 

Jack Wareham

 

   -      -  

 

Associate of any directors, executive officers or nominees

 

   -      -  

 

Other persons who received or are to receive 5% of such options or rights

 

   -      -  

 

All non-executive officer employees as a group

 

   3,617,148    $35.88

 

(a)

  

These amounts represent a good faith estimate based on the data available.

 

BOARD RECOMMENDATION

 

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE AMENDMENTS TO THE RESMED INC. 2009 EMPLOYEE STOCK PURCHASE PLAN.

 

 

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PROPOSAL 4: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

 

 

 Background 

We are asking our stockholders to approve, on a non-binding, advisory basis, the compensation of our named executive officers as described in the “Compensation Discussion and Analysis” and “Executive Compensation Tables” sections of this Proxy Statement on pages 40 through 75. This proposal is commonly known as a “say-on-pay” proposal. We currently provide an annual say-on-pay vote for our stockholders. Because the say-on-pay vote is advisory, it does not bind us. But the board’s compensation committee, which consists entirely of independent directors, values our stockholders’ opinions, and considers voting results on the say-on-pay proposal when making its executive compensation decisions. The board has adopted a policy of providing for annual say-on-pay advisory votes. Unless the board modifies its policy on the frequency of future say-on-pay advisory votes, the next say-on-pay advisory vote will be held at our 2019 annual meeting of stockholders.

The board believes that the information in the “Compensation Discussion and Analysis” and “Executive Compensation Tables” sections of this Proxy Statement demonstrates that our executive compensation programs are designed appropriately, emphasize pay for performance, and are working to ensure that management’s interests are aligned with our stockholders’ interests to support long-term value creation. The board is asking our stockholders to approve the following advisory resolution at the annual meeting:

“RESOLVED, that the stockholders of ResMed approve, on an advisory basis, the compensation paid to our named executive officers, as disclosed in the Compensation Discussion and Analysis and Executive Compensation Tables sections of this proxy statement.”

 

BOARD RECOMMENDATION

 

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF RESMED’S NAMED EXECUTIVE OFFICERS.

 

 

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COMPANY INFORMATION

 

 

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CORPORATE GOVERNANCE

 

 

 Board independence 

Our board has determined that six of our eight current directors, Ms. Burt, Ms. Drexler, and Messrs. Pace, Sulpizio, Taylor and Wareham, are independent members of our board under the listing standards of the NYSE, and they and their respective family members have no material relationship with us, commercial or otherwise, that would impair the director’s independence. The board has also determined that, if elected, Ms.Gill will also be independent. The board also determined that each member of the audit, nominating and governance, and compensation committees is independent as required by the NYSE’s listing standards, and that each member of the audit committee is independent as required by the SEC’s regulations. The board determined that Peter Farrell and Michael Farrell have material relationships with us that prohibit them from being considered independent under applicable standards: Michael Farrell is an executive officer; while Peter Farrell is a non-executive employee, the father of Michael Farrell, and was an executive officer through January 2014.

The following specific relationships or transactions were considered by our board in making its independence decisions, and the board concluded none of them impaired independence:

 

   

We hold two equity investments in entities affiliated with Dr. Pace. Our board approved these investments at the time they were made, without Dr. Pace’s participation.

 

  ¡  

In fiscal years 2011 and 2012, we invested a total of approximately $500,000 in Sova Pharmaceuticals, a pharmaceutical development company targeting central sleep apnea. As of fiscal year-end 2018, we continued to hold our equity investment, representing an ownership interest of about 6%. Dr. Pace is a founder and director of Sova, and has a nominal equity investment in it. He is not a controlling shareholder of Sova.

 

  ¡  

In fiscal years 2012 and 2013, we invested a total of approximately $1.075 million in Sanitas, Inc., a remote health-management software company. As of fiscal year-end 2018, we continued to hold our equity investment, representing an ownership investment of about 12.5%. Dr. Pace holds an equity investment of approximately $50,000 in Sanitas. He is not a controlling shareholder of Sanitas.

 

   

We have several long-tenured directors. Dr. Pace, who served as a director for more than 20 years, is not standing for re-election at this annual meeting. Messrs. Sulpizio, Taylor, and Wareham have served for more than 10 years. The board considers that the length of their tenure had not compromised their independence; in fact, in the board’s view, the depth of their knowledge and insight with the company has strengthened their contributions to our board. The nominating and governance committee believes board composition and an appropriate balance of board refreshment and experience is important to effective governance, and follows a process of regularly reviewing board composition and board refreshment, with a long-term perspective. While refreshment is an important consideration in assessing board composition, the board does not make determinations based solely on tenure.

Our board determined that these matters did not prevent Dr. Pace or Messrs. Sulpizio, Taylor, or Wareham from being considered independent under applicable standards.

 

 Meetings and director attendance 

During fiscal year 2018, each director attended more than 75% of the meetings of our board and of the committees on which the director served. Our board and standing committees met, as follows:

 

   

Regular board: five meetings;

   

Compensation committee: four meetings;

   

Audit committee: eight meetings; and

   

Nominating and governance committee: four meetings.

During each regular meeting, our independent directors met alone, and our lead director chaired those sessions. In addition to meetings, the members of our board and its committees sometimes take action by written consent in lieu of a meeting, as permitted under Delaware corporate law, or discuss company business without calling a formal meeting.

 

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All but one of our directors were present for our 2017 (and the lone director’s absence was due to an unexpected family emergency) annual stockholders meeting. We encourage directors to attend our annual meetings and generally schedule board meetings to coincide with the annual meeting to facilitate directors’ attendance.

 

 Board oversight of risk 

The general risk oversight function, including cybersecurity, is retained by the full board; the standing committees of the board, comprised and chaired by our independent directors, retain primary responsibility for risk identification and analysis in the key areas further defined below. The committees periodically provide updates to the board regarding significant risk management issues and management’s response.

 

Committee    Primary risk oversight responsibility

Audit

   Overseeing financial risk, capital risk, financial compliance risk, code of conduct and ethics compliance, and internal controls over financial reporting.

Compensation

   Overseeing our compensation philosophy and practices and evaluating the balance between risk-taking and rewards to senior officers.

Nominating and governance

   Evaluating each director’s independence, evaluating the effectiveness of our corporate governance guidelines, and overseeing management’s succession planning.

Designated internal management, as well as certified professional accounting firms performing annual internal audits, regularly review and test functions, controls and processes to review, evaluate and recommend mitigation strategies, as may be warranted. Critical areas of focus include financial, operational, regulatory, compliance, economic, compensation, and competition, among others.

 

 Board leadership structure 

We have separated the roles of board chairman and chief executive officer. Peter Farrell has served as our chairman of the board since 1989; he concurrently served as our chief executive officer from shortly after our founding in 1989, through January 2008, and from February 2011 through March 2013. In March 2013, on the appointment of Michael Farrell as our new chief executive officer, Peter Farrell resigned as chief executive officer, and continued in the role of executive chairman. In January 2014, Peter Farrell ceased serving as an executive officer; since then he has served as a non-officer employee and as non-executive chairman of the board.

The board continues to believe that having Peter Farrell serve as the chairman of the board is the most appropriate leadership structure for us and in the best interest of our stockholders. Dr. Farrell is our founder, has been our chairman since our founding in 1989, and previously served as our chief executive officer for over 20 years. Dr. Farrell has deep institutional knowledge about our organization’s history and operations, the industry, the science underlying the medical conditions we address and the technology we develop. Dr. Farrell is widely regarded as a visionary leader in our industry. Under his leadership, the board believes we have achieved remarkable success and delivered substantial long-term rewards for our stockholders. Maintaining him in the role of chairman provides leadership continuity.

The board believes the advantages described above outweigh any theoretical risks or disadvantages arising from Peter Farrell’s role as an employee, or from his serving as chairman while his son, Michael Farrell, serves as chief executive officer.

First, the board believes that Dr. Farrell is uniquely suited to effectively perform the dual roles of providing leadership to the board as chairman, and serving as an employee, in which he provides guidance to management, particularly in the areas of long-term strategy, consulting with key opinion leaders in related fields, and maintaining our unique values and culture.

 

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Second, the board believes our leadership structure mitigates any potential risks from the family relationship between Peter Farrell and Michael Farrell. Six of our eight current directors, as well as our new board nominee, Harjit Gill, are independent, which provides a counterbalance to a non-independent employee chairman. Those independent directors meet in executive session, alone, at each board meeting. The role of Ron Taylor, our lead director, provides an additional structure enabling an effective independent board. The primary responsibilities of the lead director are: to preside over board meetings in the absence of the chairman; call, establish the agenda for, and preside over meetings of the independent directors; act as a liaison between the independent directors and chairman; guide the chairman on board meeting agendas as well as the adequacy of information to be presented; communicate with stockholders as appropriate; and other duties that may be delegated by the board, independent directors, chairman or the nominating and governance committee. Finally, the board’s committees are filled entirely by independent directors, providing an opportunity for the board to fulfill its oversight responsibilities.

For the reasons discussed above, our board believes the current leadership structure is in our best interest at this time. However, our corporate governance guidelines give the board the flexibility to change its leadership over time, as needed. The board continues to evaluate whether its leadership structure is appropriate as our business evolves.

 

Committees of our board of directors 

 

The board has three standing committees to assist in the management of our affairs: compensation, nominating and governance, and audit. A copy of the charters for each of these standing committees can be found on our website at www.resmed.com.

Below is a summary of our current committee structure and membership information.

 

Independent

director

 

        Compensation        

committee

 

 

          Nominating and          

governance

committee

 

 

Audit

        committee        

 

Carol Burt

 

  -   -   chair

 

Karen Drexler

 

  member   -   -

 

Gary Pace

 

  member   member    

 

Rich Sulpizio

 

  chair   -   -

 

Ron Taylor

 

      chair   member

 

Jack Wareham

 

  -   member   member

We anticipate that, after the annual meeting, assuming stockholders elect the director candidates nominated by the board, our committee structure will change to the following:

 

Independent

director

 

        Compensation        

committee

 

 

          Nominating and          

governance

committee

 

 

Audit

        committee        

 

Carol Burt

 

  -   -   chair

 

Karen Drexler

 

  member   -   -

 

Harjit Gill

 

  member        

 

Rich Sulpizio

 

  chair   member   -

 

Ron Taylor

 

      chair   member

 

Jack Wareham

 

  -   member   member

 

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Compensation committee

During fiscal year 2018, and currently, the compensation committee has been chaired by Rich Sulpizio, and Gary Pace has been a member. From July through November 2017, Ron Taylor was a member of the committee. Karen Drexler began serving as a member from November 2017 through currently. Each of the compensation committee members has been determined by our board to meet the independence requirements for compensation committee service under the current listing standards of the NYSE and SEC.

The compensation committee’s primary purposes are to:

 

   

establish and review the compensation of our officers and executives;

 

   

oversee management’s decisions regarding our compensation philosophies, practices, and procedures; and

 

   

advise the board regarding the compensation of directors.

The compensation committee meets in person and by telephone to perform its duties. It works primarily with our chief human resources officer, our chief administrative officer and global general counsel, and their staff to gather internal data and solicit management’s recommendations regarding compensation. The committee also communicates directly with our chief executive officer and our president and chief operating officer, for recommendations and information, particularly with regard to their direct reports’ compensation. In addition, the committee consults with our chief financial officer and his staff regarding the financial impact of certain compensation decisions. However, the committee generally determines the compensation for each of our individual officers outside the presence of the affected officer. The committee also advises and consults with other non-executive board members as it determines appropriate regarding compensation issues.

During fiscal year 2018, the committee has retained a nationally-recognized independent consultant, Frederic W. Cook & Co., Inc. (“FW Cook”). FW Cook is engaged directly by the committee to render advisory services and to serve as the committee’s independent consultant on compensation-related matters for our executives and board. During fiscal year 2018, these compensation matters included:

 

   

our executive compensation program, including salaries, target and actual short-term incentive amounts, and long-term incentive equity grants;

 

   

aggregate equity pay practices at our peer group companies, including long-term incentive design features and alternatives;

 

   

board compensation, including board fees and equity grants;

 

   

industry trends, best practices, and regulatory changes; and

 

   

companies included in our peer group for competitive comparisons.

During fiscal year 2018, Aon plc provided the committee with calculations of total shareholder return to evaluate performance metrics under our performance stock units.

The committee has reviewed the independence of FW Cook and Aon, including considering the factors required by NYSE listing standards. After the review, the committee determined that each of FW Cook and Aon is independent and that no conflict of interest exists that would prevent them from providing independent and objective advice to the committee.

During fiscal year 2018, the committee continued its practice of delegating to a subcommittee comprised of our chief executive officer, our chief human resources officer, and our chief administrative officer and global general counsel, authority to approve the annual and promotional and new hire equity award grants to employees who were not officers and whose compensation is not reviewed by the committee, so long as the aggregate total of those equity grants did not exceed committee-established limits for the annual and off-cycle grants, and were consistent with committee-determined standard terms for grants and other guidelines. During fiscal year 2018, under this authority, this subcommittee granted 566,279 restricted stock units. The committee believes that this subcommittee is best suited to determine the specific annual awards to be allocated to the individual employees below the officer level given their familiarity with their performances and responsibilities. In addition, the off-cycle delegation enhances our ability to attract, reward and retain talented employees by allowing management to extend binding employment offers and to act in other special situations quickly and flexibly. All equity grants to our executive officers are pre-approved by the committee.

 

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Nominating and governance committee

During fiscal year 2018, and currently, the nominating and governance committee consists of Ron Taylor (chair), Gary Pace and Jack Wareham.

The nominating and governance committee’s primary purposes are to:

 

   

assure that the composition, practices and operation of our board contribute to lasting value creation and effective representation of our stockholders; and

 

   

assist the board with selecting board and committee members, committee selection and rotation practices, evaluating the board’s overall effectiveness, and reviewing and considering developments in corporate governance practices.

Our corporate governance guidelines state goals regarding composition of the board and committees, meetings and expectations of directors. A copy of our corporate governance guidelines may be found on our website at www.resmed.com.

The nominating and governance committee is responsible for reviewing with the board, on an annual basis, the appropriate characteristics, skills and experience required for the board as a whole and its individual members. To assist in promoting a diversity of backgrounds and experience on the board, the nominating and governance committee takes reasonable steps to identify and consider board candidates who are drawn from a wide talent pool, representing diversity of thought, culture, gender, ethnicity, race, background and other qualities. The nominating and governance committee believes board composition and an appropriate balance of board refreshment and experience is important to effective governance, and follows a process of regularly reviewing board composition and board refreshment, with a long-term perspective. The nominating and governance committee maintains a database of desired director skills and experience, and a pipeline of qualified candidates. 2018 will be the second year in a row we have replaced our longest serving independent director with a newly-elected director with a unique set of skills and experience. We expect the average tenure of our independent directors after the November 2018 annual meeting will be approximately seven and one-half years.

The suitability of individual candidates depends on many factors. Those factors include:

 

   

fundamental qualities of intelligence, honesty, good judgment, high ethics and standards of integrity, fairness and responsibility;

 

   

practical wisdom and mature business judgment;

 

   

ability to make independent analytical inquiries, general understanding of marketing, finance and other elements relevant to the success of a publicly-traded company in today’s business environment;

 

   

experience in corporate management, or as a board member of a publicly-held company;

 

   

academic experience and technical understanding in the area of our operations;

 

   

professional experience in our industry; and

 

   

a commitment to representing the long-term interests of our stockholders.

The board evaluates each individual in the context of the board as a whole, with the objective of assembling a group that can best perpetuate the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

In determining whether to recommend a director for re-election, the nominating and governance committee also considers the director’s past attendance at meetings and participation in and contributions to the board’s activities.

During fiscal year 2018, the nominating and governance committee retained an executive search firm, cStone & Associates, to conduct a search for director candidates, based on criteria approved by the committee. The search firm identified potential candidates, who were reviewed by the committee. The committee agreed on a slate of candidates for further consideration. The nominating and governance committee asked an ad hoc committee on new board member selection to assist in preliminary interviews of candidates. The ad hoc committee was appointed by the board in May 2017; chaired by our lead director, Ron Taylor, with additional members Peter Farrell and Michael Farrell. The ad hoc committee’s primary responsibility was to organize and conduct interviews and otherwise evaluate potential board candidates selected by the

 

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nominating and governance committee. The ad hoc committee reported its assessments to the nominating and governance committee, and the nominating and governance committee used that input to aid in its independent decisions on how to further evaluate—and ultimately nominate—appropriate candidates. The ad hoc committee’s activity did not limit the pool of nominees the full nominating and governance committee considers, and all decisions were made by the independent directors who comprise the nominating and governance committee.

After review and deliberation of all feedback and data, the nominating and governance committee makes its recommendation to our board.

Recommendations we receive from stockholders are subject to the same criteria as are candidates nominated by the nominating and governance committee. The committee will consider stockholder suggestions for nominees for directorship and has a policy to consider any candidate recommended by stockholders who have held a minimum of 1% of our outstanding voting securities for at least one year. A recommending stockholder must submit a detailed resume of the candidate and an explanation of the reasons why the stockholder believes the candidate is qualified for service on our board. The stockholder must also provide any other information about the candidate that would be required by US SEC rules to be included in a proxy statement. In addition, the stockholder must include the consent of the candidate (including the consent to a background check) and describe any relationships, arrangements or undertakings between the stockholder and the candidate regarding the nomination or otherwise. The stockholder must submit proof of ownership of our stock.

All communications should be submitted in writing to the chair of the nominating and governance committee, care of Secretary, ResMed Inc., 9001 Spectrum Center Boulevard, San Diego, California 92123 USA. Recommendations received after 70 days before the anniversary of the prior year’s annual meeting will likely not be considered timely for consideration at that year’s annual meeting.

The nominating and governance committee will consider stockholder recommendations of candidates on the same basis as it considers all other candidates. For further information, see “Stockholder proposals for 2018 annual meeting.”

Audit committee

At the beginning of fiscal year 2018, through November 2017, our audit committee consisted of Jack Wareham (chair), Carol Burt, and our former director Chris Roberts. In November 2017, Mr. Roberts did not stand for re-election to the board, and Ron Taylor joined the audit committee. Also in November 2017, Ms. Burt began chairing the committee. From November 2017 through currently, the committee’s membership has not changed. Each of the audit committee members serving during fiscal year 2018 has been determined by our board to be financially literate and meet the other requirements for audit committee service under the current listing standards of the NYSE and SEC. In addition, our board has identified all members of the audit committee (during fiscal year 2018 and currently) as financial experts under the SEC’s requirements.

The audit committee’s primary purposes are to assist the board with its oversight responsibilities regarding:

 

   

management’s conduct of, and the integrity of our financial reporting;

 

   

our systems of internal control over financial reporting and disclosure controls and procedures;

 

   

compliance with our code of conduct and ethics; and

 

   

qualifications, engagement, compensation, independence, and performance of our independent registered public accounting firm.

 

Communications with our board of  directors

Any interested person, including any stockholder, may communicate with our non-employee board members by written mail addressed to the chairman of the nominating and governance committee, care of Secretary, ResMed Inc., 9001 Spectrum Center Boulevard, San Diego, California 92123 USA. We encourage stockholders to include proof of ownership of our stock in their communications. The secretary will forward all communications to the chairman of the nominating and governance committee.

 

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Code of ethics

  

We have a code of business conduct and ethics for directors, officers and employees, which can be found at investor.resmed.com. The code summarizes the compliance and ethical standards and expectations we have for all of our officers, directors and employees, including our chief executive officer and senior financial officers, with respect to their conduct in connection with our business. Our code of business conduct and ethics constitutes our code of ethics within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the NYSE listing standards. We will disclose future amendments to or waivers of certain provisions of our code of business conduct and ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller and individuals performing similar functions on our website at www.resmed.com within five business days or as otherwise required by the SEC or the NYSE.

 

Pledging and hedging company stock  prohibited

We have a policy prohibiting our directors, officers, and other employees from hedging or pledging their ResMed stock.

 

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DIRECTOR COMPENSATION — 2018

 

 

 

Fiscal year 2018 program –  cash

Our non-executive director cash compensation program for fiscal year 2018 included the following:

 

                               Fee                        

 

Annual retainer

 

   $65,000

 

Additional retainer to members of standing committees

 

   None

 

Additional annual retainer to lead director

 

   $20,000

 

Additional annual retainer to audit committee chair

 

   $18,000

 

Additional annual retainer to compensation committee chair

 

   $15,000

 

Additional annual retainer to nominating and governance committee chair

 

   $10,000

 

Per meeting fee

 

   None

 

Retirement benefits

 

   None

 

Fiscal year 2018 program –  equity

During fiscal year 2018, as in past years, on our annual stockholders meeting date we awarded equity grants to our non-executive directors with a grant date fair value of $250,000. Our non-executive directors had the opportunity to elect to receive their equity grant in the form of: (1) 100% options; (2) 100% restricted stock units, or (3) 50% options and 50% RSUs. Five directors chose 100% RSUs; and two chose 100% options.

The number of options and RSUs we granted was based on a relative fair value calculation prepared by an outside consulting firm. Subject to continued service, RSUs and options vest in full on the earlier of: (1) November 11 in the year after the grant date, or (2) the date of the first annual meeting of stockholders following the grant date. The board believes that our equity ownership guidelines are sufficient to promote long-term ownership and align our directors with our stockholders. More information on our director ownership guidelines is in the section below, Equity ownership guidelines.

 

No changes for fiscal year  2018

The fiscal year 2018 director compensation program had the same structure and value as fiscal years 2014, 2015, 2016 and 2017. Fiscal year 2018 marks the fifth consecutive year we have not increased board compensation.

 

Compensation philosophy

The compensation committee reviews non-executive director compensation on an annual basis, including reports from FW Cook, the committee’s independent compensation consultant. After its review, the committee makes recommendations on non-executive director compensation to the board, and the board makes the final determination regarding non-executive director compensation.

Dual listing; US pay model. The compensation committee and board review data on both US peers and Australian peers, reflecting the company’s dual-listing locations. Australia and the US generally have different pay philosophies for compensating non-executive directors. ResMed’s Australian peers generally pay non-executive directors higher cash, award little or no equity, and have overall lower compensation than ResMed’s US peers. While the board considers Australian peer data, the board believes the most relevant peers for ResMed director compensation are US peers. ResMed’s primary listing is on the NYSE, we are primarily subject to US corporate governance requirements and risks, and our headquarters and all but one of our continuing directors and nominee reside in the US. In addition, this US-perspective is consistent with our executive compensation philosophy (which gives more weight to ResMed’s US peer’s pay practices), and more directly aligns the interests of our board members with that of our stockholders through ownership of equity. Finally, we do not wish to create internal or cultural divisions by using significantly differentiated pay models between directors based in the US and other countries.

 

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Compensation process  

     

In February and May 2018, the board and compensation committee reviewed director compensation. As part of this review, they considered FW Cook’s report covering cash and equity compensation, compared to a peer group of 17 medical device and medical technology companies in the US, and a group of 13 Australian-based peers. The report used the same peer groups used to benchmark ResMed’s executive compensation for fiscal year 2018. More information on the peer groups is included in the section in our Compensation Discussion and Analysis section entitled “Peer group comparison.”

At our 2017 annual stockholder meeting, as part of approval of the amendment and restatement of our 2009 Incentive Award Plan, our shareholders approved a $700,000 annual limit on combined cash and equity compensation for service as our non-employee director. In 2017, the cash and equity compensation paid for service as non-employee directors ranged from $315,017 to $345,017. Peter Farrell’s compensation for service as an employee is not covered by this limitation.

After considering the FW Cook report and the compensation committee’s recommendation, in May 2018 the board agreed to keep non-executive director compensation at the same value as has been in effect since fiscal year 2014.

Each year, the committee also considered the structure of our non-executive director equity program. Although our Australian peer group companies do not typically make equity grants to their non-executive directors, the practice is routine in the US. All but one of our US peers grant equity to the non-executive directors, and as of May 2018, all those granting used full value shares, while 40% of them also granted stock options or stock appreciation rights. Given this prevalence, and consistent with the US-based compensation philosophy described above, the board and committee decided to continue the equity structure of ResMed’s non-employee director program.

The compensation committee and board will continue to monitor compensation trends, competitive practices, tax regulations, and other matters related to non-executive director compensation, and make adjustments as appropriate.

 

Equity ownership guidelines

Each non-executive director is expected to hold ResMed stock with a value of at least five times the annual cash retainer (a total value of $325,000 based on the fiscal year 2018 retainer and guidelines). New directors must meet this guideline within five years after their appointment to the board. If the guideline is not met, the director must retain shares equal to 50% of the after-tax value of shares acquired on any restricted stock vesting or stock option exercise until the director’s guidelines are met. As of the record date, each of our non-executive directors met the equity ownership guidelines.

 

New directors

We pro-rate value-based equity awards and retainers for all new directors (for the period between their start date and the next annual meeting or service period, respectively). We do not provide new directors with any initial inducement equity awards that are greater than or in addition to the pro-rated annual grant amount.

 

Executive directors

Our chief executive officer does not receive additional compensation for his service as director.

 

No changes for fiscal year  2019

In May 2018, after considering market data prepared by FW Cook, the board decided that the non-executive directors’ compensation program for fiscal year 2019 will remain the same as has been in effect since fiscal year 2014. The board has maintained that decision to date in fiscal year 2019.

 

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Non-executive chairman’s  compensation

Since January 2014, Dr. Farrell has served as our non-executive chairman, as well as a non-officer employee of the company. Dr. Farrell receives separate compensation for each of these roles. During fiscal year 2018, as our non-executive chairman, he was provided the regular board retainer of $65,000, and the regular board equity grant with a value of $250,000, on the same terms as the other non-executive board members.

During fiscal year 2018, in connection with his service as a non-officer employee, Dr. Farrell was also paid an annual salary of $300,000, which was the same as the annualized salary he began receiving in January 2014, when he transitioned into the role of non-officer employee. Dr. Farrell is not eligible to participate in the annual short-term incentive program or the long-term incentive equity programs that we provide to our employees. During fiscal year 2018, we provided benefits and perquisites to Dr. Farrell in his role as non-officer employee, that were broadly consistent with those provided to our executive officers, as described in “Compensation Discussion and Analysis.” The incremental cost to us for these benefits is described in the fiscal year 2018 compensation table below.

We continue to have an executive agreement with Dr. Farrell that provides him with benefits in the event of a change of control. The program is described in detail in “Compensation Discussion and Analysis.” Consistent with a policy change adopted during fiscal year 2018 for executive officers, we entered into an amended change of control agreement with Dr. Farrell, so that in the future, all benefits would be on a “double-trigger” basis, that is, benefits would only accrue if we terminated Dr. Farrell’s employment, or if he resigned for good reason, but in either case within a specified period of time before or after a change of control. (Previously, the change of control agreement had provided for unvested equity awards to vest in full on the effective date of a change of control, without a qualifying termination.) If Dr. Farrell’s employment were to terminate under qualifying circumstances in connection with a change of control, then at the time of termination: (1) he would receive a severance payment equal to (a) two times his employee salary, plus (b) two times the amount we would be required to contribute on his behalf under our 401(k) plan based on his termination base salary; (2) he would become fully vested in his accrued retirement plan benefits; (3) all his unvested equity awards would vest in full; and (4) we would provide medical and dental health benefits for two years after the termination. The agreement does not include excise tax gross-ups; instead, it includes a “best pay” provision, reducing severance payments to the extent necessary so that no portion of any payments or benefits payable upon a change of control would be subject to excise tax if the reduction would result in the net amount payable to him being greater than the net amount received without the reduction.

For two years after a qualifying termination in connection with a change of control, Dr. Farrell will be prohibited from inducing any person in our employment to terminate employment or accept employment with anyone other than us or, subject to certain limited exceptions, engage in any business or activity or render any services or provide any advice to any person, activity, business or entity that directly or indirectly competes in any material manner with us or meaningfully support any person, business, entity or activity or initiate or further that business or activity. The restriction on post-termination employment may not apply if he resides in California, due to certain provisions of California law. In addition, as a condition to payment and providing any benefits under the agreements, he must deliver a general release of claims in favor of us.

In May 2018, our board (without Michael Farrell’s or Dr. Peter Farrell’s participation) agreed that the compensation arrangements for Dr. Farrell, both as non-executive chairman, and as a non-officer employee, would remain the same for fiscal year 2019 as in fiscal year 2018.

 

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Fiscal year 2018 director compensation table

The table below summarizes the compensation received by our non-employee directors and Dr. Peter Farrell for the fiscal year ended June 30, 2018:

 

Director  

    Fees earned    

or paid

in cash(a)

 

Option

    awards(b)(d)    

 

 

    Restricted    

stock

units(c)(d)

 

 

Other

    compensation(e)    

              Total             

 

Carol Burt

 

  $73,250       $250,017       $323,267

 

Karen Drexler

 

  $40,625       $250,017       $290,642

 

Peter Farrell

 

  $65,000       $250,017   $453,905   $768,922

 

Gary Pace

 

  $65,000       $250,017       $315,017

 

Rich Sulpizio

 

  $80,000       $250,017       $330,017

 

Ron Taylor

 

  $95,000       $250,017       $345,017

 

Jack Wareham

 

  $71,750   $250,002           $321,752

 

(a)    Each director was also reimbursed for expenses incurred for attending meetings (although these amounts are not reflected in the table above).
(b)    The amounts shown are the grant date fair value of options granted in fiscal year 2018, computed in accordance with FASB ASC Topic 718, based on the Black-Scholes model of option valuation. The following assumptions were used:

 

 

Assumption

 

  

 

                         November 16, 2017                        

 

 

Market price of stock

 

   $84.98

 

Exercise price of option

 

   $84.98

 

Expected stock volatility

 

   23.0%

 

Risk-free interest rate

 

   2.08%

 

Expected life

 

   4.9

 

Dividend yield

 

   1.65%

 

(c)    The dollar value of the RSUs shown represent the grant date fair value of stock awards granted, computed in accordance with FASB ASC Topic 718, based on the $84.98 closing value on November 16, 2017, the date of the grant, rounded down to the nearest whole share.
(d)    The following table sets forth the number of options (both exercisable and unexercisable) and RSUs held by each of our non-employee directors and Dr. Farrell as of the end of fiscal year 2018:

 

Director  

 

            Options outstanding             

at fiscal year end

 

 

 

          Restricted stock units outstanding           

at fiscal year end

 

 

Carol Burt

 

  0                       2,991

 

Karen Drexler

 

  0                       2,991

 

Peter Farrell

 

  0                       2,991

 

Gary Pace

 

  67,139                       2,991

 

Rich Sulpizio

 

  0                       2,991

 

Ron Taylor

 

  0                       2,991

 

Jack Wareham

 

  103,226                             0

 

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(e)

  Other compensation represents Peter Farrell’s total compensation for fiscal year 2018 for service as a non-officer employee, as shown in the following table:

 

Salary  

Company

contribution

    to 401(k) plan    

 

 

        Supplemental life        

and disability

insurance

premiums

 

 

        Personal use        

of company

aircraft(i)

 

Sales

        incentive        

award(ii)

 

        Sales incentive        

award tax

gross-up(ii)

          Total         

$300,000

  $10,800   $23,399   $89,709   $27,223   $2,774   $453,905

 

i.       The calculation of the aggregate incremental cost for personal use of company aircraft includes the variable costs incurred as a result of personal flight activity, which includes fuel, trip related maintenance, universal weather monitoring, on-board catering, landing and ramp fees, excise taxes, and all other miscellaneous costs. No incremental cost for personal use of the aircraft is attributed when the aircraft was previously scheduled to the destination for a business purpose. Since the aircraft are primarily used for business purposes, the aggregate incremental cost excludes fixed costs, such as the monthly management fee and amortization, because such costs would have been incurred regardless of the personal use.
ii.   This sales incentive award program is primarily targeted for sales personnel and other key management who regularly interact with our customers and to recognize their contributions to us. The committee believes that participation by Dr. Farrell in this program enhances the overall sales incentive program, by providing the sales team with an opportunity to interact with our founder. We provide these benefits on the same general basis as we provide to non-executives who qualify to participate in the program, including a tax gross-up. The tax gross-up is provided to all participants, and is provided so that they are not discouraged from participating by tax expenses that would otherwise be a personal expense attributable to this program. Our policy reflects the committee’s belief that Dr. Farrell’s attendance at this program is a part of his general business duties and that this is not a perquisite.

 

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EXECUTIVE OFFICERS

 

 

As of the record date, September 17, 2018, our executive officers were:

 

 

Executive officer

 

  

Age

 

  

Position

 

 

Michael Farrell

 

   46    Chief executive officer and director

 

Rob Douglas

 

   58    President and chief operating officer

 

Jim Hollingshead

 

   55    President – sleep business

 

Richie McHale

 

   54    President – respiratory care business

 

David Pendarvis

 

   59    Chief administrative officer, global general counsel and secretary

 

Brett Sandercock

 

   51    Chief financial officer

 

Raj Sodhi

 

   45    President – software as a service business (SaaS)

 

Executive officer biographies  

For a description of the business background of Michael Farrell, see “Proposal 1: Election of directors.”

ROB DOUGLAS

President and chief operating officer

Rob Douglas has been ResMed’s president since March 2013, and our chief operating officer since September 2011. Together with our chief executive officer, he holds full operational responsibility for ResMed and its subsidiaries. Mr. Douglas has had an extensive career within ResMed. His former roles include president – Asia Pacific and chief, global supply operations from May 2011, responsible for global manufacturing and commercial distribution and sales operations in the Asia Pacific region; chief operating officer – Asia Pacific since 2008; chief operating officer – Sydney from 2005, responsible for our manufacturing and research and development; vice president of operations from 2003 responsible for our manufacturing and vice president of respiratory and cardiac business from 2002. Mr. Douglas first joined ResMed in 2001 in the role of vice president of corporate marketing.

Mr. Douglas has a Master of Business Administration from Macquarie University, a bachelor’s degree in electrical engineering with first-class honors and a B.Sc. (Computer Sciences) from the University of New South Wales, Sydney. Mr. Douglas currently serves as co-vice chairman on the board of directors of the San Diego Regional Economic Development Corporation and is also serving as Vice Chairman of EvoNexus.

JIM HOLLINGSHEAD

President – sleep business

Jim Hollingshead was appointed president – sleep business in July 2017. Mr. Hollingshead joined ResMed in March 2010 as vice president of strategy and business development. In August 2011, his role was expanded to include the leadership of ResMed ventures and initiatives, the unit responsible for growing early stage businesses. In March 2013, he was appointed president – Americas. Before joining us, Mr. Hollingshead spent 18 years in strategy consulting, where he worked with senior executives across a wide range of industries. From September 2008 to February 2010, he was a senior partner in the strategy and life sciences practices at Deloitte Consulting, based in San Francisco. Before that Mr. Hollingshead was managing partner, west coast for Monitor Group, a global strategy consulting firm. While at Monitor Group, Mr. Hollingshead worked in various offices around the world, and successfully launched and ran three different practices, including a pan-European marketing strategy practice based in London.

Mr. Hollingshead currently sits on the board of SleepScore Labs, a joint venture between ResMed, Pegasus Capital and Oz Media, aimed at creating a consumer marketplace for scientifically validated sleep solutions like the S+ by ResMed.

Mr. Hollingshead holds an A.B. in history and international relations with highest distinction from Stanford University, and an M.A. and Ph.D in political science from the University of California at Berkeley, where he was awarded a graduate student fellowship by the National Science Foundation.

 

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RICHIE MCHALE

President – respiratory care business

Richie McHale was appointed president of ResMed’s respiratory care business in July 2017. He previously served as the company’s chief human resources officer, beginning in November 2013, and joined ResMed in 2011 as director of its United Kingdom business team.

Mr. McHale has 25 years’ experience in the life sciences sector, working primarily in commercial roles within pharmaceutical, biotechnology and medical technology companies. Prior to joining ResMed, he was managing director of UCB Pharma’s United Kingdom and Ireland business units. He also served as chair of the European Medicines Group and a member of the Board of Management for the Association of British Pharmaceutical Industry (ABPI).

Mr. McHale holds a master’s degree in coaching psychology from the Metanoia Institute in London.

DAVID PENDARVIS

Chief administrative officer, global general counsel and secretary

David Pendarvis has been chief administrative officer and global general counsel since May 2011. He served as interim president for ResMed EMEA and Japan from March to August 2017, in addition to his chief administrative officer and global general counsel roles. Mr. Pendarvis joined ResMed as global general counsel in September 2002, and has been corporate secretary since February 2003. From February 2005 to May 2011, he served as senior vice president of organizational development.

Before joining ResMed, Mr. Pendarvis was a partner in the law firm of Gray Cary Ware & Freidenrich LLP, from September 2000 until September 2002, where he specialized in intellectual property and general business litigation. From 1986 to 2000, he was a partner with Gibson, Dunn & Crutcher LLP. From 1984 to 1986 he was a law clerk to the Hon. J. Lawrence Irving, US District Judge, Southern District of California.

Since 2017, Mr. Pendarvis has served on the board of directors of WD-40 Company (NASDAQ: WDFC), a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world. He has also served on the board of directors of the San Diego Regional Chamber of Commerce since 2013 and the Corporate Directors Forum since 2010. From 2009 to 2016, he was a director on the board of Sequenom, Inc.

Mr. Pendarvis holds a Bachelor of Arts from Rice University; a Juris Doctor (J.D.), cum laude, from the University of Texas School of Law; and a Master of Science in Executive Leadership from the University of San Diego.

BRETT SANDERCOCK

Chief financial officer

Brett Sandercock has been chief financial officer since January 1, 2006. From November 2004 until December 2005, Mr. Sandercock was vice president, treasury and finance at ResMed. Before that, from 1998 to November 2004, Mr. Sandercock was group accountant and then controller at ResMed. From March 1996 to August 1998 he was manager, financial accounting and group reporting at Norton Abrasives, a division of the French multi-national, Saint Gobain.

Mr. Sandercock also held finance and accounting roles from November 1994 to March 1996 at Health Care of Australia, a large private hospital operator in Australia. From 1989 to 1994, Mr. Sandercock worked at PricewaterhouseCoopers in Sydney, specializing in audits of clients predominantly focused on distribution and manufacturing, financial services and technology.

Mr. Sandercock holds a B.Ec. from Macquarie University and is a certified chartered accountant.

 

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RAJ SODHI

President – software as a service (SaaS) business

Raj Sodhi was appointed president of ResMed’s software as a service (SaaS) business in July 2017. He was previously president of healthcare informatics and vice president of the global healthcare informatics team. He joined ResMed in 2012 through the acquisition of Umbian Inc. of which he was co-founder and president.

Before ResMed and Umbian, Mr. Sodhi worked in the financial services industry, designing, developing and managing SaaS solutions. He was senior vice president of business development and chief technology officer for Skipjack Financial Services from 2005 to 2009, and co-founder and chief technology officer of TransActive Ecommerce Solutions from 2000 to 2005.

Mr. Sodhi holds a Master of Business Administration and a Bachelor of Science in mathematics and statistics from Dalhousie University in Halifax, Nova Scotia.

 

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COMPENSATION DISCUSSION AND ANALYSIS (CD&A)

 

 

 

Introduction  

 

This compensation discussion and analysis section discusses the compensation policies and programs for our named executive officers. Our named executive officers for fiscal year 2018 were: Michael Farrell, our chief executive officer; Brett Sandercock, our chief financial officer; and our three next most highly paid executive officers: Rob Douglas, our president and chief operating officer; Jim Hollingshead, the president of our sleep business; and David Pendarvis, our chief administrative officer, global general counsel and secretary.

This section also discusses our board compensation committee’s role in designing and administering our compensation programs and policies and in making compensation decisions for our executive officers.

The goal of our compensation programs and policies is to align compensation delivery with performance for shareholders, measured both internally against budgets and externally through share price. We believe this alignment was achieved in fiscal year 2018.

 

Overview of fiscal year 2018 –  executive summary

Financial and operating success. During the 2018 fiscal year, we continued our trend of successful financial performance. We increased net revenue by double-digits, both on a GAAP basis and after adjusting for currency fluctuation. Operating income strongly increased, by 27% on a GAAP basis, and 19% after adjustments. Although net income and diluted earnings per share declined year-over-year on a GAAP basis, on an adjusted, or non-GAAP basis, each grew strongly, by at least 25%. These metrics are illustrated in the table below, with GAAP and corresponding non-GAAP measures. We believe these non-GAAP measures provide better insight in evaluating our performance. We employ and report these non-GAAP measures in our quarterly financial reports.

 

 

Financial
measure

   Percentage change    Fiscal year 2018
performance
   Fiscal year 2017
performance

Net revenue

   13%    $2.3 billion    $2.1 billion
     (10% on a constant currency basis)          

Operating income

   27%    $541.8 million    $425.8 million
     (19% non-GAAP)    ($606.6 million non-GAAP)    ($508.4 million non-GAAP)

Net income

   -8%    $315.6 million    $342.3 million
     (27% non-GAAP)    ($507.8 million non-GAAP)    ($401.3 million non-GAAP)

Diluted earnings per share

   -9%    $2.19    $2.40
     (25% non-GAAP)    ($3.53 non-GAAP)    ($2.82 non-GAAP)

For a reconciliation between GAAP and non-GAAP measures, see Appendix A to this proxy statement.

In fiscal year 2018, we made good progress with the three following foundations that allow us to drive our ResMed 2020 strategy:

 

  (1)

global leadership in digital health and connected care. As of fiscal year end, over 5 million patients were monitored at home with our connected care systems, our AirView system had over 8 million patients, and over 1 million patients had signed up for myAir, while our Brightree system had over 64 million patient accounts as part of its post-acute care network. Our connected health strategy is advancing across multiple markets;

 

  (2)

expansion in new markets. We ended fiscal year 2018 with sales (adjusted for short-term incentive measurements) in our respiratory care, Asia growth markets, software-as-a-service, and Germany Healthcare, in the aggregate, of approximately $623 million, with constant-currency growth of 5%; and

 

  (3)

strong focus on operating excellence: for talent development and to leverage our scale. Each quarter of fiscal year 2018 showed double-digit net operating profit improvement. For the full fiscal year, our adjusted operating profit, net income, and earnings per share all grew faster than our adjusted net revenue.

 

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Strong absolute and relative total stockholder returns. Our total stockholder returns (TSR) on the NYSE were very strong, outperforming the S&P 500 index and our peer group. Our one-, three-, and five-year annualized TSR were 35%, 25%, and 20%, respectively. In comparison, the S&P 500 index experienced average annualized TSR of 14%, 12%, and 13% over the one-, three-, and five-year periods ended June 30, 2018.

Against our peer group, our annualized NYSE TSR was above the median over five years, and above the 75th percentile over one and three years.

The table below shows these comparisons with more precision.

 

       
Period   

ResMed’s
annualized total
stockholder return
(NYSE)

 

  

S&P 500 average
annualized total
stockholder return

 

  

NYSE peer group
median annualized
total stockholder
return

 

 

One year ended June 30, 2018

 

   35%    14%    11%

 

Three years ended June 30, 2018

 

   25%    12%    17%

 

Five years ended June 30, 2018

 

   20%    13%    21%

Because our primary listing is on the NYSE, our TSR based on performance of our CHESS Units of Foreign Securities trading on the ASX is impacted by currency fluctuations between the US and Australian dollars. Nevertheless, our one-, three-, and five-year annualized TSR on the ASX were very strong at, respectively, 43%, 27%, and 25%. These were significantly above the ASX 100 index, which experienced average annualized total stockholder returns of 5%, 4%, and 5%, over the one-, three-, and five-year time periods. It was also above the 75th percentile of our Australian compensation peers for a one- and five-year period; and slightly under the 75th percentile for the 3-year period. The table below shows these figures.

 

       
Period   

ResMed’s
annualized total
stockholder return
(ASX)

 

  

ASX 100 average
annualized total
stockholder return

 

  

ASX peer group
median annualized
total stockholder
return

 

 

One year ended June 30, 2018

 

   43%    5%    13%

 

Three years ended June 30, 2018

 

   27%    4%    8%

 

Five years ended June 30, 2018

 

   25%    5%    15%

Strong capital management and return to our stockholders. During fiscal year 2018, we increased the dividend paid to stockholders. In July 2017, we increased our quarterly dividend by 6%, from $0.33 to $0.35 per share; and in August 2018, we announced a further 6% increase, to $0.37 per share. During fiscal year 2018, we paid approximately $200 million in dividends, representing a dividend payout ratio of 63% of net income, or 39% of adjusted (non-GAAP) net income. We also resumed our share repurchase program in the second quarter of fiscal year 2018, and during the balance of fiscal year 2018 we repurchased approximately $54 million of stock.

Compensation at risk and tied to our performance. During fiscal year 2018, approximately 89% of our chief executive officers’ compensation and 82% of our other named executive officers’ compensation was at risk in the form of annual cash incentives and equity awards, which are paid or earned based on our financial and stock price performance. The compensation decisions for fiscal year 2018 maintained the at-risk weighting for our named executive officers largely consistent with 2017, with most of the increases in compensation in the form of at-risk equity compensation. Based on this incentive-driven structure, our pay delivery matched both internal operating performance and external share price performance in 2018.

 

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Annual cash incentive awards were earned in a range from approximately 97% to 103%, based on performance in our key financial measures. During fiscal year 2018, the primary performance measures for our chief executive officer and our president and chief operating officer were adjusted net sales, which was achieved at approximately 99.5% of target, and adjusted operating profit as a percentage of revenue, which was achieved at approximately 102.1% of target, weighted equally. Based on these metrics, these two executives earned approximately 102.7% of their target short-term cash incentive. These same two components, weighted equally, comprised 80% of the incentive opportunity for our chief financial officer and our global general counsel and chief administrative officer; and 40% of the opportunity for the president of our sleep business. The balance of the opportunity for these three executives were based on specific business unit goals. These three officers earned between approximately 96.5% and 97.7% of target opportunity. We believe these measures reflect operating activities that are within the officers’ purview and most important to long-term stockholder value creation, as they focus on top line and bottom line performance.

We achieved between 93% to 102% of targeted performance under each of our goals, resulting in total payouts ranging from 96% to 102% of target bonus opportunity for each of our named executive officers as illustrated in the tables below.

 

 

Goal

 

  

Target

performance

 

 

Actual

performance

 

 

% of goal

achieved

 

 

 

% of payout

earned (before

weighting)

 

 

Adjusted net sales

 

   $2,270,177

 

  $2,259,764

 

  99.54%

 

  98.47%    

 

 

Adjusted operating profit as % of sales

 

   27.21%

 

  27.77%

 

  102.08%

 

  106.93%    

 

 

Growth markets adjusted net sales

 

   $637,017

 

  $593,887

 

  93.23%

 

  77.43%    

 

 

Sleep Adjusted Net Sales

 

   $1,638,327

 

  $1,670,934

 

  101.99%

 

  106.63%    

 

 

Sleep Adjusted Operating Profit as % of Net Sales

 

   32.39%

 

  31.72%

 

  97.93%

 

  93.10%    

 

    

 

           

 

Executive

 

   Farrell

 

   Douglas

 

  Sandercock

 

  Pendarvis

 

  Hollingshead

 

Corporate adjusted net sales

  

 

50% weight/
49.24% payout  

 

   50% weight/
49.24% payout  

 

  40% weight/
39.39% payout  

 

  40% weight/
39.39% payout  

 

  20% weight/
19.69% payout   

 

Adjusted Operating Profit as % of Net Sales

  

 

50% weight/
53.47% payout  

 

  

 

50% weight/
53.47% payout  

 

 

 

40% weight/
42.77% payout  

 

 

 

40% weight/
42.77% payout  

 

 

 

20% weight/
21.39% payout   

 

Growth markets adjusted net sales

         

 

20% weight/
15.49% payout  

 

  20% weight/
15.49% payout  

 

  20% weight/
15.49% payout   

 

Sleep adjusted net sales

                   

 

20% weight/
21.33% payout   

 

 

Sleep adjusted operating profit as % of net sales

 

                20% weight/
18.62% payout   

 

 

Total payout as % of target opportunity

 

   102.70%

 

   102.70%

 

  97.65%

 

  97.65%

 

 

 

96.51%

 

 

   

We set challenging goals for our executives for fiscal year 2018. Our fiscal year 2018 adjusted net sales goal required 10% constant currency growth over fiscal year 2017. When the fiscal year 2018 adjusted net sales goal was set, it was above our peers’ median trailing twelve-month revenue growth rate of 8% through June 30, 2017. Our actual fiscal year 2018 net sales growth (adjusted for short-term incentive plan calculations) was 9.3%, which was above the median of our peer group.

Similarly, our fiscal year 2018 goal for adjusted operating profit as a percentage of revenue was 27.21%. This was a higher percentage of revenue than our actual fiscal 2017 adjusted operating profit percentage of 26.82%, and when combined with our 2018 sales target, was projected to deliver increased operating profit in fiscal year 2018, compared with fiscal year 2017. Our actual adjusted operating profit performance of 27.77% was above our internal goal, and operating profit before tax, in dollars (adjusted for short-term incentive plan calculations), increased by 17%, from $554 million in fiscal year 2017, to $649 million in fiscal year 2018.

 

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Our equity program is tied to stock price performance and provides a direct link with the long-term interests of our stockholders.

 

   

Our fiscal year 2018 equity program design is balanced, with 50% of grant value in long-term performance units, providing a direct link with the long-term interests of our stockholders. Fifty percent of our named executives’ annual equity award values are in the form of performance-based stock units, or PSUs, that are earned over a four-year performance period beginning on our annual meeting date, with the number of shares to be earned depending on our total stockholder return, or TSR, over the applicable performance period. The outstanding PSU grants made in fiscal 2016 and 2017 require a minimum threshold of 22% cumulative annual TSR performance, before threshold shares are earned, and they require 46% cumulative TSR performance before target shares are earned, each as measured over a four-year performance period, with opportunity to earn threshold number of shares after three years if cumulative TSR performance is at least 16% at the end of three years, and target number of shares if cumulative TSR performance is 22% at the end of three years.

In addition to the PSUs described above, the other 50% of the grant date value of our annual equity awards are granted in the form of either (1) stock options, or (2) restricted stock unit awards. Before the grant date, the officer can choose to receive the remaining 50% of grant value as 100% options, 100% performance-based RSUs, or 50% of each.

Both the options and RSU awards time vest subject to continued service over a three-year period, but the RSU awards, consistent with prior years, are subject to the performance condition that we achieve 50% of our budgeted adjusted operating profit in our third and fourth quarters, either individually or combined. Because we exceeded the minimum targeted adjusted profit for the second half of fiscal year 2018, all RSUs that were granted during the fiscal year were earned, but continue to be subject to a three-year service-based vesting requirement from the grant date. We believe our RSU awards and stock option awards are also performance-based, because the ultimate value an executive will derive depends mostly on our stock performance, which in turn is driven by our financial performance.

The fiscal year 2018 program is illustrated below:

 

LOGO

 

   

Balancing Australian and US compensation practices. The committee adopted this long-term equity design to attempt to balance the competing considerations of pay-for-performance orientation, stockholder alignment, retention, and administrative complexity. In particular, granting 50% of the award in PSUs is intended to balance the current practices between our US-based compensation peers and our Australian peers. According to FW Cook’s August 2017 report, which the committee reviewed before the fiscal year 2018 compensation decisions were made, our US peers, as a group, granted, on average, 34% of their long-term incentive value in the form of performance awards, 28% in time-vested restricted stock or RSUs, and 37% in stock options. Our 50% mix of performance awards exceeds this peer data. In contrast, our Australian peers granted almost 99% of their long-term incentive value in the form of performance-based equity. At the same time, our Australian peers typically provide considerably higher base salaries, and lower long-term incentive opportunities than the US peers.

Most of our executive officers reside and work in the US, our primary listing is on the NYSE, and most of our competitors are US-based, so we consider this design a balanced approach, appropriate for our labor and investor markets. Our RSUs and PSUs do not earn any dividends or dividend equivalents, and so are valued less than at our peers who do provide dividend equivalents.

 

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Despite meaningful actual TSR performance over the three-year performance period of 65%, PSUs based on a performance period ending in fiscal year 2018 resulted in payouts below target. PSU grants that vested in fiscal year 2018 were made in fiscal year 2015, based on our relative TSR performance, over the three-year performance period, as compared to the US Dow Jones Medical Device Index, a broad-based index of medical device companies. These PSUs required TSR at the median of the index before any portion of the performance-based equity awards are earned; target performance required TSR at the 60th percentile. These PSUs ended their three-year performance period during fiscal year 2018. ResMed’s TSR was 64.90% over the three-year performance period ending November 2017, which was above the required threshold performance of 56.94%, but below the 60th percentile target level of 69.50%. As a result, shares were delivered at only 57% of the target number. This outcome speaks to the high goal-setting, with a target at the 60th percentile and threshold at the median, and the failure to earn at target, despite approximately 65% absolute TSR during the performance period, is viewed as a pay-for-performance outcome.

 

   

PSUs granted since fiscal year 2016 can be earned based on absolute TSR growth, with meaningful TSR growth targets set for a four-year performance period. In fiscal year 2018, the committee continued the PSU design begun in fiscal 2016: PSUs are earned for absolute TSR with a target of 10% compounded annual growth, which equates to 46% growth over four years, and 33% cumulative growth over three years. This design is based on the committee’s belief that its executives are responsible for creating value for our stockholders and that the performance of other companies is an external variable that is outside their control and outside their scope of responsibility. In establishing this design, the committee desired to continue to provide strong incentives to management to achieve stock price appreciation and to closely align management’s interests with actual long-term stockholder experience, while rewarding meaningful performance consistent with company goals.

Our outstanding long-term PSUs granted in fiscal 2016, 2017, and 2018 are based on cumulative absolute TSR performance over a four-year performance period, with threshold, target and maximum performance based on achieving four-year cumulative TSR of 22%, 46%, and 75%, respectively. Payouts may range from 50% to 225% of target shares granted, with no shares earned for below-threshold performance.

In addition, our outstanding PSUs provide for an earlier earnout opportunity, to recognize that a multi-year TSR incentive is effectively subject to point-to-point comparison. If we achieve cumulative three-year absolute TSR performance of 16% at the end of the third year of the performance period, that performance accelerates the award with a revised earn out schedule that is still based on the same annualized TSR growth for threshold, target and maximum growth requirements, all as set forth below.

 

         

Growth

requirements

        Annual base TSR      
growth
 

        Cumulative        

4-year TSR

 

        Accelerated        

    cumulative    
    3-year TSR     

 

Payout percentage

of target shares

granted

 

Below threshold

 

  Below 5%

 

  Less than 22%    

 

  Less than 16%    

 

  0

 

 

Threshold

 

  5%

 

  22%

 

  16%

 

  50%

 

 

Target

 

  10%

 

  46%

 

  33%

 

  100%

 

 

Maximum

 

  15%

 

  75%

 

  52%

 

  225%

 

The design also recognizes that shareholders may buy and sell on a different schedule than only the three- and four- year anniversaries of grant. So an additional feature of our outstanding PSUs is that 25% of the target PSUs may be earned and banked if, at the end of any fiscal quarter, during the first three years, cumulative TSR since grant is equal or greater than 33% (that is, the required minimum performance for payout at target after three years). Banked awards are paid at the end of the third year, count against actual awards earned based on performance at the end of the performance period, and once the banking condition is met, no additional banking may occur.

The committee believes this current PSU design more closely aligns with actual stockholder experience, is less subject to point-to-point stock price volatility, provides a stronger retention mechanism, and rewards long-term value creation for our stockholders.

Market-competitive compensation. Our objective is to provide a target total compensation program that is competitive with similarly-sized US-based public companies in the medical device and medical technology industries with which we compete for executive talent. One of the three foundations of our ResMed 2020 strategy is to ensure best-in-class talent,

 

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which we believe requires providing total direct compensation for executives that is at least near the median. The committee reviews benchmark data, but does not target a specific benchmark level.

At the beginning of fiscal year 2018, FW Cook’s report to the committee showed that fiscal year 2017 total direct compensation (measured by base salary, short-term incentive at target, and long-term incentive at grant date value) for our chief executive officer was positioned a little below the 50th percentile for US peers and 85th percentile for the secondary Australian peers. This data illustrated that our chief executive officer had a base salary at the 45th percentile, total target cash compensation at the 55th percentile and equity values at the 50th percentile of the U.S peer group, consistent with the philosophy to provide a greater portion of compensation in the form of at-risk and equity compensation. For fiscal year 2018, the committee increased the chief executive officer’s base salary by 4%, to recognize his continued development and performance.

Last year’s positive say-on-pay vote and continued implementation of emerging best practices. At our 2017 annual meeting, our stockholders voted to approve, on an advisory basis, the compensation paid to our executive officers disclosed in last year’s proxy statement; 94% of the shares voted on this proposal voted in favor of our executive compensation.

The 94% support was an increase from both the 83% approval in November 2016 and the 87% approval in November 2015. Based on feedback from our stockholders, we believe this improvement was due primarily to the three compensation program changes we announced in August 2017, that were intended to address stockholder concerns and to continue to move our program to best practices. These changes included elimination of single trigger equity acceleration, adoption of a clawback policy, and increased stock ownership guidelines for our chief executive officer. The compensation committee also believes this vote is a signal of support for our programs, which are set based on a US compensation philosophy.

We believe that our dual US and Australia shareholder base affects the rate of say-on-pay support in a manner that does not apply to many of our US competitors, where the shareholders are more US-based and expect a pay program driven by US labor market norms. Our 2017 NYSE shareholder support was 98%, but ASX support was 85%. The committee believes these variations in approval rates primarily reflect the fact that ResMed’s compensation practices are more aligned with US compensation practices than those at ASX companies, combined with an expectation by some Australian shareholders that the US-based executive team should have compensation that reflects the local Australian labor market, rather than the market where most of the executives are domiciled and where ResMed competes for talent.

As discussed above in the sub-section titled “Balancing Australian and US compensation practices,” the US-based pay philosophy results in executive compensation that is different than the Australian model, with considerably lower base salary, higher short-term cash incentives, and higher target equity value. Further, US norms have a lower percentage of equity value subject to performance conditions than exhibited by Australian companies, which we balance by granting a higher percentage of equity in a performance-based manner than the average company in our US peers. We believe our compensation arrangements balance the competing philosophies and are in the best long-term interests of our stockholders, because most of our executive officers are in the US, and we compete for talent mostly with companies that pay using US compensation structures. We continued informal dialogue with our ASX stockholders during fiscal year 2018; but in light of the approval in the say-on-pay vote, broadly maintained consistency in our executive compensation program.

Best practices. Our compensation committee, assisted by its independent compensation consultants, continuously monitors emerging best executive compensation practices, particularly at our peer companies. As part of this review, and also based on communications with our stockholders, during fiscal year 2018, we made three changes to our executive compensation program:

 

   

Clawback policy adopted. The committee adopted a compensation recovery policy, which provides that we may recover annual or long-term incentive compensation from our executive officers if ResMed is required to prepare an accounting restatement due to its material noncompliance with any financial reporting requirement under United States securities laws. The policy allows recoupment from an officer regardless of the particular officer’s role in the transactions or reporting that caused the noncompliance. The policy applies to any amounts of incentive compensation that would not have been awarded, vested, or paid to the officer had the financial results been properly reported.

 

   

Required double-trigger equity acceleration. We have amended the change of control agreements with our executive officers, so that in the event of a change of control, the agreements will only accelerate vesting of equity on a double-trigger basis, that is, if their employment is terminated under specified circumstances within six months before or one year after a change of control. Equity grants made to our executive officers during fiscal year 2018 include a similar double-trigger acceleration for a change of control.

 

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Increased equity award ownership guidelines. We increased the stock ownership guidelines for our chief executive officer, from 300% of salary, to 500%. As of 2017 fiscal year-end, our chief executive officer exceeded this guideline. Ownership guidelines for the other named executives remain at 150% of salary. We give our executive officers five years to meet these guidelines. If they do not meet them at that time, then they must retain shares equal to one-half of the after-tax value of shares acquired on vesting or exercise of options and RSUs until the guidelines are met. As of the record date, each of our executive officers exceeded their guideline.

In addition to these recently-adopted policies, we have continued to use compensation practices that we understand to be consistent with best practices, and do not have practices generally viewed as problematic.

 

   

No excise tax gross-ups in change of control agreements. Our change of control agreements do not provide excise tax gross-ups. They include a “best pay” limitation, which reduces the severance payments and benefits payable to the extent necessary so that no portion of any payments or benefits payable upon a change of control would be subject to excise tax if the reduction would result in the net amount payable to the employee being greater than the net amount received without the reduction.

 

   

Limited severance. All of our named executive officers are employed at-will, and have no contractual right to cash severance on termination, except for qualifying terminations in the event of a change of control. The cash severance on change of control is limited to a double trigger (requiring both a change of control and a termination) and the highest multiplier is for our chief executive officer, at 200% of salary and short-term incentive.

 

   

Limited retirement plans. We do not provide supplemental pension plans for our named executive officers. Our executives in the US and Australia participate in our 401(k) plan and superannuation plan on the same statutory basis as all other employees. During fiscal year 2018, we adopted a policy that provides pro-rata equity vesting for officers who retire at or after age 60, with at least 5 years’ service.

 

   

Pledging and hedging prohibited. We have a policy prohibiting our officers and directors from hedging or pledging their ResMed stock, in accordance with emerging best practices among our US peers.

 

   

Unvested equity awards do not include dividends. No dividends accrue or are paid on our outstanding equity awards.

 

Philosophy and objectives of our executive  compensation program 

 

We want to attract, motivate and retain high-quality employees who reflect our values and will enable us to achieve our short- and long-term strategic goals. We operate in a high-growth environment where substantial competition exists for skilled employees. Our ability to attract, motivate and retain high-caliber individuals depends in large part on the compensation packages we offer. We believe that our executive compensation programs should reflect our financial and operating performance. In addition, individual contribution to our success should be supported and rewarded. In designing and implementing our executive compensation program, the committee is guided by the following principles:

Pay-for-performance aligned with stockholder interests and largely at-risk compensation are the cornerstones of our compensation program. A significant portion of our executives’ compensation is at-risk and tied to the achievement of pre-established short-term corporate financial objectives through our annual cash incentive programs that our chief executive officer and our president and chief operating officer earn based on achieving our corporate goals relating to adjusted net sales and adjusted operating profit as a percentage of revenue, weighted equally. These two measures represent fundamental financial metrics: top-line sales, and the portion of those top-line sales that fall to the bottom-line. The chief executive officer and president and chief operating officer are tied to these fundamental annual metrics because they are critical drivers of our stockholder returns. Meanwhile, the remaining named executive officers earn their cash short-term incentive payments based 40% on achieving our corporate and business unit goals related to adjusted net sales and 40% on achieving our corporate and business unit adjusted operating profit as a percentage of revenue, with 20% based on achieving our corporate and business unit goals related to sales in selected growth businesses. We live with the financial results of these programs, and corporate officer payouts ranged from 96% to 103% of target in fiscal year 2018.

Equity is a key component of our executive compensation. We believe our equity-based incentive award program enhances long-term stockholder value and encourages long-term performance, because equity-based incentive awards align our executives’ financial rewards with those of our stockholders through appreciation of our stock price. We grant 50% of the value of our executive officers’ equity grants in the form of TSR-contingent PSUs, with the number of shares earned determined only after a four-year performance period, with the ability to accelerate after three years, based on our total stockholder return (also, up to 25% of target PSUs may be earned during the first three years under certain conditions that

 

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require excellent TSR performance). We grant the other 50% of the value of our executive officers’ equity grants in the form of RSUs or stock options, which may be chosen individually by executives.

The vesting of RSUs to our executive officers is subject to a specific performance condition related to our adjusted operating profit, in addition to our three-year vesting requirement. This condition was intended for units to qualify as performance-based compensation under US tax laws and preserve the deductibility of the compensation paid, while providing a tie to our measurable performance. In December 2017, however, US tax laws were changed in a way that eliminated the tax advantage of this performance-based condition. We believe that stock options are inherently performance-based, because they only deliver value if our stock price increases above the closing price on the date the option is granted. In addition, the value our executive officers ultimately receive from either stock options or RSUs depends on our stock performance over the three-year vesting periods of the grants. The vesting periods and the long-term performance periods under our PSUs also encourage retention of top executive talent.

The following pie charts illustrate the allocation of all compensation earned for fiscal year 2018 (as shown in the Summary Compensation Table at page 64 below), for our chief executive officer and the average the other named executive officers. We maintain this at-risk philosophy despite market data showing that base salary is emphasized in Australia and Europe, where certain of our executive officers reside.

 

CEO FY18 compensation summary                            

 

  

Other NEOs FY18 compensation summary

 

LOGO

   LOGO

Provide market-competitive cash compensation. Our objective is to provide a target total compensation program that is competitive with similarly-sized US-based public companies in the medical device and medical technology industries with which we compete for executive talent. The committee reviews benchmark data for the individual and for the group as a whole, but does not target a specific benchmark level.

During fiscal year 2018, the committee used a broad guideline of total target cash compensation at approximately the 60th to 70th percentile of our US peer group; and that total target cash compensation should reflect a relatively lower emphasis on salary and a higher percentage of pay at risk in the form of an annual cash incentive. The guideline is broad, to recognize individual situations, and also allows us to reflect the fact that we set challenging targets for our short-term incentive programs.

Align stockholder interest with long-term equity. Equity is a key component of our executive compensation. We believe our equity-based incentive award program enhances long-term stockholder value and encourages long-term performance, because equity-based incentive awards align our executives’ financial rewards with those of our stockholders, through appreciation of our stock price.

During fiscal year 2018, we continued the PSU equity program introduced in fiscal year 2013, and PSUs represented 50% of the equity value in our annual grants. In fiscal year 2018, we also continued our practice of providing executives the choice to select whether the balance of their equity awards would be entirely in the form of stock options, entirely in RSUs or evenly split (in value) between the two.

Performance criteria for PSUs granted during fiscal year 2018 are based on absolute total shareholder return over a four-year measurement period, with an opportunity to accelerate payouts after year three, if TSR performance is high enough. The committee believes this design aligns with actual stockholder experience, is less subject to point-to-point volatility, rewards performance for which executives are accountable, provides a stronger retention mechanism, and promotes long-term value creation.

 

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Make informed decisions. The committee annually retains an independent compensation consultant to advise the committee on executive compensation matters for executive officers and to perform a comprehensive market analysis of our executive compensation program, pay levels, and relative operating performance. See the section titled “Peer group comparisons” below.

 

 Compensation process 

Compensation committee role. The compensation committee establishes our general compensation policies, and reviews and approves salaries, short-term incentives, equity-based compensation, and all other elements of the compensation offered to our executive officers (including our named executive officers), and all other executives that report to the office of the chief executive officer. The board has determined that all members of the compensation committee are independent directors under NYSE standards.

On an annual basis, the committee considers each of the three primary elements of compensation (salary, cash incentives and equity) based on market analysis, individual performance, the value of the individual to ResMed, and other factors it deems relevant. The committee also considers regional variation. For example, base salaries for certain positions in countries outside the US, when translated to US dollars, may compare to market differently when compared to US market peers than when compared to peers in their home country. There are also regional variations in market practices for short-term and long-term incentives. The committee attempts to balance the goal of paying consistently with the local market, with the goal of maintaining internal consistency using a US pay philosophy for executives in different regions, which creates alignment throughout the executive team.

The committee also reviews our peer group, our executive benefits and perquisites, our equity pay practices, and the risks related to our compensation programs, on an annual basis. The committee regularly considers supplemental compensation policies and practices such as change of control, severance, and retirement.

Timing of decisions. In fiscal year 2018, we continued the practice established in fiscal year 2017, to re-set our executive officers’ compensation on December 1, to align with our annual equity grant, which generally occurs on the date of our stockholder meeting in November. This timing is consistent with our practice for all employees. This timing allows us to consider the previous year’s performance, and the new fiscal year’s performance goals, in compensation decisions. The timing of compensation decisions does not allow us to consider feedback following a lower-than-expected say-on-pay vote, since we would only just have the new say-on-pay information and no time to consider feedback or reactions.

The committee generally makes decisions on the principal components of executive officer compensation – base salary, short-term incentive potential, equity awards, and perquisites – during the first quarter of the fiscal year. Specific short-term incentive performance targets for executive officers are generally determined before or during the first month of the fiscal year for that year. Determining actual performance versus targets and calculating short-term incentive payouts generally occur in the first two months following the end of our fiscal year. Short-term incentive payments to our executive officers are made after the fiscal year-end audit is complete. If other executive compensation issues arise during the course of the year, the committee takes those issues up on a case-by-case basis. The impact on compensation of a change of role is generally decided contemporaneous with the role change.

Independent compensation consultants. In making its decisions, the committee reviews data obtained from peer group companies and considers the recommendations of management and the analysis and advice of its independent compensation consultants regarding each element of compensation. The committee has independent authority to retain advisors. The committee has retained FW Cook, Inc., an independent compensation consultant, to advise the committee with respect to compensation matters for executive officers. FW Cook performs no work for us other than its work providing executive compensation consulting services to the committee.

During fiscal year 2018, the committee reviewed market practices and benchmark data from FW Cook, and considered ResMed’s and our executives’ relative performance and the recommendations of the consultants. FW Cook also advised the committee regarding the Australian company benchmarks for the positions of our chief executive officer, as well as executive officers who reside there. FW Cook further advised the committee regarding long-term incentive design practices and alternatives as well as peer group equity practices. In addition to FW Cook, management retained Aon plc to provide performance results of our PSUs. The committee also considered the experience and knowledge of committee members regarding compensation practices for comparable positions at other companies. Although the committee considers various sources of information and recommendations, ultimately, of course, the committee relies on its own independent judgment.

Management’s role. Our chief executive officer, president and chief operating officer, chief human resources officer, chief administrative officer and global general counsel, chief financial officer, and members of their teams, provide input and recommendations to the committee regarding pay to the executive officers and other members of management for the

 

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committee’s review and approval. While the committee gives consideration to these recommendations, it exercises independent judgment. Management provides to the compensation consultants and to the committee historical and prospective breakdowns of total compensation components for each executive officer and financial data in support of the various compensation components. Management also provides recommendations that include financial goals and criteria for our annual and long-term incentive plans. Management gathers the information it provides from consultants, the market, and internal resources, allowing designs and strategies to be tied directly to our business needs. While management members typically attend committee meetings, the committee chair excuses individual management members as appropriate for independent review and decision-making.

Peer group comparisons. In making its decisions on executive compensation, the committee generally uses industry compensation surveys prepared by outside consultants, which review each position against comparable positions within a peer group. The US peer companies are generally within one-quarter and four times the size of our revenue and market capitalization, with ResMed in the middle to avoid bias from too many large or small peer companies. We select peer companies that are medical device or medical technology companies with a market capitalization, profitability, revenue, and employee population roughly comparable to ours.

The committee periodically reviews the composition of the peer group and the criteria and data used in compiling the list, and considers modifications to the group. In May 2017, before making fiscal year 2018 decisions, the committee reviewed the peer group, considered other companies for inclusion, and made no changes. The 17 companies comprising the US peer group for fiscal year 2018 decisions were:

 

   

Alere Inc.

 

  Illumina Inc.
   

Bio-Rad Laboratories, Inc.

 

  Intuitive Surgical, Inc.
   

C.R. Bard, Inc.

 

  Mettler-Toledo International Inc.
   

Charles River Laboratories International, Inc.

 

  NuVasive, Inc.
   

The Cooper Companies Inc.

 

  PerkinElmer Inc.
   

Dentsply Sirona Inc.

 

  STERIS plc
   

Edwards Lifesciences Corp.

 

  Varian Medical Systems Inc.
   

Haemonetics Corp.

 

  Waters Corporation
   

Hologic Inc.

 

   

As of June 30, 2017, compared to our US peer group, ResMed was at the 48th percentile for market capitalization, the 22nd percentile for revenue, the 45th percentile in operating income, and the 22nd percentile for employee population. The committee believes that this peer group reflected a reasonable cross-section of our labor market for talent and included companies that our investors might consider in determining the reasonableness of our pay and alignment of our pay with our performance.

In May 2018, the committee approved a new peer group to be used for fiscal year 2019 compensation decisions. The committee removed Alere and C.R. Bard, which had been acquired, and replaced them with two medical device companies: Teleflex Incorporated and Align Technology, Inc. which each have less revenues, operating income and market capitalization than ResMed.

The committee also considers compensation survey data from FW Cook regarding similarly-sized Australia-based publicly listed companies for our Australia-based chief financial officer, and for other executive officers based in Australia, as well as for our chief executive officer. Our chief executive officer is based in the US, so the Australian data are viewed as supplemental and secondary to the US data, and reviewed to understand the differences between the potential expectations of our NYSE and ASX stockholders. The committee generally gives less weight to the Australian peer group, because the ASX peer group is less comparable to ResMed, and because ResMed compensates senior executives and directors on a US-style pay model, which is structurally and quantitatively different from the typical practices of companies in the ASX peer group.

 

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In May 2017, the committee reviewed the existing Australian peer group, considered other Australian companies for inclusion, and decided no changes were needed. The thirteen Australian peer group companies reviewed for 2018 compensation decisions were:

 

   

Adelaide Brighton Limited

 

  Healthscope Limited
   

Ansell Limited

 

  Incitec Pivot Limited
   

Boral Limited

 

  James Hardie Industries PLC
   

Cochlear Limited

 

  Primary Health Care Limited
   

Computershare Limited

 

  Ramsay Healthcare
   

CSL Limited

 

  Sonic Healthcare
   

Fisher & Paykel Healthcare Limited

 

   

As compared to our Australian peer group, ResMed was above the 75th percentile for market capitalization, and between the median and the 75th percentile for revenue.

In May 2018, the committee reviewed the Australian peer group to be used for fiscal year 2019 compensation decisions, and made no changes.

 

 Elements of compensation 

Base salary. Base salaries provide our executives with a degree of financial certainty and stability. To attract and retain highly qualified executives, we pay within salary ranges that are generally based on similar positions in companies of comparable size and complexity in the US. Using the peer group data, the committee assesses market base salaries at the median, 60th and 75th percentiles. Our executive compensation philosophy is to pay at least near the median for high performing and experienced officers when targets are achieved. Adjustments are made based on the committee’s assessment of position, performance, experience, and role.

Annual salary adjustments for fiscal year 2018 were effective December 1. Based in part on the US peer data, the committee positioned our chief executive officer’s fiscal year 2018 target total cash compensation at the 60th percentile of our US peers. The committee thought it appropriate to continue to structure our chief executive officer’s cash compensation with a greater portion, compared to market, of at-risk short term incentive compensation. Thus, our chief executive officer’s base salary was increased by 4%, resulting in base salary at about the median, while his short-term incentive target was maintained at 130% of salary, a 75th percentile percentage; resulting in total target cash compensation at the 60th percentile.

For fiscal year 2018, the committee increased the salaries of each of our other named executive officers by 2.5% in constant currency, slightly less than our company budgeted increase, while increasing the amount for a recently-promoted officer by approximately 24%, reflecting his increased responsibilities.

 

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The table below shows the base salaries for our named executive officers. For Mr. Sandercock, the amounts shown in the table below represent the US dollar equivalent of his non-US dollar-denominated salaries, which is impacted by currency fluctuations. We believe that year-to-year currency fluctuations make the constant currency increases most meaningful for officers residing outside the US.

 

Named

executive officer

 

2018

    base salary    

 

2017

    base salary    

 

 

Constant currency

percentage

increase

from 2017 to 2018

 

       

Michael Farrell

Chief executive officer

 

  $950,000   $912,000   4.2%
       

Rob Douglas

President and chief operating officer

 

  $821,743   $801,700   2.5%
       

Jim Hollingshead

President - sleep business

 

  $620,000 (a)   $501,005   23.8%
       

David Pendarvis

Chief administrative officer, global general counsel and secretary

 

  $539,193   $526,042   2.5%
       

Brett Sandercock

Chief financial officer

 

  $459,659 (b)

AUD 612,878

  $460,406 (b)

AUD 597,930

  2.5%

 

(a)

  Mr. Hollingshead received his annual increase effective July 1, 2017, at the time of his promotion.

(b)

  These amounts reflect the exchange rate we used in setting our budget for the respective fiscal year. The exchange rate used for 2018 was approximately AUD:USD 1 to 0.75, and the exchange rate for 2017 was approximately AUD:USD to 0.77. The committee approved base salary in local currency.

Annual performance-based short-term incentives. The primary purpose of our annual short-term cash incentive program is to motivate our executives to meet or exceed our company-wide and business unit short-term operating performance objectives. The program is intended to motivate our management team to execute on our business goals, to realize our budgeted growth, to share our success with eligible executives to the extent warranted by our performance, and to provide competitive compensation to eligible executives in a manner consistent with our philosophy of paying for performance. Amounts earned are based on a targeted percentage of actual salary paid for the year and not the base salary in effect at the end of the year.

In setting appropriate short-term incentive target opportunities for fiscal year 2018, the committee reviewed the 50th, 60th, and 75th percentiles of peer comparables (both in terms of target amounts and amounts actually earned). The committee also considered the potential effect of short-term incentive targets on total cash compensation and reviewed total cash compensation at peer comparables at those same percentiles. For fiscal year 2018, the committee made no change to the target short-term incentive opportunity for our chief executive officer and other named executive officers, which range from 75% to 130%, consistent with its philosophy to have more cash compensation at risk and tied to our performance. This incentive level, as a percentage of base salary, positioned our chief executive officer between the 60th and 65th percentiles for total target cash compensation among US peers for fiscal year 2018.

The committee believes it best to tie each executive’s incentive pay to the areas over which the executive can assert the most influence and to vary the weighting to reflect the relative focus desired by the executive for each metric. For fiscal year 2018, the committee decided to revise the short-term incentive metrics to align with revisions in ResMed’s operating model, which transitioned from a regionally-based model to a model primarily based on specific businesses that operate globally. The committee determined that adjusted net sales and adjusted operating profit as a percentage of revenue remained important performance metrics on a global basis, because these goals focus on profitably increasing our revenue, as well as top- and bottom-line growth. The committee, however, determined that the operating profit metric, which in prior years was measured after tax, should be measured before tax. The committee felt this change would reduce either the positive or negative impact of external events outside of executive control, such as legislative tax rates.

 

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As a result of these decisions, the committee approved a short-term incentive program for fiscal year 2018 with the following elements:

 

   

The chief executive officer and the president and chief operating officer continued to have their incentives weighted 50% on adjusted net sales and 50% on profitability, with the adjusted operating profit metric measured before tax, rather than after-tax.

 

   

Other officers with functional responsibilities (our chief financial officer and our global general counsel and chief administrative officer) had the following three metrics and weights:

 

  ¡  

40%: adjusted net revenue;

 

  ¡  

40%: adjusted operating profit as a percentage of sales; and

 

  ¡  

20%: adjusted net revenues from respiratory care, software-as-a-service, Asia growth markets, and Germany Healthcare (“growth businesses”), in the aggregate. The committee added this new metric to increase our executive’s focus on these smaller growth businesses.

 

   

Officers with specific business responsibilities (our president—sleep business) had five metrics, equally weighted as follows:

 

  ¡  

20% based on adjusted total company net revenues;

 

  ¡  

20% based on adjusted total company operating profit before tax as a percentage of sales;

 

  ¡  

20% based on the specific business’ adjusted operating profit as a percentage of sales;

 

  ¡  

20% based on the specific business’ adjusted net revenues; and

 

  ¡  

20% based on growth businesses’ adjusted net revenue.

Other features of the fiscal year 2018 short-term incentive program continued unchanged in fiscal year 2018, such as measuring revenues on a constant currency basis to remove the effect of factors outside management’s control.

The committee believed these weightings appropriately balance overall enterprise financial performance and specific areas of individual responsibility, while aligning incentives to promote cooperation between the sleep and growth businesses. The performance measures and their weighting by named executive officer for fiscal year 2018 were:

 

Named

executive

officer

 

        Adjusted        

        net sales        

 

 

Adjusted  

operating profit  

before tax as a  

percentage of  

revenue  

 

 

Specific

business

adjusted

operating profit  

 

 

Specific

business

adjusted

operating profit  

 

 

      Growth      

      businesses      

      adjusted net      

sales

 

 

Michael Farrell

 

 

 

50%

 

 

 

50%

 

 

 

-

 

     

 

-

 

 

Rob Douglas

 

 

 

50%

 

 

 

50%

 

 

 

-

 

     

 

-

 

 

Jim Hollingshead

 

 

 

20%

 

 

 

20%

 

 

 

20%

 

 

 

20%

 

 

 

20%

 

 

David Pendarvis

 

 

 

40%

 

 

 

40%

 

 

 

-

 

     

 

20%

 

 

Brett Sandercock

 

  40%

 

 

  40%

 

 

 

 

-

 

     

 

20%

 

The payout structure for our short-term incentive program has remained the same for several years. It is based on achieving pre-established targeted milestones for each performance metric, and applies to each metric individually. It is described in the following table. Payouts are expressed as a percentage of short-term incentive opportunity for that performance metric. Performance between the achievement levels is paid based on linear interpolation. The committee has established a cap on the maximum short-term incentive total payout per executive officer at 200% of the officer’s target short-term incentive opportunity.

 

No payout      50% payout        100% payout        150% payout        200% payout    

 

<85% of goal

 

    

 

85% of goal  

 

    

 

100% of goal  

 

    

 

115% of goal  

 

    

 

>130% of goal    

 

 

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The committee approves the actual short-term incentive amounts for executive officers under these criteria after the end of the fiscal year, after reviewing our financial data and performance.

To promote the retention value of our incentive programs, the committee has adopted a policy that if an executive officer separates employment before the date of payment, we will not be obligated to pay any cash or other short-term incentive awards. This policy does not impact options, RSUs, or other long-term incentives that have vested at the time of separation.

The fiscal year 2018 targets and actual performance for each of the metrics are listed below.

 

Short-term

incentive

component

 

Threshold  

performance-  

50% payout  

($ in  

thousands)  

 

Targeted  

performance-  

100% payout  

($ in  

thousands)  

 

Maximum    

performance-  

200% payout  

($ in  

thousands)  

 

Actual  

performance  

($ in  

thousands)  

 

Percentage  

achieved  

 

 

Short-term

incentive

percentage

payout

based on

percentage

achieved

 

 

Adjusted net sales

 

 

 

$1,929,651

 

 

$2,270,177

 

 

$2,951,230

 

 

$2,259,764

 

 

99.54%

 

 

98.47%

 

Adjusted operating profit as a
percentage of revenue

 

  23.13%   27.21%   35.37%   27.77%   102.08%   106.93%

 

Total achieved after weighting

            102.70%

 

(50% each)

 

                  Farrell and Douglas  

 

Growth businesses adjusted
net sales (20% weighting)

 

  $541,465   $637,017   $828,122   $593,887   93.23%   77.43%

 

Total achieved after weighting

            97.65%

 

(40%-40%-20%)

 

                  Pendarvis and Sandercock

 

Sleep business adjusted net sales

 

  $1,392,578   $1,638,327   $2,129,825   $1,670,934   101.99%   106.63%

 

Sleep business adjusted
operating profit as a percentage of revenue

 

  27.53%   32.39%   42.11%   31.72%   97.93%   93.10%

 

Total achieved after weighting

            96.51%

 

(all components 20%)

 

                      Hollingshead

 

We set challenging goals for our executives for fiscal year 2018. Our fiscal year 2018 adjusted net sales goal required 10% constant currency growth over fiscal year 2017. When the fiscal year 2018 adjusted net sales goal was set, it was above our peers’ median trailing twelve-month revenue growth rate of 8% through June 30, 2017 (based on our compensation consultant’s August 2017 report). Our actual fiscal year 2018 net sales growth (adjusted for incentive plan calculations) was 9.3%, which was above the median of our peer group.

Similarly, our fiscal year 2018 goal for adjusted operating profit as a percentage of revenue was set at 27.21%. This was an increase over fiscal year 2017’s adjusted operating profit of 26.82%. Our actual adjusted operating profit performance of 27.77% was above our internal goal. Adjusted operating profit margin was above the median of our peer group’s trailing twelve-month operating profit performance through June 30, 2018, reflecting our high margins.

We believe that our goals are challenging, because they require strong top- and bottom-line growth, and we believe that it is a pay-for-performance outcome that is consistent with our philosophy that we pay below-target bonuses when we fall short of goals.

 

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In calculating short-term incentive global metrics achievement, the committee made the following adjustments from our GAAP financial statement revenue and operating profit calculations to eliminate the impact of certain non-operating revenue and expenses:

 

   

GAAP net sales of approximately $2.34 billion were adjusted as follows:

 

  ¡  

using budgeted exchange rates reduced performance by approximately $75 million; and

 

  ¡  

excluding sales contributed by unbudgeted acquisitions increased performance by approximately $5 million.

 

   

GAAP global operating profit before tax was approximately $542 million, and was adjusted as follows:

 

  ¡  

excluding stock-based compensation expenses increased performance by approximately $48 million;

 

  ¡  

excluding amortization of acquired intangibles increased performance by approximately $46 million;

 

  ¡  

excluding restructuring expenses increased performance by approximately $18 million;

 

  ¡  

excluding profits and losses from unbudgeted acquisitions increased performance by approximately $1 million; and

 

  ¡  

including ResMed’s share of losses from SleepScore Labs, a joint venture, reduced performance by approximately $2 million.

The short-term incentive metrics for business unit achievement use non-GAAP measures that ResMed uses internally in planning, forecasting, and evaluating the results of operations. The primary difference from GAAP is they use selected accounts and entities that align with the leader of the unit’s responsibilities and control. These measures are consistently applied by the committee in setting targets at the beginning of the fiscal year and in assessing performance against the targets. In measuring achievement in fiscal year 2018, the committee made the following adjustments to eliminate the impact of certain non-operating revenue and expenses:

 

   

Adjusted sleep business net sales is a non-GAAP measure from our internal reporting. Our internal reporting for net revenue in the sleep business, excluding Brightree, was $1.7 billion in fiscal year 2018. This net revenue was adjusted by using budgeted exchange rates, which reduced performance by approximately $46 million.

 

   

Adjusted sleep business operating profit is a non-GAAP measure from our internal reporting. Our internal reporting for sleep business operating profit was approximately $549 million. This was adjusted as follows:

 

  ¡  

including ResMed’s share of losses from SleepScore Labs, a joint venture, reduced performance by approximately $5 million;

 

  ¡  

including working capital charges for inventory and accounts receivable decreased performance by $40 million;

 

  ¡  

excluding stock-based compensation expenses increased performance by $26 million; and

 

  ¡  

excluding litigation expenses increased performance by $15 million.

 

   

Adjusted growth business net sales is a non-GAAP measure from our internal reporting. Our internal reporting for net revenue in the respiratory care, software-as-a-service, German Healthcare, and Asia growth markets, in the aggregate, was approximately $623 million This net revenue was adjusted by using budgeted exchange rates, which reduced performance by approximately $29 million. Revenue from acquisitions was included in both the target and actual performance.

 

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The following table shows the 2018 incentives at target and as earned. All actual short-term incentive payments were funded in accordance with pre-established formulas; there was no discretionary or individual adjustment by the compensation committee.

 

Named

executive

officer

 

 

Annual

short-term

   incentive target   

percentage

 

 

Annual

        short-term        

incentive

target

 

 

Annual

        short-term        

incentive

earned

 

 

 

Actual

short-term

    incentive as    

a percentage

of target

 

 

Michael Farrell

 

  130%   $1,214,400           $1,247,188           102.70%

 

Rob Douglas

 

  100%   $813,385           $835,346           102.70%

 

Jim Hollingshead

 

  80%   $496,000           $478,707           96.51%

 

David Pendarvis

 

  75%   $400,283           $390,861           97.65%

 

Brett Sandercock

  80%   $363,882 (a)       $355,317 (a)       97.65%

 

(a)

   These amounts were approved in local currency by the committee. The foreign currency is converted to USD based on the fiscal year 2018 average annual exchange rate of approximately AUD:USD 1 to 0.75.

The committee has approved a short-term incentive program for fiscal year 2019 that reflects minor adjustments to the metrics. The 2019 program has the following elements:

 

   

The chief executive officer and the president and chief operating officer will continue to have the same metrics and weightings as fiscal year 2018, except that the adjusted operating profit metric will be measured as a constant currency dollar amount, rather than as a percentage of revenue. The committee felt this change would make our profitability metric more transparent, directly related to the bottom line, and consistent with metrics used by our peers.

 

   

Other officers with functional responsibilities will have the same metrics and weights as our chief executive officer and the president and chief operating officer. The committee eliminated the 2018 metric on growth businesses’ revenue, to emphasize the revenue and profitability metrics, and align with the metrics for the chief executive officer.

 

   

Officers with specific business unit responsibilities will have four metrics, weighted as follows:

 

  ¡  

20% based on adjusted global net revenues;

 

  ¡  

20% based on adjusted global operating profit measured as a constant currency dollar amount;

 

  ¡  

30% based on the specific business’ adjusted operating profit measured as a constant currency dollar amount; and

 

  ¡  

30% based on the specific business’ adjusted net revenues/

The committee made these changes to align all executives to an overall 50% profitability / 50% revenue split, increase the weight of business unit achievement, and align the profitability metric across all plans.

Other features of the fiscal year 2018 short-term incentive program will continue unchanged in fiscal year 2019.

Long-term equity award program. The major component of our named executive officers’ direct compensation provides a long-term incentive and alignment with stockholders through equity participation. The primary purpose of granting equity awards is to link our officers’ financial success to that of our stockholders, with the value of the equity awards increasing only as our stock price increases, and to promote long-term value creation. Our equity mix is comprised of 50% long-term performance-based PSUs, and the remaining 50% in performance-based RSUs and stock options. This mix increases the capability of the committee to effectively manage our use of shares under our stock plan, balances the performance leverage and performance risk provided by various equity vehicles, more closely conforms with practices at our peer companies, and promotes long-term stock appreciation and value creation.

 

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During fiscal year 2018, we continued our practice to grant PSUs for 50% of the annual equity value for executive officers, and to provide named executive officers the choice to select whether the balance of their equity awards would be entirely in the form of stock options, entirely in RSUs or evenly split (in value) between the two. In addition, the committee continued its practice of granting RSU awards to our executive officers and certain other officers conditioned on achieving certain performance targets, in addition to having a time-based vesting period. This condition was originally intended for units to qualify as performance-based compensation under US tax laws before November 2017, but also provides a tie to our performance. The combined availability of options and RSUs gives our executives the opportunity to balance the incentive award in a manner that suits their particular risk profile and their own preferences in financial or tax planning in US and non-US jurisdictions.

We do not pay dividends or dividend equivalents on any of our equity awards.

No changes to PSU program for fiscal year 2018. For fiscal year 2018 awards, the committee did not make any changes to the PSU program from fiscal year 2017.

Fiscal year 2018 grant values. Each year, the committee establishes grant values, and the relative ratios of PSUs, RSUs, or stock options are determined by the relative values computed under Financial Accounting Standards Board Accounting Standards Codification Topic 718.

In determining the value of awards granted to specific named executive officers, the committee reviewed our performance, the number of outstanding awards available, the present value of the proposed grant, existing unvested option and RSU ownership, the awards granted in prior years, and the grant practices of our peer group companies. For fiscal year 2018, the committee reviewed peer company data to determine competitive equity award values, at the median, 60th and 75th percentiles, for each officer’s position. The committee also considered internal equity relationships, to promote a team-based approach by our senior management team. In arriving at the specific grant size, the committee considered the peer group benchmarks at an individual level, as well as aggregate equity compensation for similar groups at our peers. The committee also considered our officer’s individual performances during fiscal 2017, as well as their experience in their role, and expected future contributions. Taking all those factors into account, for fiscal year 2018 the committee increased our annual equity program grant values from fiscal 2017 by approximately 13% for each of our chief executive officer, and our president and chief operating officer, and in a range from 5% to 15% for our other named executive officers.

Based on both the FW Cook report at the beginning of fiscal year 2018, as well as their updated August 2018 review of executive compensation, the fiscal year 2018 equity grant for our chief executive officer was near the 60th percentile for long-term equity incentives. This resulted in total target compensation near the 60th percentile of the updated peer group for fiscal year 2019 decisions. The committee believed this positioning appropriate given our chief executive officer’s strong performance and ResMed’s resulting strong business and financial results. The other named executive officers were positioned consistent with the committee’s decision to emphasize at-risk compensation elements and align with stockholders’ interests.

 

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The following table sets forth equity grant values provided to our named executive officers in fiscal year 2018, as well as the elections made by our named executive officers regarding the form of award to receive. When it approved the 2018 equity grants in August 2017, the committee approved specific dollar values, and a valuation firm used those values and estimated inputs to calculate the specific number of stock options, RSUs, or PSUs to be granted based on its estimate of the value of the awards on the grant date. The intended values approved by the committee and the actual grant date values were the same. The table below sets forth the grant values, based on the NYSE closing stock price on the applicable date of the grants, a Black-Scholes formula for the options, the probable outcome of the performance conditions for the RSUs, and a Monte-Carlo simulation for the PSUs, each consistent with the accounting standards of FASB 718.

 

Named

executive

officer

      Grant value       

 

Percentage

of grant

value in

    performance-     

based stock

units

 

 

Percentage

of grant

    value in stock     

options

 

    Percentage     

of grant

value in

restricted

stock units

 

Michael Farrell

 

  $6,800,000   50%   25%   25%

 

Rob Douglas

 

  $4,500,000   50%   25%   25%

 

Jim Hollingshead

 

  $2,000,000   50%   0%   50%

 

David Pendarvis

 

  $1,700,000   50%   25%   25%

 

Brett Sandercock

 

  $2,000,000   50%   0%   50%

 

Terms of performance stock  units

Program design. Equity grants to named executive officers during fiscal year 2018 were made under our 2009 Incentive Award Plan, as amended and restated during fiscal year 2018.

Since fiscal year 2013 we have granted long-term performance stock units, or PSUs. As described above, we revised the program design for the fiscal year 2016 year PSUs (granted in November 2015), and continued this revised design in fiscal years 2017 and 2018.

PSUs issued in fiscal year 2015 completed their performance period in fiscal year 2018. The fiscal 2015 PSUs were earned and cliff-vested after the third anniversary of the grant, after the committee certified the extent to which TSR performance criteria had been met, based on our TSR performance relative to the TSR performance of companies included in the US Dow Jones Medical Device Index. The share price at the grant date (our stockholder meeting date) was used as the starting point for the TSR calculation, and a trailing 30 trading-day average share price was used to calculate the share price at the end of the performance period.

The fiscal year 2015 PSUs had a performance-based funding schedule that required us to perform at the median of the index before any portion of the performance-based equity awards could be earned, and required performance at the 60th percentile to earn the target number of shares. Shares earned could range from a minimum of 0% of target shares, to a maximum of 200% of target shares, based on the following schedule:

 

 

ResMed’s

relative TSR

 

 

Payout as a

percentage of target

 

Below 50th percentile

 

  0%

 

50th percentile

 

  40%

 

60th percentile

 

  100%

 

80th percentile and above

 

  200%

Shares earned between these percentiles would be based on linear interpolation.

PSUs issued during fiscal years 2016, 2017, and 2018 are earned and cliff vest after the fourth anniversary of the grant after a four-year period based on our absolute TSR performance, with an opportunity to accelerate payouts after year three, if TSR performance is high enough. The share price at the grant date (our stockholder meeting date) is used as the starting

 

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point for the TSR calculation, and a trailing 30 trading-day average share price is used to calculate the share price at the end of the performance period.

Payouts range from 0% to 225% of target, based on the schedule below:

 

Growth requirements           Annual base  TSR    
growth
 

    Cumulative    

4-year TSR

 

    Accelerated    

cumulative

3-year TSR

 

 

    Payout percentage    

of target shares

granted

 

 

Below threshold

 

  Below 5%   Less than 22%   Less than 16%   0

 

Threshold

 

  5%   22%   16%   50%

 

Target

 

  10%   46%   33%   100%

 

Maximum

 

  15%   75%   52%   225%

Shares earned between these achievement levels would be based on linear interpolation. The program has several features to minimize the impact of daily volatility and point-to-point variation. A 30 trading-day average price is used to measure performance at the end of the period. In addition, if cumulative TSR is 16% after three years, then target is earned, with interpolation for three-year cumulative TSR between 16% and 52%. Finally, if cumulative TSR after grant is greater than 33% at the end of any fiscal quarter in the first three years, then 25% of the target award would be deemed earned, banked and paid out at the end of year three, even if performance at the end of year three is below the year-three threshold. The banking can only occur once, and any final payouts would be net of the banked amount. The rationale for banking this relatively small payout that remains unvested is to retain award holders for at least three years if shareholders had the opportunity to realize a minimum level of 33% TSR in a short time.

PSUs with performance periods that ended in fiscal year 2018 resulted in a payout of less than target shares and less than grant value. The PSUs granted to all our executive officers in November 2014 (fiscal year 2015), ended their three-year performance period during fiscal year 2018. ResMed’s TSR of 64.90% over the three-year performance period from November 2014 through November 2017 reflected the 53rd percentile of the comparison group, and as a result, 57% of the target shares were earned and paid out under the pre-existing formula. This result reflects rigorous goals setting; absolute TSR performance for the three-year period reflected strong price appreciation and added long-term value for our stockholders. The payout amount was certified by the committee, after reviewing third-party calculations of the total shareholder returns for ResMed and the index peers, as well as the percentile distributions. The payout was formulaic and based on the plan’s design, aligning pay delivery with performance, with no discretionary adjustments by the committee.

Because of this result, and the increase in share value during the performance period, our executive officers realized the values from the fiscal year 2015 PSU grants, as shown in the table below.

 

Named

executive officer

 

  Target number of  

shares at grant

      Value at  grant(a)      

 

Number of

    shares acquired    

on vesting

 

    Value realized    

on vesting

 

Michael Farrell

 

  48,905   $2,500,000   27,876       $2,359,146

 

Rob Douglas

 

  31,984   $1,635,000   18,231       $1,542,890

 

Jim Hollingshead

 

  13,987      $715,000     7,973          $674,755

 

David Pendarvis

 

  13,449      $688,000     7,666          $648,774

 

Brett Sandercock

 

  15,649      $800,000     8,920          $754,900

 

(a)

   The grant date fair value was computed under FASB ASC Topic 718.

 

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Terms of stock options and restricted  stock units 

Stock options. During fiscal year 2018, stock options were issued under our 2009 Plan to some of our named executive officers, because they have a choice of options or RSUs for the 50% of their award that is not contingent on TSR performance. The plan requires that the exercise price of options equal the fair market value on the grant date, as measured by the closing price of our common stock on the NYSE on that date. Stock options granted to named executive officers and certain other senior executives during the November annual grant process become exercisable one-third per year on November 11th of each year after the grant date, subject to the executive’s continued service with us. On a qualifying retirement, options become exercisable on a pro-rata basis based on the service period. Executives may exercise vested options until the earlier of: (1) expiration of the grant (generally seven years after the date of grant), or (2) one year after separation for any reason (except six months after death in the case of non-US participants, and, for grants made in fiscal year 2018, three years after a qualifying retirement).

The committee considers stock options performance-based compensation. The ultimate economic value received by an option recipient depends on our future stock price performance, and could be zero, if the stock price does not increase above the strike price. These features of stock options align our executives’ interests with stockholders’ interests.

Restricted stock units. During fiscal year 2018, RSUs were granted under our 2009 Plan to all of our named executive officers. The performance conditions require that RSUs are only earned when we meet threshold levels of profitability described in the table below, based on our actual adjusted performance compared to targeted levels of earnings for each of the three performance periods: (1) third fiscal quarter; (2) fourth fiscal quarter; and (3) the third and fourth fiscal quarters combined. One half of the RSUs granted may be earned based on the earnings for each of the third and fourth fiscal quarters. No more than 100% of the RSUs granted may be earned, and once the target is met for a performance period, all RSUs associated with that period are earned. If the target for a performance period is not met, none of the RSUs for that period are earned. However, if the cumulative target for both periods is achieved in either period or in the combined period, 100% of the RSUs granted are earned.

Once earned, the RSUs vest in one-third annual increments from the date of the grant, based on continued service with us, such that all earned awards will be vested three years after grant, which facilitates retention. On a qualifying retirement, RSUs vest on a pro-rata basis based on the service period. We do not pay dividends or dividend equivalents on any of our equity awards.

In August 2018, the committee determined that the performance condition on the November 2017 RSU grants to executive officers had been met, and 100% of the RSUs granted were earned, as shown in the table below. The earned RSUs remain subject to one-third annual vesting increments from the date of grant, based on continued service.

 

Performance component           Threshold          

    Approximate actual    

performance  

 

 

  Percentage payout  

of RSU award

for the metric

 

Fiscal year 2018 third quarter adjusted earnings

 

  $75,000,177   $168,884,097   100%

 

Fiscal year 2018 fourth quarter adjusted earnings

 

  $83,547,963   $176,320,168   100%

 

2018 third and fourth quarter adjusted earnings

 

  $158,548,140   $345,204,265   100%

 

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Equity compensation award policies 

The committee’s policy is to generally make its annual incentive award grants to named executive officers and non-executive management effective on or about the annual stockholders meeting date. However, it reserves the right to make exceptions and change the policy. In setting this policy the committee considered many factors, including the alignment of this date with the date equity grants are made to directors and our officers’ December 1 salary adjustment date. This enables management and the committee to combine the salary review process with the equity grant process for consistency and administrative convenience and to make awards only after performance in the previous year is known and current year budgets and goals are set. Also, the exercise price for options included in the equity grants equals the closing price of our common stock on the actual grant date, and the price on that date is an important input into the valuation of RSUs and PSUs. Given our traditional earnings release date in late October or early November, the stockholders meeting is likely to occur in an open window period, so that the stock price on the grant date is more likely to reflect more recent performance data. Finally, the stockholders meeting date is set and announced several months in advance, providing transparency to the process. Based on these reasons, the committee has set the annual stockholders meeting date as the target for our annual equity grants, although the actual grant date (that is, the date when the committee takes formal action to make the grants) may vary by a few days from the annual meeting date due to administrative or other factors.

The committee’s policy on granting incentive awards for promotions, new hire and other special situations is that the grants must be properly approved before, or on the grant date, and the grant date is to occur on the first business day of the month after the promotion, new hire or other special situation; unless the event occurs on the first business day of the month, in which case the grant may be made as of that day.

During fiscal year 2018, the committee continued its practice of delegating to a subcommittee comprised of our chief executive officer, our chief human resources officer, and our chief administrative officer and global general counsel, authority to approve the annual, promotional, and new hire equity award grants to employees who were not officers, so long as the aggregate total of those equity grants did not exceed committee-established limits, and were consistent with committee-determined standard terms for grants and other guidelines. During fiscal year 2018, under this authority, this subcommittee granted a total of 267,929 RSUs.

The committee believes that this subcommittee is best suited to determine the specific annual awards to be allocated to the individual employees below the officer level, given their familiarity with their performances and responsibilities. In addition, the delegation enhances our ability to attract, reward and retain talented employees by allowing management to extend binding employment offers and to act in other special situations quickly and flexibly. All equity grants to our executive officers are pre-approved by the committee.

 

Equity ownership guidelines 

We have equity share ownership guidelines for our executive officers to improve long-term alignment of stockholder and management interests. These guidelines were increased for our chief executive officer during fiscal year 2018, requiring him to achieve stock ownership levels in ResMed common stock, including unvested RSUs, of at least five times his annual base salary within five years. All other named executive officers are required to own at least one and one-half times their respective annual salaries within five years. If these guidelines are not met, then on vesting of RSUs or option exercise, the officer must retain shares equal to 50% of the after-tax value of shares acquired on the vesting or exercise until the officer’s guidelines are met. As of the record date, each of our named executive officers met their ownership guideline.

 

Change of control, termination, and  retirement arrangements 

Our named executive officers have limited contractual rights to receive severance payments if employment is terminated, as described below.

Double-trigger vesting acceleration of stock options and RSUs in connection with a change of control. In August 2017, the compensation committee adopted a new policy, providing that RSUs and stock options granted in and after fiscal year 2018 to executive officers will only accelerate on a double-trigger basis, that is, if their employment is terminated under specified circumstances within six months before or one year after a change of control. Earlier grants made to our executive officers in and before fiscal year 2017 provide for accelerated vesting of RSUs and stock options on a change of control on a single-trigger basis. These legacy agreements have not been modified, and will continue to apply until the grants fully vest or terminate. Our grant agreements also provide for accelerated vesting of RSUs or stock options on an officer’s death, or permanent disability. Our change in control agreements with our executive officers were revised effective January 1, 2018 to eliminate single-trigger acceleration rights and to provide double-trigger acceleration for our stock options and RSUs.

 

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Our form option agreement for named executive officers provides that if they terminate service with us for any reason, they forfeit options that were unvested at the time of termination. However, a terminated officer has until one year after the termination to exercise vested options. These post-termination exercise provisions are intended to facilitate financial planning after employment terminates and to ensure that the executive would be able to exercise options and sell the underlying shares when not in possession of material non-public information.

Performance-based stock units. Our form PSU agreement for executive officers provides that if we terminate the officer for “cause” or the officer terminates employment without “good reason” (as those terms are defined in our change of control agreements and summarized below in “Change of control agreements”), the PSUs are cancelled. If we terminate the officer other than for cause, or the officer terminates for good reason or—as to grants made in or after November 2017—for retirement, then the PSUs become earned and vested, on a prorated basis based on the truncated service period, and based on the TSR performance measured over that truncated performance period. Similarly, if a change of control occurs, the performance-based stock units are earned and vested as of the date of the change of control, with the number of units earned based on performance through the date of the change of control. In the event of death or permanent disability, 100% of the target units vest and are immediately distributed.

Change of control agreements. We have change of control agreements with each of our named executive officers and certain other members of our senior management team. Our agreements do not contain excise tax gross-up benefits, reflecting the committee’s view of best practice, and in response to views expressed by our stockholders. The agreements include instead a “best pay” limitation, which reduces the severance payments and benefits payable to the extent necessary so that no portion of any payments or benefits payable upon a change of control of our company would be subject to the excise tax under Section 280G of the US Internal Revenue Code if the reduction would result in the net amount payable to the employee being greater than the net amount received without the reduction.

During fiscal year 2018, the committee reviewed our change of control agreements, and revised them, effective as of January 1, 2018, to eliminate single trigger and to instead provide for double-trigger accelerated vesting for stock options and restricted stock units on a change of control. These agreements also provide for double-trigger severance payments with a multiplier (based on position, which for our chief executive officer is 2 times, and for other named executive officers is 1.5 times) of salary, short-term incentive and other benefits, to be made to our named executive officers if their employment is terminated under specified circumstances within six months before or one year after a change of control. A description of the material terms of our change of control agreements can be found in “Potential payments on termination or change of control.” The committee believes that these agreements continue to be needed to attract and retain senior level candidates in light of the relatively specialized nature of our offerings and the continued potential for merger and acquisition activity in the medical technology market sector. Also, the committee believes that the agreements assure appropriate motivation by senior management to evaluate potential transactions that may involve us.

Treatment of long-term incentives on retirement. In fiscal year 2018, the compensation committee adopted a retirement policy for equity grants made in or after November 2017. Under this policy, if an executive retires on or after age 60, with at least five years of continuous service with ResMed, then on retirement, the unvested portion of all equity grants will vest, on a pro-rata basis reflecting the portion of service periods completed. On a qualifying retirement the exercise period for vested stock options will be extended to the earlier of (1) 36 months, or (2) the original term. The committee believes these retirement provisions are fair and equitable, avoid different results for the amount earned by retiring and ongoing award holders, and are consistent with market practices. This treatment of equity on a qualifying retirement applies on the same basis to all similarly-situated employees.

This new retirement policy does not change the term of pre-existing equity grants. Earlier equity grants treated retirement as a voluntary termination, and generally, unvested grants would be forfeited. These legacy grants have not been modified, and will continue to apply until they are fully vested or terminate.

Insurance benefits. We provide our named executive officers with supplemental life and disability insurance benefits not generally available to all employees, although they are available to certain non-officers. The third-party insurance companies that underwrite these policies would be obligated to make payments to an executive if the executive terminated employment with us as a result of death or disability.

 

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Perquisites and other benefits

During fiscal year 2018, we made available the limited benefits described below to our named executive officers. The incremental cost to us for these benefits is described in the summary compensation table.

 

   

We provided comprehensive medical examinations to promote personal health and work/life balance. We believe this benefits us as well as the individuals through improved health, productivity, and longevity, and is consistent with ResMed’s mission as a health and wellness solutions innovator.

 

   

We participate in an aircraft travel program to provide for more efficient use of time and to provide a more confidential and secure travel environment in which to conduct company business. This program is used primarily for business purposes, but is available to our chief executive officer and our president and chief operating officer for personal use. Personal use by other named executive officers is on an exception basis, and requires our chief executive officer’s approval. The aggregate incremental cost to us for any personal use is reviewed at least annually by the compensation committee, and the committee has a guideline limiting the value of an individual’s annual personal use to $100,000. During fiscal year 2018, no individual exceeded this limit. Aircraft use by an employee, spouse or guest that does not constitute business use based on IRS guidance is treated as imputed income to the employee, based on the IRS standard industry fare level. We do not reimburse for taxes on the imputed income. Because of the increased productivity and security, we believe that these policies are appropriate to provide a comprehensive and competitive compensation package, particularly for our chief executive officer and our president and chief operating officer.

 

   

We provided benefits in connection with sales incentive award travel programs, including travel, hotel, meals, entertainment and other expenses of the executive officer and the officer’s spouse or guest. Our policy reflects the committee’s belief that our named executive officers’ attendance at these programs is a part of their general business duties and that this is not a perquisite. The programs are primarily targeted for sales personnel and other key management who regularly interact with our customers and to recognize their contributions to us. The committee believes that participation by executive officers in these programs enhances the overall sales incentive programs and requires their attendance, to the extent determined by the appropriate operating officer. We provide these benefits on the same general basis as we provide to non-executives who qualify to participate in the programs, including a tax gross-up. The tax gross-up is provided to all participants, not only to executive officers, and is provided so that they are not discouraged from participating by tax expenses that would otherwise be a personal expense attributable to the program.

 

   

We have provided certain of our named executive officers with relocation benefits in connection with their relocation for company purposes, consistent with our mobility policy. These benefits were specifically approved by the compensation committee and included reimbursement of certain expenses, and payments to offset retirement plan contributions foregone as a result of the relocation. These benefits did not include any extraordinary items such as home purchases, reimbursement for losses on the sale of real estate, or tax gross-ups. Continuing relocation benefits are periodically reviewed and approved by the compensation committee.

 

   

We also provided paid time-off, medical plans, dental plans, vision plans, tax-qualified defined contribution retirement plans (including matching contributions and government-mandated contributions), and disability and life insurance plans. Named executive officers are eligible to participate in these benefit programs on the same basis as other similarly-situated employees in their respective locations.

 

Deferred compensation plan 

We maintain the ResMed Inc. Deferred Compensation Plan, under which eligible US employees (including executive officers) selected to participate in the deferred compensation plan may elect to defer a portion of their base salary, short-term incentive, commissions, and other specified compensation. The amounts deferred under the plan represent an unsecured general obligation to make payments to the participant in the future. Amounts deferred under the plan are credited to accounts maintained under the plan for each participant and are credited with earnings, gains, or losses based on investment options chosen by the participant. These investment options are used for measurement purposes only and amounts deferred under the plan will not represent any actual investment made on the participant’s behalf. The amount that we are required to pay under the plan is equal to the elective deferrals made by the participant, as adjusted for these hypothetical gains or losses. The plan allows us to make discretionary contributions to participant accounts in amounts and at times that we determine from time to time in our discretion, including restoration matching contributions intended to restore the matching contributions lost under our 401(k) plan as a result of deferrals under the deferred compensation plan. The committee believes that the deferred compensation plan represents an additional retention tool for executive management, as well as an attractive vehicle in recruiting talent to our executive team.

 

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Tax considerations 

Section 162(m) of the US Internal Revenue Code limits the US federal income tax deductions of publicly-traded companies to the extent total compensation to its “covered employees” exceeds $1 million in any one year. Before the Tax Cuts and Jobs Act of 2017, covered employees included the chief executive officer and the next three most highly compensated executive officers serving at the end of the fiscal year (other than the chief financial officer), and performance-based compensation arrangements could qualify for an exemption from the deduction limit if they satisfied various requirements under section 162(m) of the Code. As part of the Tax Cuts and Jobs Act of 2017, effective for tax years beginning after December 31, 2017 (ResMed’s fiscal year 2019), the ability to rely on this “qualified performance-based compensation” exception was eliminated, and the definition of covered employees was expanded to generally include all named executive officers. Although we maintain compensation plans that were intended to permit the award of deductible compensation as qualified performance-based compensation under section 162(m) before the Tax Cuts and Jobs Act of 2017, subject to the Act’s transition relief rules, we may no longer take a deduction for any compensation paid to our covered employees in excess of $1 million.

Sections 280G and 4999 of the US Internal Revenue Code impose certain adverse tax consequences on excess parachute payments, which are compensatory payments or benefits that are contingent on a change of control and exceed in the aggregate three times the executive’s average taxable compensation paid by ResMed over the five years before the change in control (the “base amount”). If this “three times base amount” threshold is exceeded, then tax penalties apply to the total payments in excess of one times the base amount. Excess parachute payments are subject to a 20% excise tax that must be withheld from the payment, and our compensation deduction in respect of the excess parachute payments is disallowed. If we were to be subject to a change of control, certain amounts received by our executives (for example, amounts attributable to accelerated vesting of equity grants and certain severance payments) could be excess parachute payments. Our change of control agreements do not obligate us to provide tax gross-ups to an affected individual for any excise taxes due under the agreement. The agreements include instead a “best pay” limitation, which reduces the severance payments and benefits payable to the extent necessary so that no portion of any payments or benefits payable on a change of control would be subject to excise tax if the reduction would result in the net amount payable to the employee being greater than the net amount received without the reduction.

Section 409A of the US Internal Revenue Code requires programs that allow executives to defer a portion of their current income to meet certain requirements regarding risk of forfeiture and election and distribution timing (among other considerations). Section 409A of the US Internal Revenue Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities and penalty taxes and interest on their vested compensation under the plans. Accordingly, as a general matter, we intend to design and administer our compensation and benefit plans and arrangements for all of our employees and other service providers, including our named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A of the US Internal Revenue Code.

 

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EXECUTIVE COMPENSATION TABLES

 

 

 

Summary compensation table 

The following table sets forth summary information concerning the compensation awarded, paid to, or earned by each of our named executive officers for all services rendered in all capacities to us for the fiscal years ended June 30, 2018, 2017, and 2016. We compensate our executive officers in their residences’ local currency. The compensation amounts for named executive officers based outside of the US are presented in US dollars based on an average annual conversion rate for the relevant fiscal years.

 

Name and principal

position

 

    Year       Salary(a)     

Option

  awards(c)  

 

 

Stock

  awards(d)  

 

 

 

Non-equity

incentive plan

compensation(e)

 

 

All other

compensation(f)

 

        Total      

 

Michael Farrell

Chief executive officer

 

 

2018

  $934,154   $1,700,000       $5,100,000       $1,247,188           $100,862           $9,082,204
  2017   $890,160   $1,500,000       $4,500,000       $1,038,941           $204,295           $8,133,396
 

2016

 

 

$845,000

 

     

$5,500,000    

 

 

$1,079,716        

 

 

$73,646        

 

 

$7,498,362

 

 

Rob Douglas

President and chief

operating officer

 

  2018   $813,385   $1,125,000       $3,375,000       $835,346           $98,824           $6,247,555
  2017   $746,345       $4,000,000       $670,069           $357,286           $5,773,700
 

2016

 

 

$694,606

 

 

$1,831,200    

 

 

$1,831,200    

 

 

$682,728        

 

 

$164,947        

 

 

$5,204,681

 

 

Jim Hollingshead

President – sleep

business

 

  2018   $620,000       $2,000,000       $478,707           $73,805           $3,172,512
  2017   $483,631       $2,600,000       $315,206           $70,274           $3,469,111
 

2016

 

 

$454,167

 

 

$382,525    

 

 

$1,147,575    

 

 

$360,212        

 

 

$69,753        

 

 

$2,414,232

 

 

David Pendarvis

  2018   $533,710   $425,000       $1,275,000       $390,861           $96,194           $2,720,765
Chief administrative   2017   $520,864   $408,047       $1,591,953       $350,724           $63,299           $2,934,887

officer, global general

counsel and secretary

 

  2016   $507,598   $367,813       $1,103,437       $374,189           $58,640           $2,411,677

 

Brett Sandercock

Chief financial officer

 

  2018     $454,853(b)       $2,000,000       $355,317           $51,220           $2,861,390
  2017   $442,081   $437,500       $1,312,500       $309,411           $46,502           $2,547,994
 

2016

 

 

$410,640

 

     

$1,712,000    

 

 

$302,713        

 

 

$43,490        

 

 

$2,468,843

 

 

(a)

  

Includes salary deferred under defined contribution retirement plans such as our US 401(k) plan, US deferred compensation plan, and Australia superannuation plan. Had these amounts not been deferred, they would have been payable to the officer in cash during the year.

(b)

  

We pay Mr. Sandercock’s base salary in Australian dollars. It is reported here in US dollars based on the fiscal year average annual exchange rates. The average annual exchange rate for fiscal year 2018 was approximately AUD:USD of 1 to 0.75. Earlier years are reported using the rates disclosed in prior years’ proxy statements.

(c)

  

Option awards represent stock options issued under our 2009 Plan, valued at the grant date computed under FASB ASC Topic 718, as described in more detail in the footnotes to the “Grants of plan-based awards” table.

(d)

  

Stock awards include RSUs and PSUs issued under our 2009 Plan, and are shown at the grant date fair value, as computed under FASB ASC Topic 718. See the footnotes to the “Grants of plan-based awards” table for further information on the valuation of stock awards. Since the PSUs are earned based solely on our TSR, they do not have performance conditions as defined under ASC 718, and have no maximum grant date fair values that differ from the grant date fair values presented in the table above. The RSU maximum grant date value is equal to the target value.

(e)

  

Represents actual payouts under our performance-based cash short-term incentive programs.

 

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(f)

   The amounts shown consist of our incremental cost for certain specified perquisites for our named executive officers, as follows:

 

Named

executive

officer

 

Medical

exams

 

Personal use

of company

aircraft(i)

 

Sales

incentive

award(ii)

 

 

Sales

incentive

award tax

gross-up(ii)

 

 

Relocation

compensation(iii)

 

Other

compensation(iv)

 

Michael Farrell

 

  $0         $31,889         $25,153         $8,474         $0           $35,346         

 

Rob Douglas

 

  $0         $5,569         $22,485         $8,474         $35,796           $26,500         

 

Jim Hollingshead

 

  $0         $5,569         $21,794         $8,474         $0           $37,968         

 

David Pendarvis

 

  $2,700         $5,569         $38,583         $11,194         $8,640           $29,508         

 

Brett Sandercock

 

  $800         $0         $0         $0         $0           $50,420         

 

(i)    The calculation of the aggregate incremental cost for personal use of company aircraft includes the variable costs incurred as a result of personal flight activity, which includes fuel, trip related maintenance, universal weather monitoring, on-board catering, landing and ramp fees, excise taxes, and all other miscellaneous costs. No incremental cost for personal use of the aircraft is attributed to a named executive officer when the aircraft was previously scheduled to the destination for a business purpose. Since our aircraft are primarily used for business purposes, the aggregate incremental cost excludes fixed costs, such as the monthly management fee and amortization, because such costs would have been incurred regardless of the personal use.
(ii)   

We provided certain of our named executive officers with benefits in connection with a sales incentive award travel program which is available to sales, marketing, and other non-executive employees. Amounts represent the cost of participation by executive officers in that program. The cost includes the incremental cost to us of travel, hotel, meals, entertainment and other expenses of the executive officer and the officer’s spouse or guest. The cost shown as gross-up represents the amounts we reimburse the officer for the tax associated with income imputed to the officer in connection with the program. We provide tax gross ups to all employees who participate in this program. Attendance is part of our officers’ management duty and enhances the effectiveness of the sales incentive program.

(iii)   

These relocation compensation amounts represent tax advisory consulting fees we paid in connection with mobility assignments.

(iv)   

These amounts include matching contributions we made under our US 401(k) plan and deferred compensation plan, government-mandated contributions we made under the ResMed Limited superannuation plan (a defined contribution retirement program for our Australia-based employees), and executive long-term disability and insurance premiums paid by us on behalf of our named executive officers. Those amounts for fiscal year 2018 were:

 

 

Named

executive officer

 

 

Company contributions to   

  deferred compensation plan(a)   

 

Company contributions to US   

  401(k) and AU superannuation(b)   

    Insurance premiums(c)   

 

Michael Farrell

 

        $0         $9,931   $25,415

 

Rob Douglas

 

        $0               $0   $26,500

 

Jim Hollingshead

 

        $0       $11,727   $26,241

 

David Pendarvis

 

  $2,010         $8,856   $18,642

 

Brett Sandercock

 

         $0       $43,211     $7,209

 

(a)

   Represents contributions intended to restore the matching contributions lost under our 401(k) plan as a result of deferrals under the deferred compensation plan. For a description of the company contributions made to the Amended and Restated ResMed Inc. Deferred Compensation Plan, see “Deferred Compensation Plan.”

(b)

  

We contribute to the US 401(k) plan for each of our participating named executive officers on the same terms that apply to all other eligible employees. For fiscal year 2018, we made a discretionary matching contribution to the plan in an amount up to 4% of eligible participants’ base salary, normal short-term incentive and commissions subject to US Internal Revenue Code limits on the maximum amount of eligible compensation. In fiscal year 2018, we made minor corrective 401(k) matching contributions. We also contributed to the ResMed Limited superannuation plan in Australia at the government-mandated rate of 9.5%, based on total base salary, on the same terms that apply to all other eligible employees.

(c)

   We pay the cost of an executive long-term disability policy that provides additional benefits for US-based executives (including US-based named executive officers) not generally available to other employees. Amounts shown represent premiums paid for both generally-available and additional insurance.

 

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Grants of plan-based  awards 

The following table summarizes all grants of plan-based awards made to our named executive officers for the fiscal year ended June 30, 2018. In the following table, PSU refers to our long-term performance-based stock units, RSU refers to restricted stock units, and STI refers to performance-based short-term cash incentives.

 

                 

 

Estimated future payouts

under non-equity incentive plan

awards(a)

  

 

Estimated future payouts

under equity incentive

plan awards (b)(c)(d)

Named

executive

officer

  

Grant  

date  

  

Grant

type

   Threshold    Target    Max    Threshold    Target    Max   

 

All other

option

awards:

number of

securities

underlying

options(e)

  

Exercise

price of

option

awards

  ($/share)  

  

 

Grant

date fair

value of

stock and

option

awards(f)(g)

 

Michael

Farrell

  

 

11/16/2017

  

 

PSU

            22,310    44,619    100,393          $3,400,000  
  

 

11/16/2017

   RSU             10,336    20,671    20,671          $1,700,000  
  

 

11/16/2017

   Options                      102,781    $84.98    $1,700,000  
  

 

8/16/2017

 

   STI    $607,200    $1,214,400    $2,428,800                              

Rob

Douglas

  

 

11/16/2017

   PSU             14,764    29,528    66,438          $2,250,000  
  

 

11/16/2017

   RSU             6,840    13,679    13,679          $1,125,000  
  

 

11/16/2017

   Options                      68,017    $84.98    $1,125,000  
  

 

8/16/2017

 

   STI    $406,693    $813,385    $1,626,770                              

Jim

Hollingshead        

  

 

11/16/2017

   PSU             6,562    13,123    29,527          $1,000,000  
  

 

11/16/2017

   RSU             6,080    12,160    12,160          $1,000,000  
  

 

8/16/2017

 

   STI    $248,000    $496,000    $992,000                              

David

Pendarvis

  

 

11/16/2017

   PSU             5,578    11,155    25,099          $850,000   
  

 

11/16/2017

   RSU             2,584    5,168    5,168          $425,000   
  

 

11/16/2017

   Options                      25,695    $84.98    $425,000   
  

 

8/16/2017

 

   STI    $200,142    $400,283    $800,566                              

Brett

Sandercock

  

 

11/16/2017

   PSU             6,562    13,123    29,527          $1,000,000  
  

 

11/16/2017

   RSU             6,080    12,160    12,160          $1,000,000  
  

 

8/16/2017

 

  

STI

 

   $181,941

 

   $363,882

 

   $727,764

 

                             

 

(a)

   Represents potential payouts under our annual performance-based cash short-term incentive program for fiscal year 2018. Short-term incentive amounts actually earned for fiscal year 2018 are reflected in the Summary Compensation Table.

(b)

   Our named executive officers may choose to receive half the value of their annual equity award as 100% options, 100% performance-based RSUs, or 50% of each; with the final number of options or RSUs based on their value determined under FASB ASC Topic 718.

(c)

  

Restricted stock unit awards granted in fiscal year 2018 are earned based on performance targets for the third and fourth fiscal quarters of fiscal year 2018. Threshold amounts shown are 50% of the RSUs granted, assuming that only one of the 2018 third quarter or fourth quarter operating profit target is achieved. The target and maximum amounts shown are 100% of the RSUs granted assuming that both the third quarter and fourth quarter targets or the aggregate third and fourth quarter targets are achieved. Based on actual fiscal year 2018 performance, 100% of the units were earned. The earned units will vest annually over three years following the date of grant, subject to the executive’s continued service.

(d)

  

Performance stock unit awards granted in fiscal year 2018 are earned based on our absolute TSR performance over a four-year period starting on the grant date (with an opportunity for an early payout after three years). Threshold amounts shown are 50% of the PSUs granted, target amounts are 100% of the PSUs granted, and maximum amounts are 225% of the PSUs granted. No PSUs are earned for performance below threshold.

(e)

  

Stock options granted in fiscal year 2018 have an exercise price equal to the NYSE closing price of our common stock on the grant date; one-third are exercisable on November 11th of each of the three years following the grant date, subject to the executive’s continued service.

 

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(f)

  

The dollar value of options represents the grant date fair value based on the Black-Scholes model of option valuation, computed in accordance with FASB ASC Topic 718. The actual value, if any, an executive may realize depends on the excess of the stock price over the exercise price on the date the option is exercised. There is no assurance that an executive will realize a value at or near the value the Black-Scholes model estimates. The Black-Scholes model uses the following assumptions:

 

     

 

November 16, 2017 

   

Market price of stock

 

  

$84.98

 

   

Exercise price of option

 

  

$84.98

 

   

Expected stock volatility

 

  

23.0%

 

   

Risk-free interest rate

 

  

2.08%

 

   

Expected life

 

  

4.9     

 

   

Dividend yield

 

  

1.65%

 

 

(g)

  

The dollar value of RSUs represents the grant date fair value, based on the probable outcome of the performance conditions and the closing value of $84.98 for RSUs granted on November 16, 2017. The probable outcome of the performance condition was 100% and the maximum payout is equal to the target payout.

 

The dollar value for PSUs represents the grant date fair value computed under FASB ASC Topic 718, determined as of the grant date using the Monte-Carlo simulation method, which uses multiple input variables to estimate the probability of meeting the TSR objectives, which is a market condition under FASB ASC Topic 718. For PSUs granted on November 16, 2017, assumes $84.98 share price and estimated Monte Carlo valuation of 89.67% ($76.20 per PSU), rounded to the nearest share.

 

Outstanding equity awards at fiscal year  end 

The following table summarizes outstanding equity awards held by our named executive officers at June 30, 2018.

 

     Option awards  

 

Stock awards

 

Named

executive

officer

 

Number of

securities

underlying

unexercised

options

    exercisable    

 

Number of

securities

underlying

unexercised

options

  unexercisable(a)  

 

Option

    exercise    

price

 

Option 

    expiration     

date 

 

      Number of      

shares or

units of

stock that

have not

vested(b)

 

    Market value    

of shares or

units of

stock that

have not

vested(c)

 

Equity

incentive plan

  awards: number  

of unearned

shares or units

of stock that

have not vested

 

 

Equity

 incentive plan 

awards:

market value

of unearned

shares or

units of stock

that have not

vested(c)

 

Michael

Farrell

    102,781        $84.98   11/16/2024   34,453   $3,568,642     20,671(d)       $2,141,102    
  46,555       93,110        $57.76   11/16/2023       44,619(e)       $4,621,636    
  93,110         $43.63   03/01/2020   14,746   $1,527,391     117,970(f)       $12,219,333    
                  12,945   $1,340,843     103,558(g)       $10,726,538    

Rob

Douglas

    68,017        $84.98   11/16/2024   24,176   $2,504,150     13,679(d)       $1,416,871    
  100,065       50,033        $58.24   11/19/2022       29,528(e)       $3,058,510    
  46,555         $43.63   03/01/2020   9,831   $1,018,295     78,648(f)       $8,146,360    
                  8,620   $892,860     68,958(i)       $7,142,670    

Jim

Hollingshead        

  20,903       10,452        $58.24   11/19/2022   16,749   $1,734,861     12,160(d)       $1,259,533    
  9,168         $43.63   03/01/2020       13,123(e)       $1,359,280    
          3,932     31,458(f)       $3,258,420    
          3,602     28,809(g)       $2,984,036    
                  1,921       15,370(h)       $1,592,025    

David

Pendarvis

    25,695        $84.98   11/16/2024   7,980   $826,568     5,168(d)       $535,301    
  2,327       4,655        $71.89   06/01/2024       11,155(e)       $1,155,435    
  12,414       24,830        $57.76   11/16/2023   3,932   $407,277     31,458(f)       $3,258,420    
  20,099       10,050        $58.24   11/19/2022   3,463   $358,698     27,702(g)       $2,869,373    
  30,569         $52.02   11/19/2021   780   $80,792     6,242(i)       $646,546    
  22,283         $51.25   11/13/2020          
  14,050           $38.98   11/15/2019                

Brett

Sandercock

  13,578       27,158        $57.76   11/16/2023   10,369   $1,074,021     12,160(d)       $1,259,533    
              13,123(e)       $1,359,280    
          4,301   $445,498     34,408(f)       $3,563,981    
                  4,030   $417,427     32,233(g)       $3,338,694    

 

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(a)   The table below shows the vesting schedule for the listed unexercisable options awards, by their expiration dates.

 

 

Expiration date

 

   Grant date    Remaining vesting schedule

 

November 16, 2024

 

   November 16, 2017    Three equal installments on November 11 of 2018, 2019 and 2020

 

June 1, 2024

 

   June 1, 2017    Two equal installments on June 1 of 2019 and 2020

 

November 16, 2023

 

   November 16, 2016    Two equal installments on November 11 of 2018 and 2019

 

November 19, 2022

 

   November 19, 2015    One installment on November 11 of 2018

 

(b)

  The number shows outstanding unvested, but earned, RSUs and PSUs. Earned RSUs vest in three annual equal increments on November 11 of each year following the grant date. Banked PSUs based on certified total shareholder return achievement are considered earned and vest on the third anniversary of the November grant date. The table below shows the vesting schedules for the remaining RSUs and PSUs:

 

Named executive

officer

 

RSUs vesting

 during fiscal year 2019 

 

RSUs vesting

 during fiscal year 2020 

 

 

PSU vesting of banked
TSR performance units

 during fiscal year 2019 

 

 

PSU vesting of banked
TSR performance units

 during fiscal year 2020 

 

Michael Farrell

 

  25,387   9,066   12,945   14,746

 

Rob Douglas

 

  12,088   12,088   8,620   9,831

 

Jim Hollingshead (i)

 

  9,508   7,241   3,602   5,853

 

David Pendarvis (ii)

 

  5,082   2,898   3,463   4,712

 

Brett Sandercock

 

  7,724   2,645   4,030   4,301

 

(i) Includes special grant issued February 16, 2017, with RSUs that vest in two equal installments on February 16 of 2019 and 2020, and certified banked PSUs to vest in 2019 and 2020.
(ii) Includes special grant issued June 1, 2017, with RSUs that vest in two equal installments on June 1 of 2019 and 2020, and certified banked PSUs to vest in 2019 and 2020.

 

(c)

  The market value is calculated by multiplying the number of RSUs and PSUs by the closing price of our common stock ($103.58) on the NYSE at June 30, 2018.

(d)

 

Represents RSUs that were granted to our executive officers in November 2017 under our incentive plan and are earned based on earnings performance targets for the third and fourth fiscal quarters of fiscal year 2018. On June 30, 2018, these shares were unearned because the committee had not yet determined whether any target had been achieved. The number of RSUs and market values shown in these columns represent 100% of the RSUs granted, based on the assumption that the targets would be achieved. The committee determined in August 2018 that the targets were achieved. In future years these units will be shown as earned, but unvested, until they vest or are forfeited.

(e)

 

Represents fiscal year 2018 performance-based stock units granted in November 2017, that are eligible for vesting following the end of a four-year performance period (beginning on the grant date), subject to acceleration, depending on our absolute TSR performance for the four-year period. In accordance with SEC rules, PSUs granted November 2017 are listed at 100% of the target stock units granted, representing the number of stock units that would be earned with target performance. However, our absolute TSR performance over the interim performance period from November 2017 through June 30, 2018, would be between threshold and target, and 70% of target units would be earned.

(f)

 

Represents fiscal year 2017 unearned PSUs granted in November 2016 that are eligible for vesting November 17, 2020, subject to possible acceleration, depending on our absolute TSR performance for the period. In accordance with SEC guidance, PSUs granted November 2016 are listed at 225% of the target stock units granted, representing the number of stock units that would be earned with maximum performance, as our absolute TSR performance over the interim performance period from November 2016 through June 30, 2018, was in excess of maximum performance.

(g)

 

Represents PSUs granted November 2015 that are eligible for vesting November 18, 2019, subject to acceleration, depending on our absolute TSR performance over the period. In accordance with SEC guidance, amounts are listed at 225% of the target stock units granted, representing the number of stock units that would be earned with maximum performance, as our absolute TSR performance over the interim performance period from November 2015 through June 30, 2018, was in excess of maximum performance.

(h)

 

Represents PSUs granted February 2017 that are eligible for vesting February 15, 2021, subject to acceleration, depending on our absolute TSR performance for the period. In accordance with SEC guidance, amounts are listed at 225% of the target stock units granted, representing the number of stock units that would be earned at maximum performance, as our absolute TSR performance over the interim performance period from February 2017 or June 2017, as applicable, through June 30, 2018, was between target and maximum performance.

(i)

 

Represents PSUs granted June 2017 that are eligible for vesting May 31, 2021, subject to acceleration, depending on our absolute TSR performance for the period. In accordance with SEC guidance, amounts are listed at 225% of the target stock units granted, representing the number of stock units that would be earned at maximum performance, as our absolute TSR performance over the interim performance period from June 2017 through June 30, 2018, was between target and maximum performance.

 

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Option exercises and stock  vested

The following table summarizes the shares each of our named executive officers acquired during the fiscal year ended June 30, 2018, by exercising options or by vesting in restricted stock units. Information on RSUs earned based on fiscal year 2018 performance, but not vested as of June 30, 2018, is in the outstanding equity awards table above (see footnote (d) to the “Outstanding equity awards at fiscal year end” table, above).

 

    

 

Option Awards

 

 

 

Stock Awards

 

Named

executive officer

 

Number of

shares

        acquired on        

exercise

 

      Market value on      

exercise(a)

 

Number of

      shares acquired      

upon vesting

 

Value realized

    upon vesting(b)    

 

Michael Farrell

 

  3,300                 $165,693               69,908                   $5,850,324        

 

Rob Douglas

 

  0                 $0               41,204                   $3,451,027        

 

Jim Hollingshead

 

  12,284                 $462,465               22,241                   $1,885,698        

 

David Pendarvis

 

  55,357                 $2,826,193               15,035                   $1,270,703        

 

Brett Sandercock

 

  0                 $0               21,969                   $1,838,750        

 

(a)

  Represents the aggregate of the market price at exercise, less the exercise price, for each share exercised.

(b)

  Represents the value deemed realized based on the closing price of our common stock on the date of vesting multiplied by the number of shares vested.

 

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 Nonqualified deferred  compensation

We maintain the ResMed Inc. Deferred Compensation Plan. Our deferred compensation plan allows participants to defer receiving some of their eligible compensation to a future date, with an opportunity to earn tax-deferred returns on the deferrals. The following table sets forth summary information regarding aggregate contributions to, and account balances under, our deferred compensation plan by our named executive officers for and as of the fiscal year ended June 30, 2018.

 

Named

executive

officer

  

Executive    

contributions    

in fiscal    

year 2018(a)    

    

Company    

contributions    

in fiscal    

year 2018(b)    

    

Aggregate    

earnings    

in fiscal    

year 2018(c)    

    

Aggregate    

withdrawals/    

distributions    

  

 

Aggregate

balance at

end of fiscal

year 2018(d)

         

 

Michael Farrell

 

     $0              $0                $0            $0        $0           

 

Rob Douglas

 

     $417,673              $0                $20,405            $0        $773,113           

 

Jim Hollingshead

 

     $589,928              $0                $99,789            $0        $1,999,412           

 

David Pendarvis

 

     $693,216              $2,010                $335,833            $0        $5,262,470           

 

Brett Sandercock

 

     $0              $0                $0            $0        $0           

 

(a)

   Represents amounts that the named executive officers elected to defer in fiscal 2018. These amounts represent compensation earned by the named executive officers in fiscal 2018, and are also reported in the appropriate columns in the “Summary Compensation Table” above.

(b)

   Represents amounts credited in fiscal 2018 as company contributions to the accounts of the named executive officer. These amounts are also reported in the “Summary Compensation Table” above under the “All Other Compensation” column.

(c)

   Represents net amounts credited to the named executive officers’ accounts as a result of performance of the investment vehicles in which their accounts were deemed invested, as more fully described in the narrative disclosure below. These amounts do not represent above-market earnings, and thus are not reported in the “Summary Compensation Table.”

(d)

   Aggregate balance as of June 30, 2018 includes all contributions from earned income through fiscal 2018 and investment income reported by June 30, 2018. The amounts that were previously reported as compensation for participating named executive officers in the Summary Compensation Table in the previous year should have been reported as follows: Mr. Douglas $335,035; Mr. Hollingshead $1,309,695; and Mr. Pendarvis $4,233,421.

General. We designed our deferred compensation plan to attract and retain key employees by providing participants an opportunity to defer receipt of a portion of their salary, short-term incentive cash payments, and commissions. The plan is an unfunded plan for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974. Deferred amounts under the plan are our general unsecured obligations and are subject to our ongoing financial solvency. Employees who are part of a select group of management or highly compensated employees are eligible to participate in the deferred compensation plan.

Contributions. Participants may elect to defer up to 75% of each of base salary, short-term incentive cash payments, and commissions for the plan year. The plan permits us to make discretionary contributions from time to time, including restoration matching contributions intended to restore any matching contributions lost under our 401(k) plan as a result of deferrals under the deferred compensation plan.

Distributions. Participants may elect to take distributions on: (1) participant’s separation from service with us; (2) a specified date; (3) participant’s permanent disability; (4) participant’s death; (5) change of control of ResMed; or (6) unforeseeable emergency. Participants will receive a lump sum payment of those benefits, or if elected by the participant, in installments. Notwithstanding other elections, all distributions due to death or permanent disability will be payable in a single lump sum.

Vesting. Participants are at all times 100% vested in amounts they defer. Participants are vested in discretionary contributions according to vesting schedules established by the plan’s administrative committee; however, discretionary contributions will become 100% vested on the earliest to occur of: (1) the participant’s death; (2) the participant’s permanent disability; or (3) a change of control of ResMed.

 

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Investment options. Earnings on amounts contributed to our deferred compensation plan are based on participant selections among the investment options determined by the plan’s administrative committee. This committee has the sole discretion to discontinue, substitute, or add investment options at any time. Participants can select from among these investment options for purposes of determining the earnings or losses that we will credit to their plan accounts, but they do not have an ownership interest in the investment options they select. No “above market” crediting rates are offered under the deferred compensation plan. Invested amounts may be transferred among available plan investment options. The investment options under the deferred compensation plan and their annual rates of return for fiscal year 2018 are in the table below:

 

Name of investment option    Rate of return through June 30, 2018

 

MFS VIT Total Return Bond

 

  

 

-0.56%

 

 

DFA VIT Inflation-Protection Securities Instl

 

  

 

1.72%

 

 

MFS VIT Value Svc

 

  

 

3.76%

 

 

American Funds IS Growth 2

 

  

 

22.51%

 

 

Great West T. Rowe Price Mid Cap Growth

 

  

 

14.05%

 

 

Vanguard VIF Small Company Growth Inv

 

  

21.46%

 

 

 

American Funds IS International 2

 

  

 

11.30%

 

 

Dreyfus Stock Index Initial

 

  

 

14.08%

 

 

American Century VP Mid Cap Value I

 

  

 

6.47%

 

 

Great West MFS International Value Initial

 

  

 

3.69%

 

 

Delaware VIP Small Cap Value Series Svc (a)

 

  

 

10.36%

 

 

  

(a)

  Fund replaced Putnam VT Small Cap Value effective October 31, 2017.

 

Potential payments on termination or change  of control 

Change of control agreements. We have entered into agreements with each of our named executive officers and certain other members of senior management (a total of 21 currently employed persons as of September 17, 2018), that provide certain change of control payments and benefits. Each of the agreements with our executive officers was reviewed and updated effective as of January 1, 2018, to eliminate single-trigger equity acceleration and replace it with double-trigger equity acceleration in the event of a change of control. In addition, the definition of good reason was revised and the term of the agreement was recommenced for three years, with automatic three-year renewal terms, as of January 1, 2018.

If at any time during the period that starts six months before and ends one year after the effective date of a “change of control,” an executive terminates employment under certain conditions described below, then the executive will be entitled to receive certain compensation and benefits from us. The conditions that entitle an executive to additional compensation are:

 

   

the executive voluntarily terminates his employment for “good reason” (as defined in the agreement and summarized below); or

 

   

we terminate the executive’s employment other than for “cause” (as defined in the agreement and summarized below); or

 

   

we terminate the executive’s employment other than for “cause” before the change of control, and the termination is at the request of the successor entity or is otherwise in anticipation of the change of control.

 

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In the event of a qualifying termination, the executive will be entitled to compensation and benefits, including the following:

 

   

the pro-rata portion of short-term incentive amounts earned through the date of termination;

 

   

a severance payment equal to two times (in the case of our chief executive officer), or one and one-half times (in the cases of the other named executive officers), the sum of the executive’s:

 

  ¡  

highest annual rate of base salary paid to the executive during the three-year period ending on the date the executive is terminated (the “termination base salary”); plus

 

  ¡  

the higher of (1) the highest actual short-term incentive amounts received by the executive during the past three years before the year of termination; or (2) a specified percentage of the termination base salary (130% in the case of our chief executive officer, and from 80% to 100% in the case of our other named executive officers); plus

 

  ¡  

the annual amount we would be required to contribute on the executive’s behalf under any pension, 401(k), deferred compensation, and other retirement plans based on the executive’s termination base salary.

 

   

the executive will become fully vested in accrued benefits under all pension, 401(k), deferred compensation, and any other retirement plans maintained by us;

 

   

all of the executive’s unvested stock options, and shares of restricted stock, RSUs, or performance units will vest in full, except that performance units earned based on our TSR are earned based on actual performance based on a truncated performance period as of the termination date, as described below;

 

   

we will provide medical and dental health benefits for two years (for our chief executive officer) or one and one-half years (for the other named executive officers) following the termination date; and

 

   

the agreement has a “best pay” provision, so that severance payments will be reduced to the extent necessary so that no portion of any payments payable upon a change of control would be subject to the excise tax under Section 280G of the Internal Revenue Code, if the reduction would result in the net amount payable to the employee being greater than the net amount received without the reduction.

All payments under the change of control agreements are designed to be paid in lump sum, subject to certain restrictions set forth in US Internal Revenue Code section 409A.

Throughout the change of control payout period (two years for our chief executive officer, and one and one-half years for the other named executive officers), the executive will be obligated not to induce any person in our employment to terminate employment or accept employment with anyone other than us or, subject to certain limited exceptions, engage in any business or activity or render any services or provide any advice to any person, activity, business or entity that directly or indirectly competes in any material manner with us or meaningfully support any person, business, entity or activity or initiate or further that business or activity. The restriction on post-termination employment will not apply to executives residing in California, to the extent the restriction is not consistent with California law. In addition, as a condition to payment and providing any benefits under the agreements, the executive must deliver a general release of claims in favor of us.

The agreements’ initial terms expire on the effective date’s third anniversary. Unless either party gives notice of its intention not to renew, the term will be automatically extended for successive three-year periods. Messrs. Douglas, Farrell, Hollingshead, and Sandercock’s current agreements all expire January 1, 2021. Mr. Pendarvis’ expires August 16, 2021.

“Cause” is generally defined as the executive’s (a) conviction or plea of guilty or nolo contendere of a misdemeanor involving moral turpitude, dishonesty or a breach of trust; (b) commission of any act of theft, fraud, embezzlement or misappropriation against us; (c) failure to devote substantially all of the executive’s business time to our business affairs or material breach of the terms of any employment-related agreement; (d) failure to comply with any corporate policies that results or is likely to result in substantial injury, financial or otherwise, to us or our reputation; (e) unauthorized disclosure or use of our co