During 2018, Ms. Goolsby and Messrs. Biegler, Keiser and Whiting served on our compensation committee. No member of our compensation committee was at any time during 2018 or at any other time an officer or employee of ours, and no member had any relationship with us requiring disclosure in the “Related Person Transactions” section of this proxy

statement. None of our executive officers has served on the board or compensation committee of any other entity that has or had one or more executive officers who served as a member of our board or compensation committee during 2018.

Periodically our non-management directors meet without management in connection with our quarterly board meetings. Accordingly, such directors met four times in 2018. At these meetings, the non-management directors reviewed strategic issues for consideration by our board, including future agendas, the flow of information to directors, management progression and succession, and our corporate governance guidelines. The non-management directors have determined that our chairman will preside at such meetings. The chairman is generally responsible for advising our CEO of decisions reached and suggestions made at these sessions. If our non-management directors include a director

who is not an independent director, our Board of Directors’ Guidelines requires that at least one of the scheduled executive sessions include only independent directors. Presently, all of our non-management directors are independent.

Stockholders and interested parties may communicate with our chairman or non-management directors as a group by utilizing the communication process identified in the “Interested Party and Stockholder Communication with our Board” section of this proxy statement.

Our policies and practices reflect corporate governance initiatives that are compliant with the NYSE listing standards and the corporate governance requirements of the Sarbanes-Oxley Act of 2002. We maintain a corporate governance section on our website which includes key information about our corporate governance initiatives including our Board of Directors’ Guidelines, charters for our board committees, our Code of Business Conduct and Ethics (applicable to all of our employees, officers and directors) and our Financial Code of Professional Conduct. The corporate governance section can be found on our website at www.capstead.com by clicking “Investor Relations” and “Governance Documents.”

Each of our directors should, to the best of his or her ability, perform in good faith the duties of a director and committee member in a manner he or she believes to be in our best interests with the care an ordinarily prudent person in a like position would use under similar circumstances. This duty of care includes the obligation to make, or cause to be made, an inquiry when the circumstances would alert a reasonable director to the need thereof. Our directors are expected to attend, in person or by telephone, all meetings of our board and committees on which they serve, as well as attend in person or by telephone our annual meeting of stockholders.

Our governance & nomination committee considers and makes recommendations to our board concerning candidates for election and the appropriate size of our board. In considering incumbent directors, the committee reviews the directors’ overall service during their terms, including the number of meetings attended, level of participation and quality of performance. Other considerations include the directors’ level of ownership of our equity securities and, when applicable, the nature of and time involved in the directors’ service on other boards. The committee reviews the completed qualification questionnaires submitted by incumbent directors (as previously described in the “Board Member Independence” section of this proxy statement) prior to making its recommendation to our board regarding the slate of directors for election at the following year’s annual meeting of stockholders. Additionally, the board concluded that all current directors continue to possess the talent, knowledge and experience relevant to our business deemed necessary to stand for re-election to our board.

 

In considering candidates to fill new positions created by expansion and/or vacancies that occur because of resignation, retirement or any other reason, the committee uses its and our management’s network of contacts to compile a list of potential candidates. The committee may also engage, if it deems appropriate, a professional search firm. Candidates are selected on the basis of talent, knowledge and experience relevant to our business without

regard to race, religion, gender or national origin as described in our Board of Directors’ Guidelines. Accordingly, our board does not consider diversity in identifying nominees for director in the sense that it is agnostic as to a potential nominee’s characteristics in this regard and does not have any diversity goals or guidelines relative to the overall make-up of our board. Candidates should possess fundamental qualities of intelligence, honesty, perceptiveness, good judgment, maturity, high ethics and standards, integrity, fairness and responsibility. Each candidate should also have a genuine interest in Capstead, recognize that he or she is accountable to our stockholders and have a background that demonstrates an understanding of business and financial affairs, the complexities of a large business organization and the related capital markets in which the Company operates.

No person shall be eligible to serve as a director who has been convicted of a felony criminal offense or any criminal offense involving moral turpitude, dishonesty or a breach of trust. The committee will consider candidates recommended by stockholders provided stockholders follow the procedures set forth in the “Stockholder Procedures for Director Candidate Recommendations” section of this proxy statement. The committee evaluates a candidate using the criteria set forth above regardless of who nominated the candidate.

 

Our Board of Directors’ Guidelines prohibit our directors from serving on more than four boards of other public companies and recommends its audit committee members serve on audit committees of no more than two other public

companies. In addition, our CEO’s service is limited to two other public company boards. None of our directors presently serve on other public company boards.

A nominee for director in an uncontested election shall be elected to our board if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election. In the case of a contested election, directors shall be elected by a plurality of the votes.

 

Concurrent with adoption of the majority vote standard in uncontested elections, our board modified our Board of Directors’ Guidelines to require an incumbent director who does not receive a majority of the votes cast and therefore is not re-elected to promptly submit a letter of resignation to our

governance & nomination committee. The committee will consider the resignation and make its recommendation to our board on whether to accept or reject the resignation. Our board, excluding the resigning director, will make a decision regarding the resignation within 90 days after the date on which the certification of the stockholder vote on the election of directors is made, and our board will publicly disclose its decision and related rationale. If a decision is made to accept the resignation, the director’s resignation shall be effective immediately.

Our Board of Directors’ Guidelines require a director to promptly submit a letter of resignation to our governance & nomination committee if the director (i) changes substantially his or her principal occupation or business association for any reason other than retirement or retirement planning, (ii) declares or is otherwise involved in a personal bankruptcy or the bankruptcy of a business in which he or she is a principal, (iii) fails to receive a majority of the votes cast in an uncontested election or (iv) is named as a party in a material legal proceeding, becomes the target of a material state or federal investigation, or receives a request of a material nature for the production of records or testimony from any state or federal agency. The committee will in turn consider

the resignation and make its recommendation to our board on whether to accept or reject the resignation. Our board, in its sole judgment, shall then decide whether such event requires the board to accept such resignation in the best interests of the company and its stockholders.

A director who has been convicted of a felony criminal offense or any criminal offense involving moral turpitude, dishonesty or a breach of trust shall resign effective immediately. An employee director must resign from our board, unless a majority of our board determines otherwise, once he or she ceases to be employed by us whether due to retirement or otherwise.

Our governance & nomination committee will consider written director candidate recommendations made by stockholders to our secretary at 8401 North Central Expressway, Suite 800, Dallas, Texas 75225-4404. Electronic or facsimile submissions will not be accepted.

 

For the committee to consider a candidate, submissions must include sufficient information concerning the recommended individual including biographical data such as age; employment history; a description of all businesses that employ or employed the candidate, including the name and phone number of the businesses; a list of board memberships the candidate holds, if any; and additional information that would provide a more complete understanding of the experiences, qualifications, attributes or skills of each director nominee in light of Capstead’s business and structure. In addition, the candidate should affirm he or she can read and understand basic financial statements and consent to stand for election, if nominated by our board, and serve, if elected by our stockholders.

Once a fully complete recommendation is received by the committee and if deemed appropriate by the committee chair, the candidate will be sent a questionnaire that requests additional information regarding independence, qualifications and other information to assist the committee in evaluating him or her, as well as certain information that must be disclosed about the candidate in our proxy statement, if nominated. Further, the questionnaire provides that the individual must grant consent to us to conduct a confidential background search of the individual to the extent allowable under federal, state and local legislation. The recommended candidate must return the questionnaire within the time frame outlined below to be considered for nomination by the committee. Recommendations for which we have received completed questionnaires by December 6, 2019 will be considered for candidacy for the 2020 annual meeting of stockholders. Completed questionnaires received after December 6, 2019 will be considered for candidacy for the 2021 annual meeting, if not earlier withdrawn.

Interested parties and stockholders who wish to contact any of our directors either individually or as a group may do so by calling toll-free (800) 358-2323, by writing to them care of Capstead Mortgage Corporation, 8401 North Central Expressway, Suite 800, Dallas, Texas 75225-4404 or via e-mail at directors@capstead.com. Interested party and

stockholder calls, letters and e-mails are screened by our employees based on criteria established and maintained by our governance & nomination committee, which includes filtering out improper or irrelevant communications such as solicitations, advertisements, spam, surveys, junk mail, mass mailings, resumes and other forms of job inquiries.

Our board and NEOs conduct a comprehensive orientation through a review of background material and meetings with our personnel to familiarize new directors with our vision, strategic direction, core values, ethics, financial matters, corporate governance practices and other key policies and practices. Our board recognizes the importance of continuing education for our directors and is committed to providing

such education to improve the performance of our board and its committees. Our executive officers assist in identifying and advising our directors about opportunities for continuing education including conferences provided by independent third parties.

 

14  |  Capstead 2019 Proxy Statement

EXECUTIVE OFFICERS

Current Officers		Age		Title
Phillip A. Reinsch		58		President, Chief Executive Officer
Lance J. Phillips		45		Senior Vice President, Chief Financial Officer, Secretary
Robert R. Spears, Jr.		57		Executive Vice President, Chief Investment Officer
Roy S. Kim		49		Senior Vice President, Treasurer

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EXECUTIVE COMPENSATION

16  |  Capstead 2019 Proxy Statement

EXECUTIVE COMPENSATION

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EXECUTIVE COMPENSATION

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EXECUTIVE COMPENSATION

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EXECUTIVE COMPENSATION

 

 

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2018 Annual Incentive Compensation Program Performance Metrics

 

 

Actual performance and payouts are interpolated between threshold and maximum performance levels as necessary.

Measurement and Assessment of our Performance. Our 2018 economic return of a negative 3.6% exceeded that of all of our agency-focused peers.  These peers reported economic returns ranging from a negative 4.8% to a negative 22.7% with an average economic return of a negative 11.0%.  Our broader REIT peers reported economic returns ranging from 7.8% to a negative 22.7% with an average economic return of a negative 4.4%.

In January 2019, the committee approved its assessments of our NEOs 2018 performance against the individual goals and objectives established by the committee.  On March 8, 2019, the committee approved calculations of our 2018 relative and absolute performance against the applicable performance levels presented above.  Our performance under each of the above metrics was as follows:

 

 

 

 

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Long-term Performance Unit Award Metrics

 

 

Actual performance and payouts will be interpolated between threshold and maximum performance levels as necessary.

 

 

 

 

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Other 2018 Compensation Elements

 

 

 

Decisions Affecting Compensation for 2019

 

 

 

 

 

 

 

2019 Annual Incentive Compensation Program Performance Metrics

 

 

Actual performance and payouts will be interpolated between threshold and maximum performance levels as necessary.

 

 

 

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Other Compensation Policies and Practices

 

 

 

 

 

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Compensation Committee Report

 

 

 

 

 

 

 

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Summary Compensation Table*

 

 

 

 

 

 

 

For 2018, the aggregate number of performance unit and restricted stock awards granted on January 3, 2019 was based on 150% of 2019 base salaries for Messrs. Reinsch, Spears and Kim and 100% of 2019 base salary for Mr. Phillips, in each case, divided by the closing common stock price on January 2, 2019 of $6.76. Such aggregate dollar opportunity was then allocated 50% to performance unit awards and 50% to restricted stock.  

 

The performance units awarded for 2018 are similar to performance units granted for 2017 and 2016 and include specific metrics against which our performance is to be measured, including relative economic return, absolute economic return and relative total stockholder return and are potentially convertible into shares of our common stock following a three-year performance period commencing January 1, 2019 and ending December 31, 2021.  The number of shares of our common stock into which the performance units are convertible is dependent on satisfaction of the performance metrics during the performance period, calculated independently for each metric and are subject to service conditions.  Because the performance units awarded are subject to performance conditions, the grant date fair value was based on management’s estimate of the probable outcome for each nonmarket-based performance metric, and a quantitative simulation for the relative total stockholder return performance metric, resulting in an aggregate fair value estimate of $6.87 per unit. Assuming we meet or exceed maximum performance levels for all of the performance metrics, in which case the units will convert into shares of common stock equal to up to twice the number of units granted, Messrs. Reinsch, Phillips, Spears, and Kim would receive shares of common stock worth a maximum of $937,500, $330,000, $900,000, and $630,000, respectively, based on the $6.76 January 2, 2019 grant date closing common stock price. 

The restricted stock awarded for 2018 will vest three years from the date of grant or January 2, 2022, subject to service conditions.  The fair value of these awards was based on the closing stock price on the date of grant.

 

For 2017, the aggregate number of the performance unit and restricted stock awards granted on January 3, 2018 was based on150% of 2018 base salaries for Messrs. Reinsch, Spears and Kim and 75% of 2018 base salary for Mr. Phillips, in each case, divided by the closing common stock price on January 2, 2018 of $8.60. Such aggregate dollar opportunity was then allocated 60% to performance units and 40% to restricted stock for Messrs. Reinsch, Spears and Kim and 50% to performance units and 50% to restricted stock for Mr. Phillips.  

 

 

 

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The 2017 performance units are potentially convertible into our common stock after conclusion of a three-year performance period ending December 31, 2020.  These units were valued at $8.71 per unit based on management’s estimate of the probable outcome for each nonmarket-based performance metric and a quantitative simulation for the relative total stockholder return performance metric.  The 2017 restricted stock awards were valued at $8.60 (the closing stock price on the date of grant) and will vest three years from the date of grant or January 3, 2021, subject to service conditions. 

For 2016, the aggregate number of the performance unit and restricted stock awards was based on 150% of 2017 base salary for each executive divided by the closing common stock price on the January 3, 2017 date of grant of $10.41. Such aggregate dollar opportunity was then allocated two-thirds to performance units and one-third to restricted stock.  

The 2016 performance units are potentially convertible into our common stock after conclusion of a three-year performance period ending December 31, 2019.  These units were valued at $10.52 per unit based on management’s estimate of the probable outcome for each nonmarket-based performance metric and a quantitative simulation for the relative total stockholder return performance metric.  The 2016 restricted stock awards were valued at $10.41 (the closing stock price on the date of grant) and will vest three years from the date of grant or January 3, 2020, subject to service conditions.

Our executives are entitled to receive all dividends and any other distributions declared from the date of grant with respect to the shares of our common stock into which the performance units are ultimately converted, if any, as if such shares had been issued on the date of grant.  Similarly, upon vesting, holders of the restricted stock will be entitled to receive dividends and any other distributions declared from the date of grant through the vesting date.

 

 

Under the 2018 annual incentive compensation program, Messrs. Reinsch, Spears and Kim had target opportunities equal to 125% of their 2018 base salaries.  Mr. Phillips had a target opportunity equal to 75% of his 2018 base salary.

 

Under the 2017 annual incentive compensation program, Messrs. Reinsch, Spears and Kim had target opportunities equal to 125% of their 2017 base salaries.  Mr. Phillips had a target opportunity equal to 75% of his 2017 base salary prorated from his October 2017 hire date.

 

Under the 2016 annual incentive compensation program, each NEO had a target opportunity equal to 125% of their 2016 base salaries (prorated for August 15, 2016 salary adjustments for Messrs. Reinsch and Spears).

Dividend equivalent rights, referred to as DERs, represent notional common stock, which entitle the holder to cash payments equal to the per share dividend amounts declared on our common stock. DERs outstanding during 2018 were as follows: 200,000 for Mr. Reinsch, 75,000 for Mr. Phillips, 200,000 for Mr. Spears, and 125,000 for Mr. Kim.

 

 

 

 

 

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Grants of Plan-Based Awards*

 

 

The performance units include specific metrics against which our performance is to be measured, including relative economic return, absolute economic return and relative total stockholder return and are potentially convertible into shares of our common stock following a three-year performance period that began on January 1, 2018 and ends December 31, 2020. The number of shares of our common stock into which the units are convertible is dependent on satisfaction of the performance metrics during the performance period, calculated independently for each metric. Because the awards are subject to these performance conditions, the grant date fair value was based on management’s estimate of the probable outcome for each nonmarket-based performance metric, and a quantitative simulation was used to value the portion of the award based on the relative total stockholder return performance metric, resulting in an aggregate fair value estimate of $8.71 per unit.

If we meet the target performance levels for all of the performance metrics, the units will convert into shares of common stock equal to the number of units granted. If we meet or exceed the “Maximum” performance levels for all of the performance metrics, the units will convert into shares of common stock equal to twice the number of units granted. Conversely, if we only meet the Threshold performance levels for all of the performance metrics, the units will convert into shares of common stock equal to one-half the number of units granted, and below these threshold performance levels, the units will expire without converting into any shares of common stock. The actual shares issued will be based on straight-line interpolations between the indicated performance levels established separately for each performance metric, as necessary. Any such shares into which the units are convertible will be issued following the end of the three-year performance period. Our executives are entitled to receive all dividends and any other distributions declared from the date of grant with respect to the shares of our common stock into which the units are ultimately converted, if any, as if such shares had been issued on the date of grant.

The restricted stock will vest three years from the date of grant or January 2, 2021, subject to service conditions.  On that date holders will be entitled to receive dividends and any other distributions declared from the date of grant through the vesting date.

 

 

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Narrative to Our Summary Compensation and Grant of Plan-Based Awards Tables

 

 

 

 

 

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Outstanding Equity Awards at Fiscal Year-End*

 

 

 

 

 

 

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Option Exercises and Stock Vested*

 

 

Nonqualified Deferred Compensation*

 

 

 

 

 

 

 

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Potential Payments Upon Termination or Change-in-Control

 

 

Our NEOs are entitled to CIC payments if their employment during the 24-month period following a CIC is terminated either a) involuntarily without cause or b) voluntarily by the NEO for good reason.  Messrs. Reinsch and Spears are entitled to receive a CIC payment equal to two times annual base salary as of the date of the CIC, a bonus payment equal to two times the annual incentive compensation program targeted payout on that date, DERs payments received for each of the eight quarters preceding the CIC, and six quarters of group medical benefits continuation costs for the executive and any covered dependents.  For Messrs. Kim and Phillips, CIC payments are calculated in a similar fashion based on one and one-half times base salary and targeted annual incentive compensation, together with six quarters of DERs payments and medical benefits.  For purposes of this table, medical benefits are estimated at $40,000 for each NEO.

In the event of a dissolution or liquidation of Capstead, outstanding performance units issued prior to 2017 will expire, while each unit issued beginning in 2017 will convert into one share of common stock and related deferred dividends will be paid.

In the event of death prior to the end of a performance period, the units will convert into the same number of shares of common stock with related deferred dividends that would have otherwise been applicable for the performance period multiplied by a fraction, the numerator of which is the number of years during the related performance period in which the executive was alive for any portion of such year and the denominator of which is three.  For purposes of this table, it is assumed target performance levels set out in each award are achieved.

In the event of a CIC and the executive’s employment is terminated at any time within 24 months of the CIC without cause or by the individual with good reason, each unit will be converted into one share of common stock and related deferred dividends will be paid. In such an event, the conversion date shall be the date of the occurrence of the CIC.

 

 

 

 

 

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EQUITY COMPENSATION PLANS