As described above under Item 10 “Board and Board Committee Matters”, on April 14, 2020, Frontier and its direct and indirect subsidiaries entered into the
Restructuring Support Agreement with the Consenting Noteholders. The Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring Plan, pursuant to which Frontier and all of its subsidiaries filed
voluntary Chapter 11 Cases. The information presented in this Item 11, or this Compensation Discussion & Analysis (“CD&A”), reflects compensation for our named executive officers (or “NEOs”) for fiscal year 2019. The impact of the Plan and
the Chapter 11 filing is not reflected in any of the tables in this CD&A. As a result of the filing of our Chapter 11 Cases, our NEOs may not be entitled to receive or retain any property or interest in property on account of any equity
interests referenced in this CD&A, and we cannot predict at this time whether NEOs will receive any value for stock-based awards or any other equity holdings in the Company’s common stock despite the values reflected in the compensation tables
included in this Item 11.
Compensation Discussion and Analysis
2019 Review
The Compensation Committee modified our executive compensation program in 2019 in several respects to enhance
executive retention, while maintaining a strong link between pay and financial and operating performance. During this challenging period for the Company’s business, a
primary goal of the Committee in making decisions regarding program design and individual executives’ target total compensation opportunities has been to provide our executives a measure of stability in compensation and minimize potential
misalignments of interests based on changes in our business and the macro business environment, while motivating our executives to focus on our business metrics and actions that will produce a high level of performance for Frontier.
CEO Pay at a Glance
On December 3, 2019, the Board appointed Bernard L. Han as President and Chief Executive Officer of the Company and as a member of the Board. Mr. Han succeeds
Daniel J. McCarthy, who stepped down as President and Chief Executive Officer and from his position on the Board on that date. For Mr. McCarthy’s pay information please see the section “Former CEO Pay Decisions” toward the end of this CD&A.
In connection with Mr. Han’s appointment as President and Chief Executive Officer, Mr. Han and the Company entered into an Employment Agreement, which provides
for an initial three-year term of employment, with automatic renewal for one-year periods thereafter unless terminated by either party. Pursuant to the Agreement, Mr. Han will be eligible for an annual base salary of $1.3 million, an aggregate
annual short- and long-term incentive compensation opportunity of $6.7 million at target performance, and temporary housing and reimbursement of travel-related expenses until May 13, 2020, at which point he will be eligible for our standard
executive relocation benefits. The aggregate amount of incentive compensation ($6.7 million) was allocated as $2.275 million in short-term incentive, $2.655 million in prepaid retention-based LTI (in the form of time-vested cash) and $1.77
million in performance-based LTI (which in 2020 will be earned based on quarterly performance). Mr. Han also received a cash retention payment of $2 million in 2019, which amount must be repaid on an after-tax basis if Mr. Han is terminated for
cause or resigns without good reason prior to December 3, 2020. Prior to his appointment as President and CEO, Mr. Han served as a consultant to the Board from October 16 through December 2, 2019 at a rate of $200,000 per month plus temporary
housing.
Executive Compensation
Key Features of our Executive Compensation Program
Our key executive compensation practices are summarized below. While these continue to be our guiding principles, the Compensation Committee has placed a greater
emphasis on retention of our executives during 2019 and 2020.
Impact of 2019 Say-on-Pay Vote
In 2019, our stockholders voted “Against” our advisory vote on executive compensation. The Compensation Committee considers the results of the annual stockholder
vote on our executive compensation program, in addition to other input from our stockholders, when evaluating and determining compensation policies and the compensation for our CEO and the other NEOs. In 2019, management contacted stockholders
representing approximately 35% of our outstanding shares to offer opportunities for engagement to ensure that we understand their concerns on our executive compensation. However, the challenges we face make it difficult for us to address these
concerns. While our programs would typically be designed to closely align pay with performance, the Committee has determined to place incremental emphasis on retention during 2019 and 2020. The failure to attract and retain management and other
key personnel could impair our ability to execute our strategy and implement operational initiatives and thus we have placed greater emphasis on aligning interests with the short-term operational goals of the Company.
Executive Compensation Program Structure
Philosophy
Our overall Executive Compensation Program Structure and Philosophy remains the same, however for the 2019 and 2020
programs the Committee has placed greater emphasis on retention and aligning interests with the short-term operational goals of the Company.
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Maintain clear alignment between the interests of our executives and those of our stockholders by rewarding performance measured by key financial metrics and strategic objectives and through the use of long-term incentive awards as a significant component of compensation.
Reinforce our performance culture for our NEOs by making a majority of their compensation at risk, i.e., contingent upon relative, specified company and individual performance.
Hire and retain talented executives by having a compensation program that is competitive in relation to comparable companies based on size, overall complexity and the nature of our business.
Ensure company goals are
fully aligned throughout the organization. Each year, we establish company-wide goals that align with Frontier’s business plan for the year. Our NEOs are compensated to the
extent they are successful in leading Frontier to achieve these goals for each year.
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Compensation Program Design During 2019
At its January and February 2019 meetings, the Compensation Committee redesigned our Compensation program to place a greater focus on retention than in previous
years. Among other changes, the 2019 short-term performance goals were set as a percent of salary for each NEO and earned and paid fully on a quarterly basis, the 2019 performance share awards were converted into a quarterly cash-based incentive
program, and the 2019 restricted stock awards were converted into a prepaid retention award payable in the first quarter of the year. Each of these awards are subject to a repayment provision such that if the NEO voluntarily resigns or is
terminated for cause within certain timeframes, the after-tax value of the award must be repaid to the Company.
In order to determine the appropriate amount and mix of compensation components for each NEO, the Compensation Committee typically considers many factors,
including experience, value provided to Frontier, scope of responsibility, Company and individual performance, benchmark data based on our peer group and general industry survey data for comparably sized companies.
Market and Peer Group Reviews
The Compensation Committee, with input from its independent compensation consultant, establishes Frontier’s peer group for use in benchmarking and market
comparison purposes. The peer group reflects our size and scale and includes businesses that are asset intensive, have a technology focus, have subscription-based revenue, deliver content and typically have a bundled package service offering. The
peer group set forth below was used to set compensation for 2019. When comparing financial metrics of Frontier to our peers in September 2018, we were at the 39th percentile in revenue, 66th percentile in EBITDA, 49th
percentile in total assets and 32nd percentile in enterprise value.
General industry survey data was also considered in determining the compensation levels of the NEOs and other executives. In the case of executives for whom
there was no publicly available data or no comparable position at the peer group companies, the results from general industry executive compensation surveys were analyzed to assess competitiveness.
As an initial step in the consideration of the general industry survey data, the survey is size-adjusted based on our annual revenue. The 2018 survey data used
to determine 2019 compensation was size-adjusted to approximate Frontier’s 2019 budgeted revenue. The analyses included examining how each executive’s target total direct compensation compared to the results in the surveys for base salary, target
bonus and target long term incentives. Some of our NEOs have responsibilities that extend beyond the traditional scope indicated by their titles. As a result, directly comparable roles in the survey data were not always available. In these cases,
the Compensation Committee considered data from these third-party surveys and the importance of the role to Frontier when determining the commensurate total compensation levels for the NEO. In considering the general industry survey data, the
Compensation Committee did not review nor is it aware of the specific companies that are included in the surveys.
2019 Total Target Direct Compensation for NEOs
Cash Compensation
Base Salary. Base salaries for our executives, including our NEOs, are set by the
Compensation Committee after consideration of various factors, including individual performance, executive experience and skill set, the ability to attract and retain talented executives and market data.
Executives are eligible for increases to their base salary if there is a change in responsibility or the individual’s base salary is not in line with desired market
position. We generally target the median of our peers when setting base salary while any increases or decreases are ultimately at the discretion of the Compensation Committee. The salaries for our NEOs were adjusted during 2019 as follows:
Annual Incentive Plan.
The Compensation Committee uses the Annual Incentive Plan (“AIP”) to provide cash incentives to executives, including the NEOs, based on the achievement of certain company goals (Company Performance Goals) that may be adjusted for individual
performance. The AIP pool is based solely on the result of achievement of the Company Performance Goals. An NEO’s “target AIP opportunity” is expressed as a percentage of his or her annual base salary and represents the amount the NEO would
receive if performance goals are achieved at target. For 2019, each of Messrs. Nielsen, Maduri, and Arndt had a target bonus opportunity equal to 100% of his base salary. Excluding his bonus stipend of $15,000 per month, Mr. Bruha had a target
bonus opportunity of 60% of his base salary of $310,000 until he was promoted to EVP, Chief Financial Officer on June 3, 2019. At that time Mr. Bruha’s AIP target was increased to 100% of his then current salary ($550,000). Mr. McCarthy’s
target bonus opportunity was 150% of his base salary. Mr. Han did not receive an award under the AIP for 2019. His target AIP percent for 2020 is 175% of salary. Potential AIP payouts could be from 0% for below-threshold performance, up to a
maximum of 130% for outstanding performance, of each NEO’s target AIP opportunity. Achievement of threshold performance would result in a payout of 70% of the target AIP opportunity, subject to the discretion of the Compensation Committee.
In 2019, the Compensation Committee continued to provide quarterly payments under the AIP. For each quarter, the NEO’s target awards were 25% of the target AIP
award stated above. This was continued to help retain our executives as well as to emphasize the importance of our short-term results.
Payments under the AIP were based on Performance Goals established at the Compensation Committee’s December 2018 and January 2019 meetings for the quarterly
performance goals on Adjusted EBITDA and Revenue along with the goals for Net Experience Score for the first two quarters of 2019. In the third quarter of 2019 the Committee replaced the Net Experience Score with a Net Broadband additions metric.
The Net Broadband additions metric was included to better align with our strategic business plan. The Company Performance Goals were weighted in relation to Frontier’s business plan (the Weighted Company Performance Goals).
Initially, the Compensation Committee set a minimum performance threshold of 93% of the Adjusted EBITDA target and an overall threshold amount of 90% in order to
achieve a payout under the 2019 AIP. For the third and fourth quarters of 2019 the Committee modified the AIP to set a threshold performance level of 85% of the target goal and a maximum performance level at 115% of the target level for each metric
to better reflect our increased performance volatility in the near-term. Along with these modifications, a “catch-up” feature was added such that if the cumulative performance on any metric is greater than the sum of the quarterly amounts an
adjustment to the payout is made to reflect the cumulative results. Throughout the year, the Compensation Committee reviewed Frontier’s performance against each of the targets, which is shown below. Payouts under the AIP for 2019 were based on an
“S” curve where the further away from target performance the larger the performance adjustment. For the third and fourth quarters the payout to performance ratio was 2:1 (i.e., achieving 115% of target-level performance results in a payout of 130%
of target).
Below is a table showing the quarterly, performance and payouts for each of the NEOs. We believe that our 2019 goals were set at a significant stretch level.
Long-Term Incentive Compensation
The 2019 long-term incentive awards were issued in two types of cash payments 1) an upfront prepaid retention award and 2) a performance award earned quarterly
over 2019. Both of the awards have recapture provisions such that if an executive leaves voluntarily or is terminated for cause within a prescribed period of time, the executive must repay to the Company the amount of the award paid to the
executive.
In February 2019, the Compensation Committee set the following targets for incentive awards for each NEO:
Prepaid Retention Awards. In 2019, the Compensation Committee awarded Prepaid Retention Awards (PRAs) with the goal of retaining our executive leadership team. These awards include a recapture provision, such that if a recipient leaves voluntarily or such
recipient’s employment is terminated for cause prior to the earlier of February 28, 2021 and the date we emerge from Chapter 11, the amount of the after-tax award paid by the Company to the executive must be repaid to the Company.
Performance Awards.
The Compensation Committee included Performance Awards as a component of the 2019 executive compensation program to ensure a significant portion of our executives’ pay is performance-based. In 2019 these awards were based on the same metrics and
goals as our AIP, including the quarterly nature of the awards. Similar to the prepaid retention grants, these awards include a recapture provision, such that if a recipient leaves voluntarily or such recipient’s employment is terminated for
cause prior to the earlier of February 28, 2021 and the date we emerge from Chapter 11, the amount of the after-tax award paid by the Company
to the executive must be repaid to the Company.
Under the 2019 Performance Award program, our NEOs earned the payouts as shown in the table below.
Results of 2017 Performance Award
The award that was issued effective January 1, 2017 for the three-year period ending on December 31, 2019 did not have a payout. This award was determined based
on Company performance on both Free Cash Flow and TSR relative to the Integrated Telecommunications Services Group (GICS Code 50101020) for the three-year Measurement Period.
Perquisites and Other Benefits
There were no reportable perquisites in 2019 for the CEO or the other NEOs.
We provide benefits to our NEOs on the same basis as all our non-union, full-time employees. These benefits consist of medical, dental and vision insurance,
basic life and disability insurance and matching contributions to our 401(k) plan for employees who participate in the plan. Messrs. McCarthy and Arndt have vested benefits under the Frontier Pension Plan, which was frozen for all non-union
participants in 2003.
Executives, including our NEOs, are not eligible for retiree medical benefits.
Changes to Our Program in 2020
The Compensation Committee continues to review our executive
compensation program to ensure it meets the twin goals of retaining valuable executives and aligning their financial interests with the success of the Company. Accordingly, the Compensation Committee has
continued certain aspects of our 2019 program while modifying other important aspects, including:
• Continuing our Annual Incentive Plan to be earned and paid fully on a quarterly schedule with quarterly goals based on specific metrics. This places a greater emphasis on our quarterly results leading to
achievement of our full-year results and promotes retention of our executives through the inclusion of a recapture provision, as described below. Quarterly goals were established in January 2020 and, in aggregate, align with the Board-approved
annual budget.
• Continuing our Prepaid Retention Award, which is an up-front cash payment with a recapture provision, as described below.
• Continuing our Performance Award as a quarterly cash-based incentive program. The payout will be based on the same performance and payout scale as the 2019 quarterly AIP. While the performance is based on
our quarterly 2020 goals, any payouts are subject to a recapture provision, as described below.
• Payments under each of the above are subject to a recapture provision providing that, in the event of voluntary termination or involuntary termination for cause, all or a portion of the amount of the after-tax award paid by the Company to the executive must be repaid to the Company.
These awards and recapture provisions are in line with both executive compensation programs for companies contemplating or undergoing significant
restructuring activities and the goal of the Committee to enhance the retentive nature of our executive pay program.
Below is a table showing the target compensation for our NEOs on January 1, 2020.
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Name
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Salary
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Target AIP
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Target Performance
Award
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Prepaid Retention
Award
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Target Total
Compensation
|
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Bernie L. Han
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1,300,000
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2,275,000
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1,770,000
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2,655,000
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8,000,000
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Sheldon Bruha
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550,000
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550,000
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600,000
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900,000
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2,600,000
|
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John Maduri
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625,000
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625,000
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1,400,000
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1,400,000
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3,550,000
|
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Mark D. Nielsen (1)
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900,000
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900,000
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500,000
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1,250,000
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3,550,000
|
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Kenneth W. Arndt
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600,000
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600,000
|
720,000
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1,080,000
|
3,000,000
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On December 3, 2019, the Company and Mr. McCarthy entered into a Release
Agreement, under which Mr. McCarthy generally receives separation payments and benefits consistent with those under his
Severance Agreement, dated August 2, 2019. These payments include:
Roles and Responsibilities
The Compensation Committee
The Compensation Committee is responsible for approving and overseeing our executive compensation philosophy and programs, as well as determining and approving
the compensation for our senior executives, including our NEOs. Each year, at its January and February meetings, the Compensation Committee reviews the Company Performance Goals and the individual performance goals for the NEOs and approves the
target levels for each of the compensation components that apply to the NEOs for the upcoming year. Also, the Compensation Committee assesses the performance of our NEOs for the prior year. With respect to CEO compensation, the Compensation
Committee reviews its recommendations with the other independent directors and considers any additional input from them before finalizing its decision.
In making its compensation decisions, the Compensation Committee reviews tally sheets setting forth all components of compensation paid to the NEOs for the past
five years, along with target compensation for those years, including base salary, AIP, and grant date values of long-term incentive awards. These tally sheets also show the executives’ holdings of unvested RSAs and performance share awards from
prior years and the current value of those awards. The Compensation Committee uses these tally sheets to (i) review the total annual compensation of the NEOs over the past five years, (ii) assess the executive officers’ compensation against their
individual and company performance over that period and (iii) assure that the Compensation Committee has a comprehensive view of our compensation programs.
The Compensation Committee reviews on a periodic basis management compensation programs, including any management incentive compensation plans, to determine
whether they are appropriate, properly coordinated and achieve their intended purpose(s), and discusses with the Board any modifications or new plans or programs.
The Chief Executive Officer
Our CEO annually reviews the performance and contributions of our other senior executives, including our other NEOs, and presents to the Compensation Committee
his performance assessments and compensation recommendations, including the proposed award for each component of the executive’s total compensation. The review typically consists of an assessment of the executive’s performance against company-level
and individual goals and targets. The Compensation Committee then conducts a separate review process with respect to these executives and, after making any adjustments, approves the compensation for these executives.
The CEO is not involved in setting his own compensation.
The Compensation Consultant
The Compensation Committee retains an independent executive compensation consultant that provides services to the Compensation Committee. Since 2010, the
Compensation Committee engaged Frederic W. Cook & Co., Inc. to assist the Committee in the development of compensation programs, evaluation of compensation practices and the determination of compensation awards. In preparation for its July 2019
meeting, the Committee changed its consultant and engaged Willis Towers Watson based on their expertise in advising distressed companies that are contemplating or undergoing a significant restructuring.
The Compensation Committee considers the compensation consultant’s input and advice while reaching its own independent decisions on compensation matters. The
Compensation Committee has sole authority to retain and terminate the compensation consultant.
The Compensation Committee has instituted policies to avoid conflicts of interest raised by the work of the compensation consultant. Pursuant to SEC rules, the
Compensation Committee is required to consider any conflicts of interest raised by the work of the Compensation Committee’s compensation consultants. After considering the relevant factors, the Compensation Committee determined that no conflicts of
interest were raised by the work of either compensation consultant in 2019.
Additional Compensation Features and Policies
Stock Ownership Guidelines
To further align our executives’ interests with those of our stockholders, our Board established stock ownership guidelines for the CEO and the other members of
the Senior Leadership Team and reviews the guidelines annually. The CEO is expected to own shares of Frontier stock having a minimum value of five times (5x) base salary, the CFO is expected to own shares of Frontier stock having a minimum value of
three and one-half times (3.5x) base salary and each other member of the Senior Leadership Team is expected to own shares of Frontier stock having a minimum value of two and one-half times (2.5x) base salary. Unvested restricted share awards and
unearned performance shares are not counted for purposes of fulfilling this requirement. At such times as a member of the Senior Leadership Team does not meet the applicable ownership guideline, the executive will be required to hold 50% of
Frontier stock that the executive acquires after that date through the Frontier equity compensation programs, excluding shares sold to pay related taxes. The Compensation Committee administers these stock ownership guidelines. Other than
withholding for tax purposes upon vesting of shares, none of our current NEOs sold any shares during 2019.
Hedging and Pledging Prohibition
Executives are prohibited from hedging or pledging their shares of Frontier stock.
Termination of Employment and Change-in-Control Arrangements
Under the terms of his Employment Agreement, if Mr. Han is terminated without cause or resigns for good reason or if the Company elects not to renew the
term of the agreement, he will, subject to his execution and non-revocation of a general release of claims in favor of the Company, receive (a) cash severance equal to one times his base salary (two times the sum of his base salary and target
annual bonus, if such termination occurs during the six-month period prior to or one-year period following a change in control), (b) a pro rata portion of his outstanding incentive compensation awards (based on actual performance), and (c) continued health coverage for 12 months following his termination of employment (18 months if such termination occurs within the six-month period prior to or one-year period following a change in
control). Mr. Han is also subject to customary restrictive covenants under his Employment Agreement, including one-year post-termination restrictions on competing with or soliciting employees of the Company.
To attract talented executives, support retention objectives and ensure that executives perform their work with objectivity, we provide certain post-employment
benefits to the NEOs. In addition, Frontier has implemented separation agreements with each of its executives (other than Mr. Han) such that they can receive severance for termination by the Company without cause or for good reason equal to one
times base salary (two times the sum of base salary and target annual bonus, if such termination occurs during the six-month period prior to or one-year period following a change in control),
The Compensation Committee set the severance amounts based on peer group reviews. The change-in-control arrangements do not include gross-up payments for excise
taxes imposed under Section 280G of the Internal Revenue Code as a result of severance payouts.
For further discussion of these severance arrangements, see “Employment Arrangements; Potential Payments Upon Termination or Change-in-Control” that follows this
Compensation Discussion and Analysis.
Clawback Policies
Since 2010, Frontier has included in all of its equity compensation awards, including to the NEOs, a recoupment or “clawback” provision. This provision requires
that unvested equity awards be forfeited if the Compensation Committee determines that the employee engaged in certain defined types of misconduct, including engaging in acts considered to be contrary to the best interests of Frontier, commission
of felonies or other serious crimes, or engaging in any activity which constitutes gross misconduct. The provision also provides that the Compensation Committee may in its sole discretion require the employee to return all stock that vested within
the 12-month period immediately prior to the misconduct, or if no longer held by the employee, to pay to Frontier any and all gains realized from such stock.
Effective December 11, 2014, we adopted an enhanced clawback policy that is triggered if Frontier is required to restate its financial statements due to material
noncompliance with any financial reporting requirement under the securities laws that was contributed to by the fraud or intentional misconduct of an executive officer, including an NEO. If the policy is triggered, the Compensation Committee will
require reimbursement or forfeiture of any cash and equity incentive compensation awarded to or received by the executive officer in question during the three-year period preceding the date on which Frontier is required to prepare the restatement.
The amount to be recovered would be the excess of the incentive compensation obtained by the executive officer based on the erroneous data over the amount that would have been obtained by the executive officer had it been based on the restated
results, as determined by the Compensation Committee. We will review the terms of this recovery policy in light of the requirements under the Dodd-Frank Act and will make any necessary changes to be in compliance with final regulations when issued.
Tax Implications—Deductibility of Executive Compensation
The exemption from 162(m)’s deduction limit for performance-based compensation has been repealed for tax years beginning after December 31, 2017. Consequently,
compensation paid to our covered executive officers in excess of $1 million will not be deductible.
Compensation Committee Report
The Compensation Committee of our Board of Directors has submitted the following report for inclusion in this Annual Report on Form 10-K:
Our Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Amendment No. 1 to Frontier’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2019 with management. Based on our Committee’s review of and the discussions with management with respect to the Compensation Discussion and Analysis, our Committee recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in Frontier’s Annual Report on Form 10-K.
The foregoing report is provided by the following directors, who constitute the Committee:
Summary Compensation Table
The following table sets forth the compensation awarded to, earned by, or paid to our CEO, CFO and the three other most highly compensated executive officers at
fiscal year-end.
Grants of Plan-Based Awards
The following table sets forth information with respect to awards granted to each of our NEOs during 2019.
Cash awards under the Frontier Bonus Plan for 2019 performance shown under the Estimated Possible Payouts Under Non-Equity Incentive Plan Awards columns were
paid shortly after the close of the applicable quarter or year based on performance metrics set for each performance period, as described above under “Compensation Discussion and Analysis—2019 Total Direct Compensation for NEOs—Cash
Compensation—Annual Bonus.” Target awards under the Frontier Bonus Plan are set as a percentage of base salary. Targets awards were set at 100% of 2019 base salary for Messrs. Bruha, Maduri, Nielsen and Arndt. Mr. McCarthy’s target award was set at
150% of 2019 base salary. Payouts can be 0% of target for below-threshold performance, up to 70% of target for threshold performance and up to 130% of target for outstanding performance. The awards shown under the Estimated Future Payouts Under
Equity Incentive Plan Awards columns are performance shares deemed to have been granted in 2017 in accordance with Financial Accounting Standards Board ASC Topic 718 (i.e., the second tranche of the 2018-2020 Measurement Period and the third
tranche of the 2017-2019 Measurement Period). See footnotes (2) and (3) to the Summary Compensation Table. The amounts shown represent the range of shares that may be issued at the end of the applicable Measurement Period for such grants assuming
achievement of threshold, target or maximum performance. If our operating cash flow (Free Cash Flow per share for the 2017-2019 and 2018-2020 periods) performance is, on average, below threshold for the three-year Measurement Period, no shares will
be issued at the end of the period. Dividends on performance shares will be accrued and paid out at the end of the three-year Measurement Period only with respect to shares that are earned and issued. See the discussion of performance share awards
under “Compensation Discussion and Analysis—2019 Total Direct Compensation for NEOs—Long-Term Incentive Compensation—Performance Share/Cash Awards.”
The stock awards shown under the All Other Stock Awards column in the above table are grants of restricted shares. The grants represent annual restricted share
awards and vest in three equal annual installments commencing one year after the date of approval by the Compensation Committee. All such grants of restricted shares were made under our 2017 Equity Incentive Plan. See the discussion of restricted
share awards under “Compensation Discussion and Analysis—2019 Total Direct Compensation for NEOs—Long-Term Incentive Compensation—Restricted Share Awards.”
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding outstanding equity awards held by each of the NEOs at year-end.
Option Exercises and Stock Vested
The following table sets forth information regarding the restricted shares and performance shares that vested for each of the NEOs in 2019. No NEO acquired any
shares upon the exercise of stock options in 2019. The value of restricted shares realized upon vesting and performance shares earned is based on the closing price of the shares on the applicable vesting dates.
Pension Benefits
We have a noncontributory, qualified retirement plan, the Frontier Pension Plan, covering certain employees. The plan provides benefits that, in most cases, are
based on formulas related to base salary and years of service. The plan was amended to provide that, effective February 1, 2003, no further benefits will be accrued under the plan by most non-union participants (including all executive officers),
and is considered “frozen.” Mr. Arndt is the only NEO with vested benefits under the plan. The estimated annual pension benefits (assumed to be paid in the normal form of an annuity) for Mr. Arndt is $3,386. This amount is calculated under the plan
based on Mr. Arndt’s 6 years, two months of service credit at the time the plan was frozen and the compensation limits established in accordance with federal tax law in the computation of retirement benefits under qualified plans. Benefits are not
subject to reduction for Social Security payments or other offset amounts. For a discussion of valuation assumptions, see Note 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31,
2019.
Employment Arrangements; Potential Payments upon Termination or Change-in-Control
Employment Agreements and Arrangements
Frontier is party to an employment agreement with each of Mr. Han, Mr. Maduri, Mr. Nielsen, and Mr. Arndt. These agreements have been publicly filed with the
SEC.
Each NEO receives a base salary and is entitled to participate in the Frontier Bonus Plan and our 2013 and 2017 Equity Incentive Plans. In addition, each NEO is
entitled to severance benefits under our Severance Plan.
Potential Payments upon Termination of Employment or Change-in-Control
The following summarizes potential payments that would be made under the Company’s Severance Plan or the NEO’s employment agreement, as applicable, upon a
termination of employment or change-in-control as of December 31, 2019.
If Mr. Han’s employment is terminated without “cause” or by Mr. Han with “good reason,” we would be required to pay Mr. Han an amount equal to the non-change in
control severance factor applicable to Mr. Han (as set forth below) multiplied by the sum of his base salary. In addition, in such circumstances, Mr. Han would be entitled to an amount equal to 12 times the monthly COBRA charge for the type of
employer-provided health coverage in effect for him.
With respect to our other active NEOs, if the executive’s employment is terminated without “cause” or by the NEO with “good reason,” we would be required to pay
the executive an amount equal to the non-change in control severance factor applicable to the executive (as set forth below) multiplied by his base salary. The executive would also be entitled to purchase from Frontier three months of subsidized
COBRA coverage at the active employee rate.
If Mr. Han’s employment is terminated due to his death or in connection with a disability, Mr. Han or his estate would be entitled to payment of unpaid base
salary, accrued paid-time-off, accrued benefits, and a prorated portion of his incentive pay based on time worked.
In the event Mr. Han’s employment is terminated without “cause” or by Mr. Han with “good reason” in connection with a “change in control,” we would be required
to pay Mr. Han an amount equal to the change in control severance factor applicable to Mr. Han (as set forth below) multiplied by the sum of his base salary and annual bonus target. In addition, in such circumstances, Mr. Han would be entitled to
an amount equal to 18 times the monthly COBRA charge for the type of employer-provided health coverage in effect for him.
With respect to our other active NEOs, in the event the NEO’s employment is terminated without “cause” or by the executive with “good reason” in connection with
a change in control, we would be required to pay the executive an amount equal to the change in control severance factor applicable to the executive (as set forth below) multiplied by his base salary and annual bonus target. The executive would
also be entitled to purchase from Frontier three months of subsidized COBRA coverage at the active employee rate.
To the extent an active NEO would be subject to any excise taxes under Section 280G of the Internal Revenue Code, the amounts he or she would be entitled to
receive would be “capped” to avoid any excise tax unless the total payments to be received by him or her without regard to a cap would result in a higher after-tax benefit. The executive would be responsible for paying any required excise tax.
The severance factors for our active NEOs as of December 31, 2019 were as follows:
Each NEO would be required to enter into a separation agreement in which the NEO releases claims against Frontier in order to receive the severance payments.
The following table sets forth certain potential payments that would have been made to each NEO had his or her employment been terminated as of December 31, 2019
under various scenarios, including a change in control. The information for Mr. Arndt does not include his pension benefits, which are set forth under “Pension Benefits.”
Because payments to be made to an NEO depend on several factors, actual amounts to be paid out upon an NEO’s termination of employment can only be determined at
the time of separation from Frontier.
For 2019, the ratio of our annual total CEO compensation to the median annual total compensation of all our employees (other than our CEO, Bernard L. Han) as
described below, commonly referred to as the “CEO Pay Ratio”, was 78 to 1.
We determined that the 2019 median annual total compensation of all our employees who were employed as of December 31, 2019, other than our CEO, was $148,269.
Mr. Han was appointed President and CEO on December 3, 2019 and therefore his compensation does not represent a full year pay package. As permitted by the applicable SEC rules, we aggregated the applicable Summary Compensation Table compensation
for our former CEO and current CEO. For purposes of this CEO Pay Ratio disclosure, CEO Compensation was $11,617,176, which was calculated as the sum of:
The decreases from the 2018 CEO pay ratio of 93:1 is attributable to the increase in the median employee compensation due to a discount-driven actuarial increase
to pension accrual in 2019.
For 2019, we used the same median employee that was identified in 2018 and 2017 since there has been no change in our employee workforce or employee compensation
arrangements that we believe would significantly impact our pay ratio disclosure. As of December 31, 2019, our total population consisted of approximately 18,700 employees. To identify the median employee, we used a Consistently Applied
Compensation Measure (CACM) defined as annual base salary as of December 31, 2017. Our disclosed pay ratio is a reasonable estimate calculated in a manner consistent with S-K Item 402(u).
In June 2019, in order to continue to attract and retain qualified non-employee members of our Board, the Board approved a change to the form of compensation for
all non-employee directors such that all compensation is paid in cash. Mr. Han, the only employee director, receives no remuneration for service as a member of our Board.
Annual Director Retainer and Fees
Each non-employee director is paid an annual $95,000 retainer and an annual $120,000 fee. The $215,000 aggregate annual retainer and fees are payable in cash in
advance in equal quarterly installments on or about the first business day of each quarter.
Through the second quarter of 2019, the $120,000 annual fee was paid in the form of stock units; stock units for fees were earned quarterly and credited to the
director’s account on the first business day of each quarter. The number of stock units credited equaled the amount of the retainer, stipend or fee (as appropriate) divided by the closing price of our common stock on the credit date of the stock
units. We hold all stock units until a director’s termination of service, at which time the units are redeemable, at the director’s election, in either cash or in shares of our common stock at a conversion rate of 1-for-1.
Chair and Committee Stipends
The Chairman of the Board is paid an annual stipend of $175,000. Stipends of $25,000, $20,000 and $15,000 are paid to the Chairs of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee, respectively. The stipends are payable in cash in advance in equal quarterly installments on or about the first business day of each quarter. Through the second quarter of
2019, the Chairman’s annual stipend was paid 45% in cash and 55% in stock units, as described above.
In June 2019, the Finance Committee’s role and membership were expanded with the addition of three new non-employee directors. At this time, the Board approved
changes to the compensation for Finance Committee members. The Chair of the Finance Committee is paid an annual stipend of $1,465,000 and received in June 2019 supplemental compensation of $1,000,000 million in cash, subject to specified repayment
terms. The other members of the Finance Committee are paid an annual stipend of $385,000. These Chair and Committee stipends are payable in advance in equal quarterly installments on or about the first business day of each quarter. During the
first two quarters of 2019, the Chair received a stipend of $25,000 and the other Committee members received no additional compensation.
The following table sets forth compensation information earned for 2019 by each non-employee director.
At December 31, 2019, Mr. Fraioli and Mr. Shapiro each held 666.67 stock options. Such stock options were granted with an exercise price equal to the
closing price of our common stock on the date each director was elected to the Board. The options became exercisable six months after the grant date and expire on May 7, 2020 for Mr. Shapiro and July 6, 2020 for Mr. Fraioli, the tenth anniversary
of the grant date. Since October 2010, directors are no longer eligible to receive stock option grants upon joining the Board.
In addition, our bylaws require us to indemnify our directors and officers to the fullest extent permitted by law, so that they may be free from undue
concern about personal liability in connection with their service to the Company. We have also entered into indemnification agreements with our directors and officers that provide similar indemnification rights.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes compensation plans under which our securities are authorized for issuance as of December 31, 2019.
Security Ownership of Certain Beneficial Owners and Management
Set forth below is certain information with respect to the beneficial ownership of our common stock (as determined under the rules of the SEC) by (1) each
person who, to our knowledge, is the beneficial owner of more than 5% of our outstanding shares of common stock, which is our only class of voting securities, (2) each director, (3) each of the executive officers named in the Summary
Compensation Table under “Executive Compensation” and (4) all of our directors and executive officers as a group. The information is as of March 27, 2020 unless otherwise indicated, and ownership percentages are based on 104,987,947 shares of
common stock outstanding as of March 27, 2020. The business address of each person listed is c/o Frontier Communications Corporation, 401 Merritt 7, Norwalk, Connecticut 06851, unless stated otherwise. Except as otherwise described below, each
of the persons named in the table has sole voting and investment power with respect to the common stock beneficially owned and has not pledged such common stock as security for any obligations.
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(j)
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Consists of shares that may be acquired upon the redemption of stock units.
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(k)
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Includes 120,567 restricted shares over which Mr. Arndt has sole voting power but no dispositive power and 101 shares held in a 401(k) plan.
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(l)
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Includes 110,771 restricted shares over which Mr. Bruha has sole voting power but no dispositive power.
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(m)
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Includes 147,700 restricted shares over which Mr. Gable has sole voting power but no dispositive power.
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(n)
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Includes 106,012 restricted shares over which Mr. Nielsen has sole voting power but no dispositive power.
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(o)
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Includes 201,667 restricted shares over which Mr. Maduri has sole voting power but no dispositive power.
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(p)
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Represents holdings prior to Mr. McCarthy’s departure on December 3, 2019. Includes 490,030 restricted shares over which Mr. McCarthy had sole voting power but no
dispositive power and 1,844 shares held in a 401(k) plan.
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Transactions with Related Persons
The Board has adopted a written policy addressing our procedures with respect to the review, approval and ratification of “related person transactions” that
are required to be disclosed pursuant to SEC regulations. The policy provides that any transaction, arrangement or relationship, or series of similar transactions, to which we are a party, that exceeds $120,000 in the aggregate, with a “related
person” (as defined in the SEC regulations) who has or will have a direct or indirect material interest shall be subject to review, approval or ratification by the Nominating and Corporate Governance Committee. In its review of related person
transactions, the Nominating and Corporate Governance Committee shall review the material facts and circumstances of the transaction and shall take into account specified factors, where appropriate, based on the particular facts and
circumstances, including (i) the nature of the “related person’s” interest in the transaction, (ii) the significance of the transaction to us and to the “related person” and (iii) whether the transaction is likely to impair the judgment of the
“related person” to act in the best interest of Frontier.
No member of the Nominating and Corporate Governance Committee may participate in the review, approval or ratification of a transaction with respect to which
he or she is a “related person,” although such director can be counted for purposes of a quorum and shall provide such information with respect to the transaction as may be reasonably requested by other members of the Committee or the Board.
The Board is required to affirmatively determine that a majority of the directors qualify as independent under applicable SEC and Nasdaq listing standards.
The Board undertakes an annual review of director independence by reviewing relationships between Frontier and each director as well as Frontier and the organizations with which each director is affiliated. After considering the relevant
facts, the Board has determined that no director, other than Mr. Han, has a material relationship with Frontier (either directly or as a partner, stockholder or officer of an organization that has a relationship with Frontier) that would impair
the director’s ability to exercise independent judgment in carrying out his or her responsibilities as a director. Therefore, all of our directors, other than Mr. Han, and each member of each committee of the Board of Directors are independent
under Nasdaq listing standards.
In accordance with the Sarbanes-Oxley Act of 2002, the rules of the SEC and the Audit Committee Charter, the pre-approval of the Audit Committee is required
for all audit and permissible non-audit services that will be provided by KPMG LLP, our independent registered public accounting firm. All of the services of KPMG LLP for 2019 and 2018 were pre-approved by the Audit Committee.
The following table sets forth the fees for professional audit services paid by us to KPMG LLP, our independent registered public accounting firm:
Audit Fees
Audit fees relate to professional services rendered in connection with the audit of our annual consolidated financial statements included in our Annual
Report on Form 10-K and internal control over financial reporting, the review of our quarterly financial statements included in our Quarterly Reports on Form 10-Q and audit services provided in connection with other subsidiary audit reports and
professional services rendered in connection with Frontier’s debt offerings.
Audit-Related Fees
For 2019 and 2018, audit-related fees primarily relate to professional services rendered in connection with agreed-upon procedure reports.
Tax Fees
Tax fees for 2019 and 2018 primarily relate to tax consulting services as well as professional services rendered in connection with the preparation of
transactional tax filings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities indicated on the 28th day of April 2020.
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