FLOWSERVE CORPORATION DEF 14A

02UNITED 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

 

   Filed by the Registrant  Filed by a Party other than the Registrant

 

Check the appropriate box:
Preliminary Proxy Statement
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to ss.240.14a-12

 

FLOWSERVE CORPORATION

 

 

(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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Invitation to 2019 Annual
Meeting of Shareholders

 

  Thursday, May 23, 2019
11:30 a.m., local time
R. Scott Rowe
President and
Chief Executive Officer
Flowserve Global Technology and Training Center,
4343 West Royal Lane, Irving, Texas 75063

 

Dear Fellow Shareholder:

I am pleased to invite you to join me, our Board of Directors, executive officers, associates and other shareholders at Flowserve’s 2019 Annual Meeting of Shareholders. The attached Notice of 2019 Annual Meeting of Shareholders and Proxy Statement contain details of the business to be conducted.

2018 was an important turning point for Flowserve with us beginning to see concrete benefits from our Flowserve 2.0 Transformation program, as well as improvements in our markets and increased activity from our core customer segments. With the capability of our people, proven legacy of our product brands, and now, the new guiding principles and foundation in place for our organization, we believe that Flowserve’s future is optimistic.

2018 highlights include:

Implementation of new purpose statement and values

Significant increase in employee engagement

Progress in implementation of Flowserve 2.0 Transformation manifested in financial improvement

Adding several new leaders to the executive team

Systematic focus and improvement on customer lead time, on time delivery and quality

Looking to 2019, we expect that Flowserve will be better positioned to take advantage of new opportunities — specifically due to our increased backlog, renewed aftermarket activity and growth opportunities in emerging markets. With Flowserve better positioned to take advantage of new opportunities to grow our business and continue to make operational improvements, we are very excited for the future of our company.

Flowserve’s Board and senior leadership continue to be encouraged by the positive feedback we have received about the clarity of information we provide through our proxy statement. We have further enhanced the information in this proxy and will continue to do so based on your feedback. Your vote is very important to us and to our business. Prior to the meeting, I encourage you to sign and return your proxy card, or use telephone or Internet voting, so that your shares will be represented and voted at the meeting. You can find instructions on how to vote beginning on page 11.

I hope to see you at our annual meeting. Thank you in advance for voting and for your continued support of Flowserve.


 

Table of Contents

PROXY STATEMENT FOR THE 2019 ANNUAL MEETING OF SHAREHOLDERS

10

Solicitation

10

Voting

11

Shareholder Proposals and Nominations

12

14

Required Vote and Recommendation

14

Board of Directors — Biographical Information

15

Role of the Board; Corporate Governance Matters

17

Committees of the Board

18

Board of Directors Compensation

20

Compensation Committee Interlocks and Insider Participation

21

EXECUTIVE OFFICERS

22

EXECUTIVE COMPENSATION

23

Compensation Discussion and Analysis

23

Annual Executive Compensation Program Review and Compensation Risk

39

Organization and Compensation Committee Report

39

Summary Compensation Table

40

2018 Grants of Plan-Based Awards

42

Outstanding Equity Awards at Year-End 2018

43

2018 Option Exercises and Stock Vested

44

2018 Pension Benefits

44

Potential Payments upon Termination or Change In Control

44

49

Required Vote and Recommendation

50

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

51

SECURITY OWNERSHIP OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS

52

SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS

53

EQUITY COMPENSATION PLAN INFORMATION

54


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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

54

55

Required Vote and Recommendation

55

56

Proposed Plan

56

Required Vote and Recommendation

65

66

Shareholder Resolution

66

The Company’s Opposition Statement

66

Required Vote and Recommendation

67

68

Shareholder Resolution

68

The Company’s Opposition Statement

68

Required Vote and Recommendation

69

REPORT OF THE AUDIT COMMITTEE

70

OTHER AUDIT INFORMATION

71

Relationship with Independent Registered Public Accounting Firm

71

Audit and Non-Audit Fees and Services

71

Audit Committee Approval Policy

71

OTHER MATTERS

71

A-1


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Notice of
2019 Annual Meeting
of Shareholders

When:

Thursday, May 23, 2019 at 11:30 a.m. (local time)

 

Where:

Flowserve Corporation
Global Technology and Training Center,
4343 West Royal Lane, Irving, Texas 75063

We are pleased to invite you to join our Board of Directors and senior leadership at Flowserve’s 2019 Annual Meeting of Shareholders. Directions to the Annual Meeting and a map of the area are included in the proxy materials on the inside back cover and are also available online at www.proxyvote.com. We will also broadcast the Annual Meeting as a live audio webcast at www.flowserve.com, under the “Investors—Events & Presentations” section.

At the Annual Meeting, shareholders will vote on the following matters either in person or by proxy:

1.

the election of ten directors, each to serve a term expiring at the 2020 Annual Meeting of Shareholders;

2.

an advisory vote to approve the Company’s executive compensation;

3.

ratification of the appointment of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm for 2019;

4.

approval of the Flowserve Corporation 2020 Long-Term Incentive Plan;

5.

two shareholder proposals, if properly presented; and

6.

any other business properly presented at the Annual Meeting.

The enclosed proxy statement contains other important information that you should read and consider before you vote.

Record date:

Shareholders of record of the Company’s common stock, par value $1.25 per share, at the close of business on March 29, 2019 are entitled to notice of and to vote at the Annual Meeting.

Voting Information:

In accordance with Securities and Exchange Commission rules, we are furnishing proxy materials to our shareholders on the Internet, rather than by mail. We believe this e-proxy process expedites our shareholders’ receipt of proxy materials, lowers our costs and reduces the environmental impact of our Annual Meeting. The proxy statement and annual report to shareholders and any other proxy materials are available on our hosted website at www.proxyvote.com. For additional related information, please refer to the section entitled “Important Notice of Electronic Availability of Materials for the Shareholder Meeting to be held on May 23, 2019” in the enclosed proxy statement.

Your vote is very important. Whether or not you plan to attend the Annual Meeting, please complete and return your proxy card or vote by telephone or via the Internet by following the instructions included in the Notice of Internet Availability of Proxy Materials. Returning a proxy card or otherwise submitting your proxy does not deprive you of your right to attend the Annual Meeting and vote in person.

By order of the Board of Directors,

 

 

 

Lanesha T. Minnix
Senior Vice President,
Chief Legal Officer and Corporate Secretary

YOU CAN VOTE BY ANY OF THE FOLLOWING METHODS:

INTERNET

BY TELEPHONE

BY MAIL

IN PERSON

www.proxyvote.com until May 22, 2019

(1-800-690-6903) until May 22, 2019

Complete by signing and returning your proxy or voting instruction card before May 23, 2019

 

If you are a registered shareholder. You may deliver a completed proxy card or vote by ballot at the meeting.

Please refer to the enclosed proxy materials or the information forwarded by your bank, broker or other holder of record to see which voting methods are available to you.


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Proxy Summary

This summary highlights information contained elsewhere in the proxy statement. This summary does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. Page references are supplied to help you find additional information in the proxy statement.

2019 Annual Meeting of Shareholders

Date and Time: May 23, 2019, 11:30 a.m. (local time)

Record Date: March 29, 2019

Location: Flowserve Global Technology and Training Center, 4343 W. Royal Lane, Irving, Texas 75063

Audio Webcast: The Annual Meeting will be broadcast as a live audio webcast at www.flowserve.com, under the “Investors—Events & Presentations” section.

Voting Matters

 

Board Vote Recommendation

Page Reference
(for more detail)

Election of Directors

FOR each nominee

14

Management Proposals:

 

Advisory Vote on Executive Compensation

FOR

49

Ratification of Auditors

FOR

55

2020 Long-Term Incentive Plan

FOR

56

Shareholder Proposals:

 

Adopt Shareholder Proposal on Greenhouse Gas Emissions

AGAINST

66

Adopt Shareholder Proposal on Right to Act by Written Consent

AGAINST

68

How to Vote (page 11)

YOU CAN VOTE BY ANY OF THE FOLLOWING METHODS:

INTERNET

BY TELEPHONE

BY MAIL

IN PERSON

www.proxyvote.com until May 22, 2019

(1-800-690-6903) until May 22, 2019

Complete by signing and returning your proxy or voting instruction card before May 23, 2019

 

If you are a registered shareholder. You may deliver a completed proxy card or vote by ballot at the meeting.

Please refer to the enclosed proxy materials or the information forwarded by your bank, broker or other holder of record to see which voting methods are available to you.

 

 

 

 - 2019 PROXY STATEMENT    6


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Board Nominees (page 15)

 

 - 2019 PROXY STATEMENT    7


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Executive Officers (page 22)

Name

Age

Position

Since

Previous Position

R. Scott Rowe

48

President and CEO

April 2017

President — Cameron Group, Schlumberger Ltd.

Elizabeth L. Burger

48

Senior VP and Chief Human Resources Officer

April 2018

Chief Human Resources Officer, Hanesbrands Inc.

Lee S. Eckert

52

Senior VP and Chief Financial Officer

October 2017

Senior Vice President and CFO, CHC Group LLC

Keith E. Gillespie

53

Senior VP and Chief Sales Officer

May 2015

Managing Director, AlixPartners LLP

John R. Lenander

61

President, Flow Control Division

February 2017

Interim President, Flow Control Division

Lanesha T. Minnix

44

Senior VP and Chief Legal Officer

June 2018

SVP and General Counsel, BMC Stock Holdings, Inc.

Kirk R. Wilson

51

President, Aftermarket Services & Solutions

September 2015

Flowserve President, Services & Solutions

David J. Wilson

50

President, Flowserve Pumps Division

September 2017

President, Industrial, SPX Flow, Inc.

Executive Compensation Highlights (page 24)

Objectives and Principles

Our key compensation objectives are to attract and retain key leaders, reward current performance, drive future performance and align the long-term interests of our executives with those of our shareholders. We use the following principles to effect these objectives:

Compensation Should Reinforce Our Business Objectives and Strategy we consider our key strategies for achieving our business vision when identifying incentive measures and assigning goals and objectives.

Compensation Should Align Pay and Performance a significant portion of our executives’ total compensation should be tied to how well they perform individually and should be “at risk” based on how well the Company performs.

Compensation Levels Should be Market Competitive our executive compensation program is compared to relevant market data to ensure we encourage building long-term shareholder value and attract and retain executive talent.

The Executive Compensation Program Should be Reviewed Annually for Effectiveness our Organization and Compensation Committee conducts an annual review of all executive compensation program components to ensure alignment with our compensation objectives.

Performance-Based Compensation Should be Benchmarked internal performance metrics without comparison to an industry-appropriate, high performing external benchmark yield an incomplete measure of Company performance.

Incentive Compensation Should Represent the Majority of Total Compensation the proportion of an executive’s total compensation that is “at risk” based on individual or Company performance should increase with the scope and level of responsibilities.

Incentive Compensation Should Balance Short-Term and Long-Term Performance we use annual cash incentive opportunities and equity-based awards to balance the Company’s short- and long- term performance objectives.

Long-Term Incentives Should Balance Stock- and Financial-Based Achievements – our equity awards are equally weighted between time-vested restricted stock units, which makes the Company’s share price a targeted incentive, and contingent performance shares, which emphasize achievement of financial performance metrics.

Executive Compensation Program Elements

Category

Compensation Element

Description

Cash

Base Salary

Fixed cash compensation based on responsibilities of the position

 

Annual Incentive Opportunity

Annual cash incentive for achievement of financial performance metrics

Long-Term Incentives

Restricted Stock Units

Vests ratably over a three-year period

 

Contingent Performance Units

Cliff vests at end of a three-year period based on financial performance metrics

Retirement

Qualified Pension Plan

Qualified pension plan, available to all salaried U.S. employees

Senior Management Pension Plan

Partially-funded, non-qualified defined benefit restoration plan, available to certain U.S. employees based on salary level

Supplemental Executive Pension Plan

Partially-funded, non-qualified supplemental defined benefit plan, available to eligible U.S. executives to maintain competitive total retirement benefits

 

401(k) Plan

Qualified 401(k) plan available to all U.S. employees

Other

Severance Plan

Sets standard benefits for senior executives in the event of severance

 

Change-in-Control Plan

Sets standard benefits for senior executives upon a change-in-control

 

Other Benefits

Physical exam, enhanced vacation; no other perquisites offered

 

 

 

 

 - 2019 PROXY STATEMENT    8


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2018 Executive Total Compensation Mix

 

 

2018 Executive Compensation Summary (page 40)

Name and

Principal Position

Salary

($)

Bonus

($)

Stock

Awards

($)

Non-Equity

Incentive Plan

Compensation

($)

Change in Pension

Value and Non-

Qualified Deferred

Compensation

Earnings

($)

All Other

Compensation

($)

Total

($)

R. Scott Rowe
President and CEO

1,126,654

5,944,049

1,250,832

227,180

153,754

8,702,469

Lee S. Eckert
Senior VP and CFO

563,327

1,666,626

390,885

75,861

35,951

2,732,650

David Wilson
President, FPD

459,087

1,118,009

281,524

61,781

160,802

2,081,203

Keith E. Gillespie
Senior VP and Chief Sales Officer

485,000

1,077,752

406,042

84,258

44,976

2,098,028

Elizabeth L. Burger

Senior VP and CHRO

330,865

100,000

935,972

198,077

38,347

65,371

1,668,632

 

 - 2019 PROXY STATEMENT    9


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PROXY STATEMENT FOR THE 2019 ANNUAL MEETING OF SHAREHOLDERS

Flowserve Corporation
5215 N. O’Connor Blvd., Suite 2300
Irving, Texas 75039

Solicitation

We are providing these proxy materials in connection with the solicitation by the Board of Directors (the “Board”) of Flowserve Corporation, a New York corporation (the “Company” or “Flowserve”), of proxies to be voted at the 2019 Annual Meeting of Shareholders (the “Annual Meeting”), which will be held on Thursday, May 23, 2019, and at any adjournments or postponements of this scheduled meeting. The use of “we,” “us” or “our” in this proxy statement refers to the Company.

IMPORTANT NOTICE OF ELECTRONIC AVAILABILITY OF MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON MAY 23, 2019

Pursuant to Securities and Exchange Commission (“SEC”) rules, we may furnish proxy materials, including this proxy statement and the Company’s annual report for the year ending December 31, 2018, to our shareholders by providing access to such documents on the Internet instead of mailing printed copies. Most shareholders will not receive printed copies of the proxy materials unless they request them. Instead, a Notice of Internet Availability of Proxy Materials (“Notice of Internet Availability”), which was mailed to most of our shareholders, will explain how you may access and review the proxy materials and how you may submit your proxy on the Internet. If you would like to receive a paper or electronic copy of our proxy materials, please follow the instructions included in the Notice of Internet Availability. Shareholders who requested paper copies of proxy materials or previously elected to receive proxy materials electronically did not receive the Notice of Internet Availability and are receiving the proxy materials in the format requested.

This proxy statement and the Company’s annual report for the year ending December 31, 2018 are available electronically on our hosted website at www.proxyvote.com.

To access and review the materials made available electronically:

1.

Go to www.proxyvote.com and input the 16-digit control number from the Notice of Internet Availability or proxy card.

2.

Click the “2019 Proxy Statement” in the right column.

3.

Have your proxy card or voting instructions available.

We encourage you to review all of the important information contained in the proxy materials before voting. If you would like to attend the Annual Meeting in person, please refer to the inside back cover of this proxy statement or www.proxyvote.com for directions to the meeting. We will also broadcast the Annual Meeting as a live audio webcast at www.flowserve.com under the “Investors—Events & Presentations” section.

The Notice of Internet Availability and the proxy materials are first being made available to our shareholders on or about April 11, 2019.

Cost of Proxy Solicitation

The solicitation of proxies is made by our Board and will be conducted primarily by mail. Brokerage firms and other custodians, nominees and fiduciaries are reimbursed by the Company for reasonable out-of-pocket expenses that they incur to send proxy materials to shareholders and solicit their votes. In addition to this mailing, proxies may be solicited, without extra compensation, by our officers and employees, by mail, telephone, facsimile, electronic mail and other methods of communication. The Company bears the full cost of soliciting proxies. The Company has also retained Alliance Advisors to aid in the solicitation of proxies by mail, telephone, facsimile, e-mail and personal solicitation and will request brokerage houses and other nominees, fiduciaries and custodians to forward soliciting materials to beneficial owners of the Company’s common stock, par value $1.25 per share (“common stock”). For these services, the Company will pay Alliance Advisors a fee of $9,000 plus reimbursement for reasonable out-of-pocket expenses.

Shareholders Sharing an Address

To reduce the expenses of delivering duplicate proxy materials, we deliver one Notice of Internet Availability and, if applicable, annual report and proxy statement, to multiple shareholders sharing the same mailing address unless otherwise requested. We will promptly send a separate annual report and proxy statement to a shareholder at a shared address upon request at no cost. Shareholders with a shared address may also request that we send a single copy in the future if we are currently sending multiple copies to the same address. Requests related to delivery of proxy materials may be made by calling Investor Relations at (972) 443-6500 or writing to Flowserve Corporation, Attention: Investor Relations, 5215 N. O’Connor Blvd., Suite 2300, Irving, Texas 75039. Shareholders who hold shares in “street name” (as described below) may contact their brokerage firm, bank, broker-dealer or similar organization to request information about this “householding” procedure.

 - 2019 PROXY STATEMENT    10


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Voting

Who May Vote and Number of Votes

If you are a shareholder of record at the close of business on March 29, 2019 (the “Record Date”), you may vote on the matters proposed in this proxy statement. You have one vote for each share you own.

Quorum for the Meeting

A majority of the outstanding shares of common stock entitled to vote at the Annual Meeting and represented in person or by proxy constitutes a quorum. A quorum is necessary to conduct business at the Annual Meeting. You are part of the quorum if you have voted. Shares that a shareholder abstains from voting on a particular proposal are counted as present at the meeting for purposes of determining a quorum.

Broker non-votes are also counted as present for purposes of determining a quorum. A “broker non-vote” occurs when a broker holding shares in “street name” for a beneficial owner is represented in person or by proxy at the meeting but does not vote on a particular proposal because the broker has not received voting instructions from the beneficial owner and cannot or chooses not to vote the shares in its discretion for that particular proposal.

Counting of Votes

The voting standards required to elect directors and approve the other proposals, as well as the treatment of abstentions and broker non-votes, are described with each proposal under the respective “Required Vote and Recommendation” heading.

Only “votes cast” count in the voting results, and abstentions are not considered votes cast. If your shares are held through a broker, your vote instructs the broker how you want your shares to be voted. If you vote on each proposal, your shares will be voted in accordance with your instructions. Under the rules of the New York Stock Exchange (“NYSE”), brokers may vote shares they hold in “street name” on behalf of beneficial owners who have not voted with respect to certain discretionary matters. The proposal to ratify the appointment of PricewaterhouseCoopers LLP (Proposal Three) is considered a discretionary matter, so brokers may vote shares on this matter in their discretion if no voting instructions are received. However, the election of directors (Proposal One), the advisory vote on executive compensation (Proposal Two), the approval of the Company’s 2020 Long-Term Incentive Plan (Proposal Four) and the shareholder proposals (Proposal Five and Proposal Six) are NOT considered discretionary matters, so brokers have no discretion to vote shares for which no voting instructions are received, and no vote will be cast if you do not vote on those items. We therefore urge you to vote on ALL voting items.

The advisory vote on executive compensation is non-binding, meaning that our Board will not be obligated to take any compensation actions, or to adjust our executive compensation programs or policies, as a result of the vote. Notwithstanding the advisory nature of the vote, the resolution will be considered passed with the affirmative vote of a majority of the votes cast at the Annual Meeting.

There are no dissenters’ rights of appraisal with respect to the matters to be acted upon at the meeting.

At the close of business on the Record Date, 131,101,071 shares of common stock were issued and outstanding (excluding treasury shares) that may be voted at the Annual Meeting.

How to Vote

Voting by Proxy Holders for Shares Registered in the Name of a Brokerage Firm or Bank

If your shares are held by a broker, bank or other nominee (i.e., in “street name”), you will receive instructions from your nominee, which you must follow in order to have your shares voted. “Street name” shareholders who wish to vote at the meeting will need to obtain a proxy from the broker, bank or other nominee that holds their shares to confirm their shareholder status for entry into the Annual Meeting.

Voting by Proxy Holder for Shares Registered Directly in the Name of Shareholder

If you hold your shares in your own name as a holder of record, you must vote your shares in person at the Annual Meeting or instruct the proxy holders named on the proxy card how to vote your shares by either (i) using the Internet website or the toll-free telephone number set forth below or (ii) if you received paper copies of the proxy materials, signing, dating and mailing the enclosed proxy card to our independent proxy tabulation firm, Broadridge Investor Communications Services (“Broadridge”), in the enclosed envelope. Each of these voting methods is described below:

Vote by Internet. You have the option to vote via the Internet at the address of www.proxyvote.com by following the on-screen instructions that will direct you how to vote your shares. Internet voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on May 22, 2019. Have your proxy card available when you access the Internet website. IF YOU VOTE BY INTERNET, YOU DO NOT NEED TO RETURN A PROXY CARD.

 - 2019 PROXY STATEMENT    11


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Vote by Telephone. If you hold your shares in your name as a holder of record, you may vote by telephone by calling toll-free to 1-800-690-6903 from the United States and Canada and following the series of voice instructions that will direct you how to vote your shares. Have your proxy card available when you place your telephone call. Telephone voting is available 24 hours a day, 7 days a week, until 11:59 p.m., Eastern Time, on May 22, 2019. IF YOU VOTE BY TELEPHONE, YOU DO NOT NEED TO RETURN A PROXY CARD.

Vote by Mail. If you received paper copies of the proxy materials, you may mark the enclosed proxy card, sign and date it and return it to Broadridge in the enclosed envelope as soon as possible before the Annual Meeting. Your signed proxy card must be received by Broadridge prior to the date of the Annual Meeting for your vote to be counted at the Annual Meeting.

Vote in Person. If you are a registered shareholder and attend the Annual Meeting in person, you may deliver a completed proxy card or vote by ballot at the Annual Meeting.

Voting by Participants in the Flowserve Corporation Retirement Savings Plan

If you are a participant in the Flowserve Corporation Retirement Savings Plan, your vote serves as a voting instruction to the trustee for this plan.

To be timely, if you vote your shares in the Flowserve Corporation Retirement Savings Plan by telephone or Internet, your vote must be received by 11:59 p.m., Eastern Time, on May 22, 2019. If you do not vote by telephone or Internet, please return your proxy card as soon as possible.

If you vote in a timely manner, the trustee will vote the shares as you have directed.

If you do not vote, or if you do not vote in a timely manner, the trustee will vote your shares in the same proportion as the shares voted by participants who timely return their cards to the trustee.

Changing Your Vote

You may revoke your proxy at any time before it has been exercised at the Annual Meeting by:

timely mailing in a revised proxy dated later than the prior submitted proxy;

timely notifying the Corporate Secretary in writing that you are revoking your proxy;

timely casting a new vote by telephone or the Internet; or

if you are a holder of record, appearing in person and voting by ballot at the Annual Meeting.

Vote Tabulations

Tabulation of voted proxies will be handled by Broadridge, an independent firm. Broadridge is the inspector of elections for the Annual Meeting.

Shareholder Proposals and Nominations

Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the “Exchange Act”), certain shareholder proposals may be eligible for inclusion in our 2020 proxy statement. These shareholder proposals must comply with the requirements of Rule 14a-8, including a requirement that shareholder proposals be received by the Corporate Secretary no later than December 13, 2019. We strongly encourage any shareholder interested in submitting a proposal to contact the Corporate Secretary in advance of this deadline to discuss the proposal. Submitting a shareholder proposal does not guarantee that we will include it in our proxy statement. The Corporate Governance and Nominating Committee reviews all shareholder proposals and makes recommendations to the Board for action on such proposals.

In order for an eligible shareholder or group of shareholders to nominate a director nominee for election at our 2020 annual meeting of shareholders pursuant to the proxy access provision of our By-laws, the shareholder must submit notice of such nomination and other required information in writing between November 13, 2019 and December 13, 2019. If, however, the 2020 annual meeting is held more than 30 days before or more than 60 days after the anniversary of the 2019 annual meeting, the shareholder must submit any such notice and other required information between (i) 150 calendar days prior to the 2020 annual meeting and (ii) the later of 120 calendar days prior to the 2020 annual meeting or 10 days following the date on which the date of the 2020 annual meeting is publicly announced. The nomination and supporting materials must also comply with the requirements set forth in our By-laws for inclusion of director nominees in the proxy statement.

Alternatively, under the Company’s By-laws, if a shareholder does not want to submit a proposal for inclusion in our proxy statement but wants to introduce it at our 2020 annual meeting, or intends to nominate a person for election to the Board directly (rather than by inclusion in our proxy statement or by recommending such person as a candidate to our Corporate Governance and Nominating Committee as described below under “Board of Directors—Committees of the Board—Corporate Governance and Nominating Committee”), the shareholder must submit the proposal or nomination in writing between January 24, 2020 and February 23, 2020. If, however, the 2020 annual meeting is held more than 30 days before or more than 60 days after the anniversary of the 2019 Annual Meeting, the shareholder must submit any such proposal between (i) 120 calendar days prior to the 2020 annual meeting and (ii)

 - 2019 PROXY STATEMENT    12


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the later of 90 calendar days prior to the 2020 annual meeting or 10 days following the date on which the date of the 2020 annual meeting is publicly announced.

The shareholder’s submission must be made by a registered shareholder on his or her behalf or on behalf of a beneficial owner of the shares, and must include detailed information specified in our By-laws concerning the proposal or nominee, as the case may be, and detailed information as to the shareholder’s interests in Company securities. At the 2020 annual meeting, we will not entertain any proposals or nominations that do not meet these requirements other than shareholder nominations eligible to be included in our 2020 proxy statement as described above.

If the shareholder does not comply with the requirements of Rule 14a-4(c)(1) under the Exchange Act, we may exercise discretionary voting authority under proxies that we solicit to vote in accordance with our best judgment on any such shareholder proposal or nomination. The Company’s By-laws are posted on our website at www.flowserve.com under the “Investors — Corporate Governance” caption. To make a submission or to request a copy of the Company’s By-laws, shareholders should contact our Corporate Secretary at the following address:

Flowserve Corporation
5215 N. O’Connor Blvd., Suite 2300
Irving, Texas 75039

Attention: Corporate Secretary

We strongly encourage shareholders to seek advice from knowledgeable legal counsel and contact the Corporate Secretary before submitting a proposal or a nomination.

 - 2019 PROXY STATEMENT    13


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PROPOSAL ONE:

ELECTION OF DIRECTORS

The Company’s Board currently consists of eleven directors. Leif E. Darner will retire from the Board effective as of the Annual Meeting and is therefore not nominated for reelection. Upon Mr. Darner’s retirement, the Board will reduce the number of directors to ten. Accordingly, the Board has nominated the following ten directors: R. Scott Rowe, Ruby R. Chandy, Gayla J. Delly, Roger L. Fix, John R. Friedery, John L. Garrison, Joe E. Harlan, Michael C. McMurray, Rick J. Mills and David E. Roberts, whose terms of office as members of the Board are expiring at this Annual Meeting, to serve a one-year term expiring at the 2020 annual meeting of shareholders. Biographical information for each nominee is provided below under the headings “Board of Directors—Biographical Information—Nominees to Serve an Annual Term Expiring at the 2020 Annual Meeting of Shareholders.”

Required Vote and Recommendation

Our By-laws require that, in an uncontested election, each director will be elected by a vote of the majority of the votes cast. A majority of votes cast means that the number of shares cast “for” a director’s election exceeds the number of votes cast “against” that director. We will not treat any share as having cast a vote on this proposal and will therefore have no effect on the proposal (a) where the ballot is marked as abstained, (b) if it is otherwise present at the Annual Meeting but there is an abstention or (c) where a shareholder gives no authority or direction. In a contested election, the directors will be elected by a plurality of the votes cast, meaning the directors receiving the largest number of “for” votes will be elected to the open positions.

In an uncontested election, any nominee for director who duly holds office as a director under the By-Laws and does not receive an affirmative vote of a majority of the votes cast in favor of or against such nominee is required to tender his or her resignation promptly after such election. The independent directors of the Board, giving due consideration to the best interests of the Company and our shareholders, will then evaluate the relevant facts and circumstances and make a decision, within 30 days after the election, on whether to accept the tendered resignation. Any director whose resignation is under consideration is prohibited from participating in the Board’s decision. The Board will promptly disclose publicly its decision and, if applicable, the reasons for rejecting the tendered resignation. The Board may fill any vacancy resulting from a director’s accepted resignation, as provided in our By-laws.

Broker non-votes will not be considered to have voted on this proposal and will therefore have no effect on the proposal.

The individuals named as proxies on the enclosed proxy card will vote your proxy “FOR” the election of these nominees unless you instruct otherwise or you abstain for any one or more of them. If any director is unable to stand for re-election, the Board may reduce the number of directors or choose a substitute. The nominees have indicated their willingness to serve as directors, and we have no reason to believe any nominee will not be able to stand for re-election.

The Board recommends that you vote FOR the election of all nominees to serve as directors.

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Board of Directors — Biographical Information

Nominees to Serve an Annual Term Expiring at the 2020 Annual Meeting of Shareholders

R. Scott Rowe, age 48, has served as a director and as President and Chief Executive Officer of Flowserve since April 2017. Mr. Rowe previously served as President of the Cameron Group of Schlumberger Ltd, a position he assumed in April 2016 following the merger between Schlumberger Ltd. and Cameron International Corporation (“Cameron”). Prior to this position, he served as President and Chief Executive Officer of Cameron from October 2015 to April 2016. From October 2014 to September 2015, Mr. Rowe served as President and Chief Operating Officer of Cameron, from March 2014 to September 2014, Mr. Rowe served as Chief Executive Officer of OneSubsea, a joint venture established by Cameron and Schlumberger, from August 2012 to February 2014, Mr. Rowe served as President of the Subsea Systems division of Cameron, and from April 2010 to August 2012, Mr. Rowe served as President of the Engineered and Process Valves division of Cameron.

We believe Mr. Rowe is well qualified to serve as a director due to his position as the Company’s President and Chief Executive Officer, which enables him to provide the Board with intimate knowledge of the Company’s day to day operations.

 

Ruby R. Chandy, age 57, has served as a director since May 2017 and serves as a member of the Finance Committee and Organization and Compensation Committee. Ms. Chandy was the President of the Industrial Division of Pall Corporation, a leading supplier of filtration, separation, and purification technologies, from April 2012 to November 2015. Previously, she was Managing Director, Vice President of Dow Plastics Additives, a unit of The Dow Chemical Company, a multinational chemical corporation, from 2011 to April 2012. Ms. Chandy is currently a director of AMETEK, Inc., a manufacturer of electronic instruments and electromechanical devices, serving since May 2013. She served as a director of IDEX Corporation, a designer and manufacturer of fluidics systems and specialty engineered products, from April 2006 until April 2013.

We believe Ms. Chandy is well qualified to serve as a director due to her executive management experience, marketing and strategy skills, relevant experience in industrial companies, extensive engineering and management education, broad international business and financial experience and enterprise risk oversight experience.

 

Gayla J. Delly, age 59, has served as a director since January 2008 and serves as Chair of the Audit Committee and as a member of the Corporate Governance and Nominating Committee. From January 2012 to September 2016, Ms. Delly served as President and Chief Executive Officer of Benchmark Electronics Inc., a company that provides contract manufacturing, design, engineering, test and distribution services to manufacturers of computers, medical devices, telecommunications equipment and industrial control and test instruments. Ms. Delly is a certified public accountant. At Benchmark Electronics Inc., she previously served as President from 2006 to December 2011, Executive Vice President and Chief Financial Officer from 2001 to 2006, and as Corporate Controller and Treasurer from 1995 to 2001. Ms. Delly currently serves as a director and member of the audit committee and nominating and corporate governance committee of Broadcom Ltd., a designer, developer and global supplier of semiconductor devices, being appointed in December 2017. From March 2005 to October 2008, Ms. Delly also served as a member of the board of directors for Power One, a provider of power conversion and management solutions.

We believe that Ms. Delly is well qualified to serve as a director due to her international manufacturing experience, with specific focus on engineering and technology in emerging markets, including Asia and Latin America, which provides valuable insight into the Company’s operations and assists in identifying product portfolio opportunities. In addition to her board experience, Ms. Delly has valuable executive leadership experience and financial expertise gained from her time with Benchmark Electronics Inc.

 

Roger L. Fix, age 65, has served as a director since April 2006 and serves as the Chairman of the Board. Mr. Fix served as the President and Chief Executive Officer of Standex International Corporation (“Standex”), a publicly traded diversified manufacturing company, from 2003 to January 2014 and as a director for Standex from 2001 to October 2017. Mr. Fix served as the non-executive chairman of the Standex board of directors from January 2014 to October 2016. He was Standex’s Chief Operating Officer from 2001 to 2002. Before joining Standex, he was employed by Outboard Marine Corporation, a marine manufacturing company, as Chief Executive Officer and President from 2000 to 2001 and Chief Operating Officer and President during 2000. He also served as a member of its board of directors from 2000 to 2001. He served as Chief Executive of John Crane Inc., a global manufacturer of mechanical seals for pump and compressor applications in the process industry, from 1998 to 2000 and as its President — North America from 1996 to 1998. He was President of Xomox Corporation, a manufacturer of process control valves and actuators, from 1993 to 1996. He was also employed by Reda Pump Company, a manufacturer of electrical submersible pumping systems for oil production, from 1981 to 1993, most recently as Vice President and General Manager/Eastern Division. Since June 2014, Mr. Fix has served as a director of Commercial Vehicle Group, Inc., a global supplier of complete cab systems in the heavy-duty truck, construction and agricultural markets including the specialty and military transportation markets.

We believe that Mr. Fix is well qualified to serve as a director due to his executive leadership experience, including with John Crane Inc., Xomox Corporation and other competitor companies, which provides extensive knowledge of the Company’s products and valuable insight into the competitive landscape for flow control products. In addition to his board experience, Mr. Fix also has international operations experience and corporate development expertise.

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John R. Friedery, age 62, has served as a director since August 2007 and serves as Chair of the Corporate Governance and Nominating Committee and as a member of the Organization and Compensation Committee. From January 2008 to January 2010, Mr. Friedery served as Senior Vice President; President, Metal Beverage Packaging, Americas and Asia, for Ball Corporation, a provider of metal and plastic packaging for beverages, foods and household products, and of aerospace and other technologies services. From January 2004 to December 2007, he served as Ball Corporation’s Chief Operating Officer, Packaging Products Americas, and from April 2000 to May 2004 as the President, Metal Beverage Container operations, as well as other leadership roles in Ball Corporation since 1988. Prior to his employment with Ball Corporation, he served in field operations for Dresser/Atlas Well Services and in operations, exploration and production for Nondorf Oil and Gas. Mr. Friedery is currently providing strategic and management consulting services to the packaging and other manufacturing industries.

We believe that Mr. Friedery is well qualified to serve as a director due to his extensive operational experience with an international industrial manufacturing focus, which provides a global business perspective and a deep understanding of the Company’s industry, end-markets and strategic focus. In addition to his board experience, Mr. Friedery also has experience with renewables and sustainability expertise gained from his service with Ball Corporation.

 

John L. Garrison, age 58, has served as a director since October 2018 and serves as a member of the Organization and Compensation Committee and Corporate Governance and Nominating Committee. Since November 2015, Mr. Garrison has served as the President and Chief Executive Officer of Terex Corporation, a worldwide manufacturer of lifting and material handling solutions, and since August 2018 has served as the Chairman of the Board of Terex Corporation. Previously, he was President and Chief Executive Officer of Bell Helicopter, a segment of Textron, Inc., since 2009.

We believe that Mr. Garrison is well qualified to serve as a director due to his strong manufacturing, international operations and leadership experience gained through his various executive and board leadership roles. In addition, Mr. Garrison is currently leading an operational transformation at Terex Corporation which began in 2016 and has similar elements to the Company’s Flowserve 2.0 Transformation program. This experience provides Mr. Garrison with unique insights into the current climate the Company faces and the significant focus required by the Company to implement the Flowserve 2.0 Transformation.

 

Joe E. Harlan, age 59, has served as a director since August 2007 and serves as a member of the Audit Committee and the Corporate Governance and Nominating Committee. From September 2011 to August 2017, Mr. Harlan served in various executive positions at Dow Chemical Company, a global specialty chemical, advanced materials, agrosciences and plastics company, including most recently as Vice Chairman and Chief Commercial Officer from October 2014 to August 2017. From 2008 to August 2011, he served as Executive Vice President of the Consumer and Office Business of the 3M Company, a diversified consumer products and office supply provider. From 2005 to 2008, Mr. Harlan served as 3M Company’s Executive Vice President of the Electro and Communications Business. He served as President and Chief Executive Officer of Sumitomo 3M Ltd., a diversified technology and products manufacturer, from 2003 to 2004. Prior to his career with 3M Company, he spent 20 years with General Electric Company, holding a number of leadership positions including serving as Vice President of Finance and Chief Financial Officer for GE Lighting Group (Global). Mr. Harlan has served as a director of Hitachi, Ltd., a global information technology company headquartered in Japan, since June 2018.

We believe that Mr. Harlan is well qualified to serve as a director due to his strong international experience and familiarity with emerging markets, including Asian markets, gained through his various executive leadership roles. In addition to his board experience, Mr. Harlan also has experience in engineering and technology service from his positions with General Electric and 3M Company.

 

Michael C. McMurray, age 54, has served as a director since October 2018 and serves as a member of the Audit Committee and Finance Committee. Since August 2012, Mr. McMurray has served as the Senior Vice President and Chief Financial Officer of Owens Corning, a global manufacturer of insulation, roofing and fiberglass composites. Prior to this role, he served in the roles of Vice President, Investor Relations and Treasurer of Owens Corning and Vice President and Finance Leader of Owens Corning’s Building Materials Group. Prior to joining Owens Corning in 2008, he had over two decades of finance experience at Royal Dutch Shell.

We believe that Mr. McMurray is well qualified to serve as a director due to his extensive knowledge of global industrial manufacturing, the Company’s end markets and the financial markets, which provides valuable insight into the strategic decisions to capitalize on the Company’s growth opportunities. Additionally, Mr. McMurray has valuable multinational executive leadership and financial expertise at both Owens Corning and Royal Dutch Shell.

 

Rick J. Mills, age 71, has served as a director since May 2007 and serves as a member of the Audit Committee and the Finance Committee. He served as a Vice President of Cummins Inc., a manufacturer of large diesel engines, and President of the Components Group at Cummins Inc., from 2005 to March 2008. He was Vice President and President — Filtration Business from 2000 to 2005 and held other key management positions with Cummins Inc. from 1970 to 2000, including Corporate Controller and Chief Accounting Officer from 1996 to 2000. From February 2005 to April 2009, Mr. Mills served as a director for Rohm & Haas, a specialty chemicals company, which was sold to Dow Chemical in April 2009. From 2008 to 2010, Mr. Mills served as a director and member of the audit committee of GERDAU Ameristeel, the second largest mini-mill steel producer in North America, which was acquired by GERDAU, SA in 2010. Since January 2012, Mr. Mills has served as a director and member of the audit committee of Commercial Metals Company, a global manufacturer, recycler and marketer of steel and metal products and related materials. From October 2013 to May 2018, Mr. Mills served as director and member of the audit committee of Masonite International, a global manufacturer of interior and exterior doors, door components and door entry systems. Mr. Mills intends to retire from the Board at the 2020 annual meeting of shareholders.

We believe that Mr. Mills is well qualified to serve as a director due to his extensive knowledge of industrial manufacturing and cyclical

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end-markets, which provides a deep familiarity with the Company’s industrial challenges and opportunities. Additionally, Mr. Mills has valuable corporate governance and compliance expertise through his board of directors and audit committee experience.

 

David E. Roberts, age 58, has served as a director since November 2011 and serves as Chair of the Organization and Compensation Committee and as a member of the Finance Committee. Since February 2017, Mr. Roberts has served as the Chief Executive Officer of Gavilan Resources, LLC, a private company formed in partnership with Blackstone that is focused on oil and natural gas development and production opportunities in South Texas. Prior to this role, Mr. Roberts served as President and CEO of Penn West Exploration, a Canadian oil and gas exploration and production company, from June 2013 to October 2016. He served as Executive Vice President and Chief Operating Officer of Marathon Oil Corporation, an independent upstream company with international operations in exploration and production, oil sands mining and integrated gas, from 2011 through December 2012. He held other key management positions with Marathon from 2006 through 2011, including Executive Vice President in charge of Marathon’s worldwide upstream operations and Senior Vice President of business development. Prior to his time at Marathon, Mr. Roberts held leadership roles at BG Group, an integrated natural gas company, and served as advisor to the Vice Chairman of Chevron Corporation from 2001 to 2003.

We believe Mr. Roberts is well qualified to serve as a director due to his executive leadership experience, strong international operations background, business development experience and extensive knowledge of and experience in the energy industry. This provides Mr. Roberts with a unique insight into the Company’s operational challenges and opportunities and its end-markets and customer needs.

Role of the Board; Corporate Governance Matters

The Board has a duty to oversee the Chief Executive Officer and other senior management in the competent and ethical operation of the Company on a day-to-day basis and to help ensure that our shareholders’ best interests are served. In its efforts to satisfy this duty, the Board has established internal guidelines designed to promote effective oversight of the Company’s vital business affairs that the Board monitors, which it updates as it deems appropriate.

The guidelines set parameters for the director recruiting process and the composition of Board committees. They also determine the formal process for review and evaluation of the Chief Executive Officer, individual directors and the Board’s performance. The guidelines further establish targets for director equity ownership and require a director to offer his or her resignation when such director’s principal occupation changes during a term of office. Under such circumstances, the Corporate Governance and Nominating Committee of the Board will review whether it is appropriate for the director to continue serving on the Board. Finally, these guidelines establish age limits for directors, which may be waived by the Board if deemed appropriate.

Further, the Board has adopted formal Corporate Governance Guidelines (“Guidelines”), which, among other things, contain a prescribed set of qualification standards with respect to the determination of director independence, which either meet or exceed the independence requirements of the NYSE. Under the Guidelines, only those directors who have no material relationship with the Company (except in his or her role as a director) are deemed independent. The Guidelines specify the criteria by which the independence of our directors will be determined, including strict guidelines for directors and their immediate family members with respect to past employment or affiliation with the Company or its independent registered public accounting firm.

The Board has determined that, other than R. Scott Rowe, the Company’s President and Chief Executive Officer, each member of the Board, including all persons nominated for re-election, meet the independence standards set forth in the applicable rules of the SEC and the NYSE corporate governance listing standards.

The Board’s Guidelines, and Code of Ethics, as well as the Company’s Code of Ethics and Code of Business Conduct, are available on the Company’s website at www.flowserve.com under the “Investors — Corporate Governance” caption.

Board Leadership Structure and Risk Oversight

The positions of Chairman of the Board and Chief Executive Officer have been separated at the Company since 2005. Roger L. Fix, the Company’s current Non-Executive Chairman of the Board, presides over the meetings of the Board, including executive sessions of the Board where only non-employee directors are present. He reviews and approves the agendas for Board meetings, among his other duties as Chairman of the Board. He also serves as an alternate member for all Board committees. Mr. Fix strives to attend as many committee meetings as possible.

We currently believe that separating the positions of Chairman of the Board and Chief Executive Officer is most appropriate for the Company because it places an independent director in a position of leadership on the Board. We believe this independent leadership and the Non-Executive Chairman’s authority to call meetings of the non-employee directors adds value to our shareholders by facilitating a more efficient exercise of the Board’s fiduciary duties in the current structure. We also believe the Non-Executive Chairman further enhances independent oversight by being responsible for establishing the Board’s annual schedule and collaborating with the Chief Executive Officer on the agendas for all Board meetings. The separation of Chairman and Chief Executive Officer also allows the Non-Executive Chairman to provide support and advice to the Chief Executive Officer, reinforcing the reporting relationship, and accountability, of the Chief Executive Officer to the Board.

The Company’s Chief Executive Officer and other members of senior management are responsible for the ongoing assessment and management of the risks the Company faces, including risks relating to capital structure, liquidity and credit, financial reporting, information technology, cybersecurity and public disclosure, operations and governance. The Board and each of the Board’s four committees (the Audit Committee, Finance Committee, Corporate Governance and Nominating Committee and Organization and Compensation Committee)

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oversee senior management’s policies and procedures in addressing these and other risks that fall within the scope of the Board’s and the committees’ respective areas of oversight responsibility. For example, the Board directly oversees risk management relating to strategic planning, the Finance Committee directly oversees risk management relating to capital structure and liquidity, the Corporate Governance and Nominating Committee directly oversees risk management relating to director independence and corporate governance and the Organization and Compensation Committee directly oversees risk management relating to employee compensation and succession planning. Additionally, the Audit Committee directly oversees risk management relating to financial reporting and public disclosure and legal and regulatory compliance and, in accordance with provisions of the NYSE Listed Company Manual, reviews and discusses, in a general manner, the process by which the Board and its committees oversee senior management’s exercise of risk management responsibilities. The Board is regularly informed through committee reports of each committee’s activities in overseeing risk management within their respective areas of oversight responsibility.

Meetings of the Board

The Board held nine regular meetings and one special meeting in 2018. Executive sessions of non-employee directors are normally held at each regular Board meeting. Any non-employee director may request that additional executive sessions be scheduled. Shareholders may communicate with the Company’s non-employee directors by following the instructions set forth under “—Shareholder Communications with the Board” below. Board members customarily have attended the Company’s annual meetings of shareholders. All Board members attended the Company’s 2018 annual meeting of shareholders with the exception of John L. Garrison and Michael C. McMurray as they joined the Board after the annual meeting. In 2018, each director attended at least 75% of the meetings of the Board and the committees on which he or she served during the period for which he or she has been a director.

Shareholder Communications with the Board

Shareholders and other interested parties may communicate with the Board directly by writing to: Non-Executive Chairman of the Board, c/o Flowserve’s Corporate Secretary, Flowserve Corporation, 5215 N. O’Connor Blvd., Suite 2300, Irving, Texas 75039. All such communications will be delivered to our chairman, Mr. Fix.

Committees of the Board

The Board maintains an Audit Committee, a Finance Committee, a Corporate Governance and Nominating Committee (“CG&N Committee”) and an Organization and Compensation Committee (“O&C Committee”). Only independent directors are eligible to serve on Board committees. Each committee is governed by a written charter. The charters of the Audit Committee, Finance Committee, CG&N Committee and O&C Committee are available on the Company’s website at www.flowserve.com under the “Investors — Corporate Governance — Documents & Charters” caption.

Committee Membership and Number of Meetings

The following table identifies the current members of each of the Board’s committees and the number of meetings held in 2018:

Name

Audit(1)(2)

Corporate Governance

& Nominating(2)

Finance(2)

Organization &

Compensation(2)

Ruby R. Chandy

 

 

 X

 X

Leif E. Darner(4)

 

 

Chair

 X

Gayla J. Delly

Chair

X

 

 

Roger L. Fix(3)

 

 

 

 

John R. Friedery

 

Chair

 

X

John L. Garrison

 

X

 

X

Joe E. Harlan

 X

X

 

 

Michael C. McMurray

X

 

X

 

Rick J. Mills

X

 

X

 

David E. Roberts

 

 

X

Chair

Number of Meetings Held

9

5

6

5

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(1)

The Board has determined that Ms. Delly qualifies as an audit committee financial expert under SEC rules and has accounting or related financial management expertise for purposes of the NYSE corporate governance listing standards. The Board has also determined that all members of the Audit Committee are financially literate, within the meaning of the NYSE corporate governance listing standards, and meet the applicable independence standards set forth in the SEC rules and required by the NYSE.

(2)

The Board has determined that all members of the committee meet the applicable independence standards of the NYSE.

(3)

As the Non-Executive Chairman of the Board of Directors, Mr. Fix serves as an alternate director of all committees for any committee member not in attendance at a committee meeting.

(4)

Mr. Darner is retiring at the Annual Meeting.

Audit Committee

The Audit Committee directly engages the Company’s independent auditors, pre-approves the scope of the annual external audit and pre-approves all audit and non-audit services to be provided by the independent auditor. The Audit Committee further approves and directly reviews the results of the Company’s internal audit plan. The Audit Committee also meets with management and the independent auditors to review the quality and accuracy of the annual and quarterly financial statements and considers the reports and recommendations of independent internal and external auditors pertaining to audit results, accounting practices, policies and procedures and internal controls. The Audit Committee also reviews and discusses, in a general manner, the process by which the Board and the other Board committees oversee senior management’s exercise of risk management responsibilities.

The Audit Committee meets regularly with the external and internal auditors in executive sessions to discuss their reports on a confidential basis. In addition, the Audit Committee prepares and issues the “Report of the Audit Committee” included in this proxy statement.

Finance Committee

The Finance Committee advises the Board on all corporate financing and related treasury matters regarding capital structure and major corporate transactions. The Finance Committee also approves major capital expenditures, including acquisitions, made by the Company and also advises the Board on the Company’s pension fund performance, information technology and cybersecurity risks.

Corporate Governance and Nominating Committee

The CG&N Committee is responsible for making recommendations to the Board for the positions of Chairman of the Board, President and Chief Executive Officer. The CG&N Committee is also responsible for recommending candidates for membership to the Board. Prior to considering director nominee candidates, the CG&N Committee assesses the appropriateness of the Board’s current size and composition and whether any vacancies on the Board are expected due to retirement or other factors. If additional directors are needed or vacancies are anticipated or otherwise arise, the CG&N Committee utilizes a variety of methods for identifying and evaluating nominee director candidates.

The identification and evaluation of director candidates begins with the Guidelines, which establish the criteria for Board membership. As a starting point under the Guidelines, all prospective Board members must possess the highest professional and personal ethics. Board members should have varied professional expertise in fields of accounting and finance, engineering, industrial sales, manufacturing, international operations, human resources and field service. Additionally, all existing and prospective Board members should have a broad strategic view, possess a global business perspective and demonstrate relevant and successful career experience. A Board member’s service on the boards of other public companies should be limited to a number that permits them, given their individual circumstances, to responsibly perform all director duties and effectively represent the interests of the shareholders.

The Guidelines further articulate the Board’s firm belief that, underlying the aforementioned criteria, the Board’s members should have a diversity of backgrounds, which is viewed in comprehensive terms. In evaluating diversity of backgrounds, the Board considers individual qualities and attributes, such as educational background, professional skills, business experience and cultural viewpoint, as well as more categorical diversity metrics, such as race, age, gender and nationality. This consideration is implemented through the selection process for director nominees, and the Board assesses its effectiveness in promoting diversity through an annual self-assessment process that solicits feedback concerning the appropriateness of the Board’s diversity, among other critical performance factors.

The CG&N Committee considers various potential director candidates who may come to the attention of the CG&N Committee through current Board members, professional search firms, shareholders or other persons. The CG&N Committee generally retains a national executive-recruiting firm to research, screen and contact potential candidates regarding their interest in serving on the Board, although the CG&N Committee may also use less formal recruiting methods.

A shareholder desiring to recommend a candidate for election to the Board should submit a written notice, as required by the Company’s By-laws, including the candidate’s name and qualifications to our Corporate Secretary, who will refer the recommendation to the CG&N Committee. The CG&N Committee may require any shareholder-recommended candidate to furnish such other information as may reasonably be required to determine the eligibility of such recommended candidate or to assist in evaluating the recommended candidate. The CG&N Committee may require the submission of a fully completed and signed Questionnaire for Directors and Executive Officers on the Company’s standard form and a written consent by the shareholder-recommended candidate to serve as a director, if so elected.

Under the proxy access provisions of our By-laws, eligible shareholders and/or shareholder groups are permitted to include shareholder-nominated director candidates in our proxy materials. Additional details about the process to include shareholder-nominated director candidates in our proxy materials are set forth under “—Shareholder Proposals and Nominations” above and in Article II, Section 9 of the Company’s By-laws.

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All identified candidates, including shareholder-recommended candidates, are evaluated by the CG&N Committee using generally the same methods and criteria, although those methods and criteria may vary from time to time depending on the CG&N Committee’s assessment of the Company’s needs and current situation.

The CG&N Committee also oversees the annual Board and committee self-evaluation process. The performance evaluations solicit anonymous input from the directors regarding the performance and effectiveness of the Board, the Board committees and individual directors, and provide an opportunity for directors to identify areas for improvements. The CG&N Committee reviews the results and feedback from the evaluation process and makes recommendations for improvements as appropriate. The Board has successfully used this process to evaluate Board and committee effectiveness and identify opportunities to strengthen the Board.

The CG&N Committee is also responsible for preparing materials for the Chief Executive Officer’s annual performance review conducted by the Board. Further, the CG&N Committee reviews and recommends, as deemed appropriate, changes to the Company’s corporate governance policies consistent with SEC rules and the NYSE corporate governance listing standards.

Organization and Compensation Committee

The O&C Committee is responsible for establishing executive compensation for officers, including the Chief Executive Officer and other corporate officers. As further discussed under “Executive Compensation,” decisions regarding compensation are made by the O&C Committee in a manner that is intended to be internally equitable, externally competitive and an incentive for effective performance in the best interests of our shareholders, while adhering to and promoting the Company’s risk management objectives. The O&C Committee is the administrator of the Company’s various equity and incentive compensation plans for key employees. The O&C Committee may, under certain circumstances, delegate routine or ministerial activities under these plans to management.

The O&C Committee also reviews the recommendations of the Chief Executive Officer and the Senior Vice President, Chief Human Resources Officer, regarding adjustments to the Company’s executive compensation programs. The O&C Committee has retained and regularly meets with its independent executive compensation consultant, Frederic W. Cook & Co., Inc. (“FW Cook”). FW Cook has assisted the O&C Committee in evaluating the Company’s compensation programs and adherence to the philosophies and principles stated below under “Executive Compensation—Compensation Discussion and Analysis.”

The O&C Committee is also responsible for reviewing management succession plans and for recommending changes in director compensation to the Board. The O&C Committee periodically reviews the organizational design, management development plans and managerial capabilities of the Company. The O&C Committee also prepares and issues the “Organization and Compensation Committee Report” included in this proxy statement.

Board of Directors Compensation

The following table sets forth certain information with respect to our non-employee director compensation for the fiscal year ended December 31, 2018. Compensation information for Mr. Rowe is set forth below under “Executive Compensation—Summary Compensation Table.” Mr. Rowe did not receive any compensation solely for service as a director.

Name

Fees Earned or Paid in Cash ($)

 

Stock Awards ($)(1)(2)

Total ($)

Ruby R. Chandy

115,000

(3)

124,992

239,992

Leif E. Darner

110,000

 

124,992

234,992

Gayla J. Delly

138,000

(3)

124,992

262,992

Roger L. Fix

225,000

(4)

124,992

349,992

John R. Friedery

110,000

 

124,992

234,992

John L. Garrison(5)

25,000

 

25,000

Joe E. Harlan

100,000

 

124,992

224,992

Michael C. McMurray(6)

25,000

 

25,000

Rick J. Mills

115,000

(3)

124,992

239,992

David E. Roberts

115,000

 

124,992

239,992

(1)

Eligible directors received an annual equity grant of 2,894 shares of restricted common stock on May 24, 2018, the date of the Company’s 2018 Annual Meeting of shareholders. The amounts shown in this column reflect the grant date fair value of the awards computed in accordance with Financial Accounting Standards Board Accounting Standards Codification 718, “Compensation – Stock Compensation”, and are calculated using a price per share of $43.19, the closing market price of the Company’s common stock as reported by the NYSE on the date of grant. Assumptions used in the valuations are discussed in Note 6 to the Company’s audited consolidated financial statements for the year ended December 31, 2018 in the Annual Report on Form 10-K filed on February 20, 2019.

(2)

The non-employee directors elected at the 2018 annual meeting of shareholders each had 2,894 shares of restricted common stock outstanding at December 31, 2018; all other shares held are vested.

(3)

Amount reported includes a 15% premium to actual fees due to the director’s election to defer all or a portion of cash retainer payments in the form of Company common stock under the Company’s director stock deferral plan.

(4)

Includes an additional $125,000 cash retainer for services as Non-Executive Chairman of the Board.

(5)

Mr. Garrison was elected to the Board effective October 2, 2018.

(6)

Mr. McMurray was elected to the Board effective October 2, 2018.

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2018 Director Compensation Elements

In 2018, non-employee directors received, as applicable: (a) an annual cash retainer of $85,000; (b) an annual cash committee service fee of $7,500 (per committee); (c) an annual cash committee chairman service fee of $20,000 for the Audit Committee chairman, $15,000 for the O&C Committee chairman and $10,000 for the Finance and CG&N Committee chairman; (d) an annual cash retainer for services as Non-Executive Chairman of the Board of $125,000; and (e) equity compensation with a target value of $125,000. Directors are also eligible to receive special additional compensation when performing services that have been determined by the Board to be well above and beyond the normal director service requirements. The Board has set a compensatory rate of $3,500 per day for such services, though no compensation was paid for this purpose in 2018. The compensation elements and amounts were established by the Board after review of data prepared by the O&C Committee’s independent consultant, showing competitive director compensation levels for peer companies and the Company’s compensation peer group, which is discussed under “Executive Compensation.”

Pursuant to the Company’s cash and stock director deferral plans and equity compensation plans, directors may elect to defer all or a portion of their annual cash compensation and equity compensation. The annual cash compensation may be deferred in the form of cash or in the form of an equivalent value of Company common stock. Compensation deferred in the form of cash accrues interest while deferred at rates that do not exceed market rates or constitute preferential earnings. If a director elects to defer cash compensation in the form of Company common stock, the director receives a 15% premium on the amount deferred.

The equity portion of non-employee director compensation is provided in the form of restricted common stock of the Company having a $125,000 fair market valuation at the time of grant, which is established on the date of the annual meeting of shareholders of the applicable year. Voting rights accompany such restricted common stock, which fully vest after the earlier of one year from the date of grant, the termination of the director’s service due to death or disability or a change in control. Under the Guidelines, all non-employee directors must own shares of Company common stock with a value at least five times his or her annual cash retainer (currently valued at $425,000) by his or her fifth anniversary of Board service. If the stock ownership requirement is not met, the director will receive all future Board compensation in the form of Company common stock until the requirement is satisfied. For 2018, all non-employee directors met their stock ownership requirements.

Compensation Committee Interlocks and Insider Participation

During 2018, the members of the O&C Committee included Ms. Chandy, Mr. Darner, Mr. Friedery, Mr. Garrison and Mr. Roberts. None of the members of the O&C Committee were at any time during 2018 an officer or employee of the Company or were formally an officer of the Company. None of our executive officers serve as a member of the board of directors or a compensation committee of any entity that has one or more executive officers serving as a member of our Board or O&C Committee.

 - 2019 PROXY STATEMENT    21


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EXECUTIVE OFFICERS

The following sets forth certain information regarding the Company’s executive officers. Information pertaining to Mr. Rowe, who is both a director and executive officer of the Company, is presented above under “Board of Directors—Biographical Information—Nominees to Serve an Annual Term Expiring at the 2020 Annual Meeting of Shareholders.”

Name

Age

 

Position with the Company

R. Scott Rowe

48

 

President, Chief Executive Officer and Director

Elizabeth L. Burger(1)

48

 

Senior Vice President, Chief Human Resources Officer

Lee S. Eckert

52

 

Senior Vice President, Chief Financial Officer

Keith E. Gillespie

53

 

Senior Vice President, Chief Sales Officer

John R. Lenander

62

 

President, Flow Control Division

Lanesha T. Minnix(2)

44

 

Senior Vice President, Chief Legal Officer

Kirk R. Wilson

52

 

President, Aftermarket Services & Solutions

David J. Wilson

50

 

President, Flowserve Pumps Division

(1)

Ms. Burger was appointed as Senior Vice President, Chief Human Resources Officer effective April 16, 2018.

(2)

Ms. Minnix was appointed as Senior Vice President, Chief Legal Officer and Corporate Secretary effective June 11, 2018.

 

Elizabeth L. Burger has served as Senior Vice President, Chief Human Resources Officer since joining Flowserve in April 2018. Before joining the Company, she was Chief Human Resources Officer with Hanesbrands Inc., a global manufacturer and marketer of everyday basic apparel. Prior to joining HanesBrands Inc., she worked at Monsanto Company in various roles of increasing responsibility, and most recently served as its Senior Vice President, Global Business Operations.

Lee S. Eckert has served as Senior Vice President, Chief Financial Officer since joining Flowserve in October 2017. Before joining the Company, he was Senior Vice President and CFO of CHC Group LLC, a global commercial helicopter service provider to the offshore oil and gas industry, from July 2015 to September 2017. CHC Group LLC and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in May 2016. Prior to CHC Group LLC, Mr. Eckert served as chief financial officer of the U.S. division of National Grid Plc. from June 2011 to September 2014, and, from June 2006 to June 2011, Mr. Eckert served in various executive capacities as MeadWestvaco Corporation, including as Vice President, Operations, Healthcare from November 2010 to June 2011, and chief financial officer, packaging resource group from June 2006 to October 2010.

Keith E. Gillespie has served as Senior Vice President, Chief Sales Officer since October 2016. In this capacity, he has responsibility for selling and commercial operations activities of the Company. Prior to this role, he served as Chief Strategy Officer of the Company from May 2015 to October 2016 with responsibility for corporate strategy, research and development, corporate development and marketing at the Company. Before joining the Company, he was Managing Director at AlixPartners from 2002 to 2015, where he was responsible for leading the firm’s Business and Consumer Services Practice and the firm’s Growth and Strategy Practice, as well as business improvement efforts at global companies across multiple sectors. Prior to AlixPartners, he served in various senior executive roles at McKinsey & Company, i2 Technologies, and TenFold Corporation.

John R. Lenander has served as President, Flow Control Division since February 2017. He has served in various roles since joining the Company in June 2006, most recently as Interim President, Flow Control Division from November 2015 to February 2017, as Vice President & General Manager, Oil & Gas Sector from 2008 to 2015 and Vice President, Business Development, Flow Control Division from 2006 to 2008. He was employed previously with Dresser, Inc., where he held several management positions, most recently as Vice President, Global Sales, Flow Solutions Division from 2002 to 2005.

Lanesha T. Minnix has served as Senior Vice President, Chief Legal Officer and Corporate Secretary since joining Flowserve in June 2018. Prior to joining Flowserve, Ms. Minnix served as Senior Vice President, General Counsel for BMC Stock Holdings, Inc., a leading provider of diversified building products and services. Prior to this role, Ms. Minnix was Vice President, Deputy General Counsel and Chief Compliance Officer for ABM Industries Incorporated, a Fortune 500 facility solutions company. Before her tenure with ABM Industries Incorporated, Ms. Minnix held roles with increasing responsibility at both Royal Dutch Shell/Shell Oil Company and Sprint Corporation. Ms. Minnix began her career as a corporate associate at the law firm of K&L Gates.

Kirk R. Wilson has served as President of Aftermarket Services & Solutions, a component of our Flowserve Pumps Division, since September 2015. He has served in various roles since joining the Company in 1987, most recently as President, Services and Solutions Operations from January 2012 to September 2015, as Vice President and General Manager, Integrated Solutions Group from 2008 to 2011 and Vice President, Marketing for the Pump Division from 2004 to 2008.

David J. Wilson has served as President of the Flowserve Pumps Division since July 2018 and as President of the Industrial Product Division since September 2017. He was employed previously with SPX Flow, Inc., a manufacturer and supplier of engineered products, as President, Industrial until January 2017. Prior to SPX Flow, Inc.’s spin-off from SPX Corporation, Mr. Wilson served as President, Flow Technology – Industrial, of SPX Corporation. Prior to his most recent position at SPX Corporation, he held various senior positions within that company from 1998 to 2013.

 - 2019 PROXY STATEMENT    22


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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) describes our executive compensation program and policies and the material compensation decisions we have made for our principal executive officer and our other executive officers named in the “Summary Compensation Table” on page 41. To guide the discussion and analysis, we have organized our CD&A into the following sections:

I.

Executive Summary - This section provides an overview of our executive officers, market context, and the 2018 say-on-pay vote.

Page 23

II.

Executive Compensation Program Objectives and Principles This section describes the objectives that guide our compensation programs and discusses the individual principles the O&C Committee has established to drive our achievement of those objectives.

Page 25

III.

Elements of the Executive Compensation Program This section discusses the individual elements of our compensation program for the Named Executive Officers, including base salary, annual cash incentive opportunity, long-term equity incentives (including stock ownership requirements), pension plan, severance benefits, change-in-control plan and certain other benefits. This includes how our performance peer group is established and how compensation is benchmarked to market reference points.

Page 27

IV.

Oversight of the Executive Compensation Program This section describes the respective roles and responsibilities of the O&C Committee and the O&C Committee’s independent compensation consultant.

Page 34

V.

Additional Executive Compensation Information This section includes an overview of other important executive compensation programs and policies, including employment agreements, tax and accounting implications.

Page 35

Executive Summary

Introduction

We refer to this group of executive officers collectively as our “Named Executive Officers” throughout this document. During 2018, our Named Executive Officers were:

R. Scott Rowe

President and Chief Executive Officer (“CEO”) (principal executive officer)

Lee S. Eckert

Senior Vice President and Chief Financial Officer (“CFO”) (principal financial officer)

David J. Wilson

President, Flowserve Pumps Division

Keith E. Gillespie

Senior Vice President, Chief Sales Officer

Elizabeth L. Burger

Senior Vice President, Chief Human Resources Officer(1)

(1)

Ms. Burger was appointed as Senior Vice President, Chief Human Resources Officer, effective April 16, 2018.

For more information on the Named Executive Officers, see “Executive Officers” on page 22.

Strategy, Market and Organization Context

Significant Strategic and Organizational Transformation in 2018

Fiscal 2018 was a year of significant improvement and transformation for Flowserve. Mr. Rowe continued the implementation of a new transformational business strategy called Flowserve 2.0 and fully established his executive team.

FLOWSERVE 2.0 Implementing our Transformative Business Strategy

 

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The highlights of our 2018 progress towards our new strategic initiatives include:

Progress in implementation of Flowserve 2.0 led to improved financial performance

Systematic focus and improvement on customer lead time, on time delivery and quality

Improved safety performance

Implemented new purpose statement and values

Significant increase in employee engagement

 

Market Context

Our major end markets include oil and gas, chemical, power and general industries. In 2018, most of our major end markets have improved from the cyclical downturns experienced in recent years. Over the past several years, our customers delayed large capital projects, including regular maintenance and upgrades. This conservative approach in their capital planning had an effect on our financial performance over the last few years. However, in 2018 we saw an increase in project opportunities and capital expenditures in the oil and gas market, as well as a majority of our other end markets.

Pay and Performance Alignment

The following charts illustrate the directional relationship between our Company performance and our various incentive plan components: the Company’s annual incentive plan (AIP) and contingent performance shares (PSUs).

 

 

 

 

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Compensation Alignment in Support of Our Strategic Objectives

To support the implementation of our Flowserve 2.0 transformational strategy, we adopted the following compensation program design for 2019.

 

2019 ANNUAL INCENTIVE PLAN (“AIP”):

Design Feature

Rationale

Maintained emphasis on operating income and working capital efficiency

Critical to execute our strategy

Changed PWC calculation from a year-end to quarterly measurement

To reward continuous and sustained improvement

Changed on-time delivery calculation

Ensure balance across our aftermarket and original equipment business

Focused on stretch goals

Reward year-over-year improvement

 

2019-2021 CONTINGENT PERFORMANCE SHARES:

Design Feature

Rationale

Maintained total shareholder return (TSR) metric measured against a performance peer group

Aligned with shareholder interests

Maintained ROIC metric with improvement targets aligned with the 2022 financial targets communicated to investors at December 13, 2018 analyst day

Encourage effective capital deployment and alignment with shareholders

2018 Say-on-Pay Vote

Management and the O&C Committee are attentive to the outcome of the shareholder “Say on Pay” vote. At the Company’s 2018 annual shareholder meeting, the Company received 94% of votes cast in favor of the Say on Pay resolution. While our shareholders expressed strong support in favor of our Named Executive Officers’ compensation at the 2018 Annual Meeting, we are constantly seeking to improve our compensation program as demonstrated by the changes made since the end of 2017.

Executive Compensation Program Objectives and Principles

Compensation Governance Practices

The O&C Committee maintains a thoughtful approach to corporate governance practices for executive compensation. Below is a summary of those practices.

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What We Do

What We Don’t Do

Target the market median for all elements of pay

Balance compensation programs

Cap incentive program payments

Maintain a clawback policy

Provide 50% of long-term incentives in the form of performance-based compensation

Maintain stock ownership requirements

Fully disclose incentive plan targets and results

Utilize an independent compensation consultant

No hedging or pledging stock

No excise tax gross-ups for executives

No employment agreements with Named Executive Officers

No option repricing without stockholder approval

No excessive perquisites

Principles that Guide our Compensation Programs

Our key executive compensation objectives are to attract and retain key leaders, reward current performance, drive future performance and align the long-term interests of our executives with those of our shareholders. In pursuing these objectives, the O&C Committee uses certain guiding principles in designing the specific elements of the executive compensation program, as outlined below:

Compensation Principles

How We Make Our Principles A Reality

Reinforce Our Strategy

Ensure compensation programs reflect the Company’s business vision and the key strategies for accomplishing that vision: People, Process and Technology, Customer, and Finance.

Consider our key strategies and risk tolerance when identifying the appropriate incentive measures and when assigning individual goals and objectives to the Named Executive Officers.

Align Pay and Performance

Use a variety of performance-based compensation vehicles that promote our annual operating plan and long-term business strategy, build long-term shareholder value and avoid encouraging excessive risk-taking.

Ensure strong correlation between executive pay and Company performance through incentive arrangements that offer an opportunity for above target compensation when our performance exceeds our goals balanced by the risk of below target compensation when it does not.

Maintain Competitive Market Strategy

Use multiple sources of benchmarking data including: (i) the Compensation Peer Group (“CPG”), (ii) the manufacturing industry portion of the AON Hewitt Associates’ Total Compensation Measurement survey (the “AON Survey”) and (iii) the General Industry Willis Towers Watson Survey (the “WTW Survey”). The data from the AON Survey and WTW Survey is being utilized for positions that are not adequately covered by the CPG data.

Set target compensation at levels approximating the market median to maintain market competitive compensation.

Review Programs Annually for Effectiveness

Review annually major elements of our executive compensation program along with supplemental elements like health and welfare benefits, retirement income, perquisites, and severance.

Stay abreast of evolving market practices in the general industry, external regulatory requirements, the competitive market for executives, our risk management objectives and our executive compensation philosophy.

Measure Performance on a Relative Basis

Evaluate the Company’s performance relative to organizations in the CPG and other high performance cyclical industrial manufacturers for the performance-based element of our executive compensation program.

Assess how well we deliver results that build long-term shareholder value to better establish the performance expectations of senior management.

Grant Majority of Compensation “At Risk”

Ensure majority of total compensation is “at risk” and should increase in line with the scope and level of the executive’s business responsibilities.

Maintain higher percentage of “at risk” compensation for the CEO compared to the other Named Executive Officers in light of the position’s strategic focus, global governance and management responsibilities and accompanying risks.

Balance Short-Term and Long-Term Performance

Provide each Named Executive Officer with a competitive amount of cash compensation each year (with the opportunity to increase that amount if annual incentive objectives are exceeded), complemented by an opportunity to earn a substantial amount of additional compensation if the executive is successful in achieving the Company’s long-term objectives.

Balance Stock- and Financial-Based Achievements

Use multiple long-term incentive vehicles and metrics based on both the Company stock price and pre-established financial metrics.

Maintain flexibility in our compensation process to adjust the current mix of award types, adjust vesting conditions or approve different types of awards as part of our overall long-term incentive program.

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Compensation Framework Supports Pay and Performance Alignment

Each year, the O&C Committee, which is made up entirely of independent directors, determines the total amount and appropriate mix of compensation for our executive officers, including the Named Executive Officers. We believe that our compensation program is designed so that pay is commensurate with the level of performance generated, with incentive compensation representing the majority of total compensation. As shown below, for 2018, the President and CEO had 85.8% of his pay “at risk” or “variable” and dependent upon Company and stock price performance, as well as his individual performance. The other Named Executive Officers had on average 71.7% of their pay “at risk” or “variable.”

 

Elements of the Executive Compensation Program

Overview

Compensation Objectives and Core Elements

We provide executive compensation and benefits that are market-competitive and in which a large portion of the total opportunity is variable and tied to our performance and changes in shareholder value over a multi-year period.

Consistent with these principles, the core elements of our executive compensation program consist of:

cash compensation, in the form of market competitive base salary and an annual incentive opportunity payable upon achievement of performance goals; and

long-term equity compensation, in the form of RSUs that vest over time and contingent performance shares that vest, if at all, based on the achievement of benchmarked financial performance metrics.

 

The primary elements of the Company’s executive compensation program in 2018 are shown in the following table and are discussed in detail below:

Category

Compensation Element

Description

Cash

Base Salary

Fixed cash compensation based on responsibilities of the position and set at levels approximating the market median

 

Annual Incentive Opportunity

Annual cash incentive for Company achievement of pre-determined financial performance metrics; payment ranges from 0% to 200% of target award

Long-Term Incentives

Restricted Stock Units
(50% of total grant value)

Vests ratably over a three-year period

 

Contingent Performance Units
(50% of total grant value)

Cliff vests at end of a three-year period at 0% to 200% of award value based on absolute ROIC targets and relative TSR against the Performance Peer Group (“PPG”)

Retirement

Qualified Pension Plan

Qualified pension plan, available to all salaried U.S. employees

 

Senior Management Pension Plan

Partially-funded, non-qualified defined benefit restoration plan, available to executive officers and other U.S. employees based on salary level

 

Supplemental Executive Pension Plan

Partially-funded, non-qualified supplemental defined benefit plan, available to eligible U.S. executives to maintain competitive total retirement benefits

 

401(k) Plan

Qualified 401(k) plan available to all U.S. employees; Company matches 75% of pre-tax contributions up to 6% of salary

Other

Executive Officer Severance Plan

Sets standard benefits for senior executives in the event of severance

 

Change-in-Control Plan

Sets standard benefits for senior executives upon a change-in-control

Other Benefits

Physical exam, enhanced vacation, relocation benefits

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The Flowserve Corporation Equity and Incentive Compensation Plan (“EICP”) is our shareholder-approved equity and cash compensation plan that allows Flowserve to provide equity compensation in compliance with any applicable shareholder-approval requirements of the New York Stock Exchange. In addition, the shareholder-approved performance criteria in the EICP allow us to provide equity and cash compensation that may be tax-deductible under IRC 162(m) to our Named Executive Officers. In 2009, shareholders approved the EICP, and the Company reserved 8,700,000 shares of common stock (as adjusted for the Company’s three-for-one forward stock split effected on June 21, 2013) for distribution. In 2015, shareholders re-approved the performance criteria under the EICP to allow Flowserve to continue to provide compensation that may be tax-deductible for purposes of Section 162(m) of the IRC. The Annual Incentive Plan (“AIP”) and the Long-Term Incentive Plan (“LTIP”) were two Board-approved Flowserve compensation plans that are adopted under, and have the same expiration date as, the EICP, but which are maintained separate from the EICP. Awards granted under the AIP and LTIP that are intended to comply with the requirements of IRC 162(m) must use one or more of the EICP’s shareholder-approved performance criteria, and are dependent on fulfilling such performance criteria. In addition, equity awards provided under the LTIP are subject to the limitations of the EICP including the 8,700,000 shares of common stock that are reserved for distribution under the EICP. The Board most recently reviewed and approved the AIP and the LTIP on December 20, 2016.

Base Salary

During the first quarter of each year, the O&C Committee reviews and establishes the base salaries of the Named Executive Officers. The O&C Committee has established and maintains base salary market reference points for the Company’s various executive positions indicated by the market compensation survey data compiled and prepared by management and independently reviewed by the O&C Committee’s compensation consultant. For each Named Executive Officer, the O&C Committee considers the scope of his or her responsibilities, experience and individual performance and then balances these factors against competitive salary practices. The O&C Committee did not assign any relative or specific weights to these factors. Because we are committed to a pay-for-performance philosophy, the O&C Committee generally establishes base salary levels to approximate the market median of companies within the CPG and the broad market taken from the AON Survey and WTW Survey.

The base salaries paid to the Named Executive Officers during 2018 are shown below and in the “Summary Compensation Table” under the “Salary” column. Mr. Rowe’s base salary and other compensation components in 2018 are discussed below in further detail under “—Additional Executive Compensation Information—Chief Executive Officer Compensation in 2018.”

Named Executive Officer

2018 Salary

($)

R. Scott Rowe(1)

1,126,654

Lee S. Eckert

563,327

David J. Wilson

459,087

Keith E. Gillespie

485,000

Elizabeth L. Burger

330,865

(1)

See “Chief Executive Officer Compensation in 2018” on page 34 for further detail.

Annual Incentive Opportunity

During the first quarter of each year, the O&C Committee establishes an annual cash incentive opportunity for each Named Executive Officer under the AIP. At that time, the O&C Committee approves: (i) the overall Company performance measures for the fiscal year; and (ii) an AIP target opportunity for each Named Executive Officer.

Setting the AIP Target Opportunity

Each year, the O&C Committee establishes an AIP target opportunity for each Named Executive Officer, expressed as a percentage of the executive’s base salary. The O&C Committee sets these targets in consultation with its compensation consultant and in adherence to our stated executive compensation objectives and principles. The target annual incentive opportunity for each Named Executive Officer in 2018 is set forth in the following table:

Named Executive Officer

2018 AIP Target %

R. Scott Rowe

120%

Lee S. Eckert

75%

David J. Wilson

65%

Keith E. Gillespie

65%

Elizabeth L. Burger

65%

 

Setting Company Performance Measures and Rigorous Goals

The O&C Committee, working with its compensation consultant and the CEO, evaluates and approves the Company’s AIP performance measures for each fiscal year. The O&C Committee sets each Named Executive Officer’s AIP performance measures that are consistent with our business strategy and tied to the achievement of important strategic objectives. The Company’s AIP performance measures and targets, unadjusted for extraordinary events, established for 2018 were as follows:

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Fiscal 2018 Performance

Measures & Weighting

Consolidated

Adjusted

Operating

Income

Business Unit

Operating

Income

Revenue or

Bookings(1)

Adjusted PWC

as % of Sales

Customer

On-time

Delivery

Total

R. Scott Rowe

50%

15%

20%

15%

100%

Lee S. Eckert

50%

15%

20%

15%

100%

David J. Wilson(2)

25%

25%

15%

20%

15%

100%

Keith E. Gillespie

40%

60%

100%

Elizabeth L. Burger

50%

15%

20%

15%

100%

(1)

Only Mr. Gillespie has a Consolidated Bookings target. The other Named Executive Officers have a Consolidated Revenue target.

(2)

Mr. Wilson received a business unit target for each of Revenue, Adjusted PWC as % of Sales and Customer On-time Delivery. These metrics were calculated only for IPD operations for the first half of 2018 and for combined IPD and EPD operations for the second half of 2018.

 

The metrics presented in the table above were evaluated using pre-defined internal criteria. The O&C Committee selected these performance metrics, with input from management, because they support the key strategies that we believe drive sustainable and profitable Company growth (as discussed under “—Executive Compensation Program Objectives and Principles” above).

Adjusted primary working capital is calculated by adding net receivables and total inventory less accounts payable, accrued deferred revenue and accrued progress billings. The adjusted primary working capital as a percentage of sales metric is calculated by dividing adjusted primary working capital as of December 31, 2018 by total sales in 2018.

Customer on-time delivery is calculated by dividing the number of customer items shipped on-time by the total number of customer items shipped.

Additionally, the O&C Committee may exercise its judgment, within parameters it establishes at the beginning of the year, whether to exclude the effect of certain specified developments that occur during the year in determining the extent to which the performance objectives are met. Such developments may include unanticipated changes in accounting principles or extraordinary, unusual or unplanned events that have been reported in our public filings. For 2018, the impacts of transformation and restructuring activity and the divestiture of two Industrial Product Division locations and related product lines in the third quarter of 2018 were excluded when determining whether the performance objectives were met for the AIP. In addition, the impact of certain accounting changes due to the implementation of the new revenue recognition standard were excluded when determining whether the adjusted primary working capital metrics were met. As a result of these exclusions, for 2018 our (i) Operating Income metric was approximately $376.2 million compared to reported Operating Income of approximately $247.5 million, (ii) our Revenue metric was approximately $3,804.3 million compared to reported Revenue of approximately $3,832.7 million and (iii) our Bookings metric was approximately $3,996.5 million compared to reported Bookings of approximately $4,020 million. These exclusions also caused (a) the Consolidated Adjusted PWC metric to reduce by 50 basis points, (b) the Business Unit Operating Income metric to increase by $28.8 million, (c) the Business Unit Revenue metric to decrease by $28.4 million and (d) the Business Unit Adjusted PWC metric to reduce by 90 basis points.

Where applicable, AIP awards are paid in March or April for the prior year’s performance based upon the O&C Committee’s assessment of actual performance against the pre-established AIP performance objectives. A more in-depth description of the O&C Committee’s decisions with respect to the annual incentive awards paid to each Named Executive Officer for 2018 follows.

Measuring Performance and Establishing Payout

The 2018 payout range established for each Named Executive Officer was 0% to 200% of his or her respective target award opportunity. The actual payout percentage is determined using a matrix that compares the Company’s actual performance against the established performance targets for the year (referred to as “plan”). The following tables show the percentage of target award that is paid at different levels of Company performance against plan, as well as actual performance and payout percentages for 2018.

Fiscal 2018 Financial

Metric Performance

Threshold

(50% Payout)

Target

(100% Payout)

Maximum

(200% Payout)


Measured

Performance


Percentage

Payout

Consolidated Adjusted Operating Income

$293.8

$367.2

$440.6

$376.2

(102.4% of Target)

112%

Consolidated Revenue

$3,481.0

 

$3,763.2

 

$4,139.5

 

$3,804.3

(101.1% of Target)

111%

Consolidated Bookings(1)

$3,553.3

 

$3,841.4

 

$4,225.5

 

$3,996.5

(104% of Target)

140%

Consolidated Adjusted
PWC as % of Sales

26.4%

 

24%

 

21.6%

 

26.4%

(90% of Target)

50%

Consolidated Customer
On-Time Delivery

*

*

*

*

(95.8% of Target)

62.5%

Business Unit Revenue

*

*

*

*

(99.8% of Target)

98%(2)

Business Unit Adjusted
PWC as % of Sales

*

*

*

*

(114% of Target)

12.5%(2)

Business Unit Customer
On-Time Delivery

*

*

*

*

(94.1% of Target)

22.5%(2)

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*

Not disclosed for competitive reasons as discussed below.

(1)

Only Mr. Gillespie has a Consolidated Bookings target. The other Named Executive Officers have a Consolidated Revenue target.

(2)

Represents Fiscal 2018 payout percentage for Mr. Wilson, based on the results of IPD for the first half of the year and the blended results of EPD and IPD for the second half of the year.

The Company has chosen not to disclose the Threshold, Target, Maximum and Measured Performance data for the consolidated customer on-time delivery metrics for all Named Executive Officers and the business unit operating income, revenue, adjusted primary working capital as a percentage of sales and customer on-time delivery metrics used for Mr. Wilson, as these metrics correspond to financial data that is not otherwise publicly disclosed and is used primarily to assess compensation for these Named Executive Officers. As such, the Company believes that the disclosure of such information would cause competitive harm to the Company without adding meaningfully to the understanding of its business. Additionally, like all performance targets for financial metrics used in our AIP, the O&C Committee has set performance goals at definitive, challenging and objective levels that require significant effort and achievement by our Named Executive Officers for payout to occur.

After the end of 2018, the O&C Committee reviewed the Company’s actual performance against each of the performance measures established at the beginning of the year. The O&C Committee noted that the Company remained resilient in 2018 in the context of continued uncertainty in its end markets. They noted, among other things, sales of $3.83 billion, operating income of $247.5 million, gross margins of 31%, and cash flows from operations of $190.8 million. Consistent with the principle of aligning awards with performance, the O&C Committee calculated the AIP percentage payout for each Named Executive Officer in accordance with the AIP formula and the achievement of the performance measures, with certain adjustments for the impact of restructuring expenses, divestitures and accounting adjustments (as described above). As a result, the calculated AIP percentage payout for the CEO and all other Named Executive Officers, other than Mr. Gillespie and Mr. Wilson, was 92% of their target annual incentive opportunity. The calculated AIP percentage payout for (i) Mr. Gillespie was 128.8% of his target annual incentive opportunity and (ii) Mr. Wilson was 93.9% of his target annual incentive opportunity.

Individual Performance Adjustment

At the same time that the O&C Committee sets AIP performance metrics for a given year, it establishes a payout range for all AIP awards. The payout range ultimately determines the percentage of the target incentive to be paid, with an established upper limitation and a minimum below which no payment will be made. Additionally, the O&C Committee may modify an individual AIP award upward or downward based on an individual’s contribution to our performance, as well as individual performance in relation to any extraordinary events or transactions. For 2018, no individual performance adjustments were made for annual incentive awards to Named Executive Officers.

Long-Term Incentives

Our long-term incentive program rewards the Named Executive Officers for the Company’s performance over a multi-year period. Our long-term incentive program consists of two components: (1) restricted stock units (“RSUs”) that vest over time and (2) contingent performance share awards (“PSAs”). In 2018, all Named Executive Officers received their long-term incentive awards in these forms, other than the options described below. The O&C Committee may also award one-time grants of RSUs in its discretion based on performance or other factors.

 

Determining the Structure of Awards

As discussed above, the O&C Committee believes that long-term incentive compensation is essential to retaining and motivating executives. The O&C Committee further believes that providing our executives with long-term incentives will encourage them to operate the Company’s business with a view towards building long-term shareholder value. Based on these considerations, the O&C Committee determined that for 2018, an equity award combination, the value of which consists of approximately one-half of RSUs, which vest ratably over a three-year period, and one-half of PSAs, which cliff vests at the end of a three-year period, would best serve the 2018 goals. The awards are granted subject to a pre-approved total target pool of RSUs and contingent performance share awards available to employees eligible to participate in the long-term incentive program. The only options that have been awarded since 2007 are options that have been granted to R. Scott Rowe as part of his one-time sign on compensation. Additional information regarding Mr. Rowe’s compensation is set forth under “—Chief Executive Officer Compensation in 2018.”

Restricted Stock Unit Awards

The O&C Committee grants RSU awards that vest ratably over a three-year period to deliver a meaningful long-term incentive that balances risk and potential reward. These awards also serve as an

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effective incentive for our superior executive performers to remain with the Company and continue such performance. Target RSU grants to the Named Executive Officers in 2018 represented one-half of the executives’ total target long-term incentive opportunity. Target grants were determined by dividing this portion of the executive’s long-term incentive opportunity by the price of the Company’s common stock, which was calculated by taking an average of closing prices reported on the NYSE during the last twenty trading days of 2017.

RSU awards are only earned if the individual continued to be employed by the Company until the applicable vesting dates of the awards except pursuant to special end of service vesting as discussed below under “—End of Service Benefits.” Until vesting, holders of RSU awards do not have voting rights on the units, but the units are entitled to receive dividend accruals, if any.

The grant date fair value of the RSU awards granted to the Named Executive Officers during 2018, calculated in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation — Stock Compensation,” are shown in the “Summary Compensation Table” under the “Stock Awards” column and the accompanying footnotes. Additional information on the awards granted in 2018 is shown in the “2018 Grants of Plan-Based Awards” table.

Contingent Performance Share Awards

Contingent performance shares are RSUs that vest, if at all, based on the Company’s achievement of pre-determined financial metrics, measured over a three-year performance period. In 2018, these represented one-half of the executives’ total target long-term incentive opportunity. For the 2016-2018 performance period, the O&C Committee changed the bookings component in order to benchmark it to the Company’s target bookings growth under its operating plan. When coming to this determination, the O&C Committee noted that the Company’s operating plan incorporated expected macro-economic conditions, such as expected OECD GDP growth, along with expected conditions in the Company’s end markets other than GDP growth. As a result, the O&C Committee recognized that the operating plan provided a closer alignment to expected market conditions in the industry. Therefore, for the 2016-2018 performance period, contingent performance shares are based on: 1) RONA performance compared to that of the PPG and 2) the Company’s bookings growth compared to targeted bookings growth under the Company’s operating plan.

For the 2017-2019 performance period, the O&C Committee determined the contingent performance share award measures should be based on: 1) three-year average ROIC performance relative to the three-year average of WACC and compared to that of the PPG and 2) relative TSR compared to that of the PPG. The O&C Committee shifted to the ROIC metric because it believed that shareholder value is maximized through generating a ROIC that exceeds the Company’s WACC, which we refer to as economic return. In addition, the O&C Committee believed that relative TSR compared to that of the PPG is an appropriate performance metric primarily because it is objectively determinable, provides rewards that are aligned to relative performance through varying economic cycles and reflects the delivery of value to shareholders over the three-year performance period. The importance of achieving economic return and TSR goals has been emphasized by making a substantial component of each executive officer’s compensation dependent on the Company’s achievement of these goals, with executives maximizing their annual incentive compensation opportunity if the Company achieves its economic return and TSR goals.

For 2018 grants, which cover the 2018-2020 period, the vesting percentage range established for each Named Executive Officer was 0% to 200% of his or her respective target long-term incentive opportunity allocated to the contingent performance shares. In order to achieve a target (100%) vesting percentage for the grants, the Company must, over the three-year performance period, achieve: 1) ROIC improvement goals which closely correlate to the compounded annual share price growth rate of the S&P Industrial Machinery Index over a 10-year period and 2) an average relative TSR equivalent to the 50th percentile three-year relative TSR average among the members of the PPG. The O&C Committee curently believes that the ROIC and TSR measures are well correlated to shareholder value creation.

As such, the Company’s contingent performance share award measures established for 2018-2020 were as follows:

2018 Performance Measures

Weighting

ROIC

50.0%

TSR

50.0%

 

On the basis of the foregoing performance metrics, we use the following formula to calculate the PSAs for the 2018-2020 period:

 

The O&C Committee believes that these performance-based awards provide a stronger incentive for our executives to achieve specific performance goals over the performance period that advance our business strategies, build long-term shareholder value and encourage executive retention.

These performance-based awards are subject to forfeiture if the executive’s employment terminates for any reason other than death, disability, special end of service or reduction-in-force before the end of the three-year performance period or if the performance goals are not reached. Until vesting, holders of contingent performance share units do not have voting rights on the units, but the units are entitled to receive dividend accruals, if any.

Prior to the granting of contingent performance share awards each year, the O&C Committee establishes a vesting percentage range around each executive’s target long-term incentive opportunity allocated to the contingent performance shares. This vesting percentage range has an established upper limitation and a minimum below which no shares will vest. Similar to AIP awards, the percentage vesting range determines the amount of contingent performance shares that vest relative to the original award amount.

 

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The following tables illustrate the performance scores of the contingent performance share metrics at different levels of Company performance for PSAs for the 2018-2020 period:

ROIC Performance v.

Target

(50% weight)

 % Performance Score

<80% of Target ROIC

0%

80% of Target ROIC

50%

Target ROIC

100%

>120% of Target ROIC

200%

 

TSR Performance v.

Percentile of PPG TSR Performance

(50% weight)

 % Performance Score

<PPG TSR Averages 25th Percentile

0%

PPG TSR Averages 25th Percentile

50%

PPG TSR Averages 50th Percentile

100%

PPG TSR Averages 75th Percentile

200%

 

Setting the Target Opportunity

Each year, the O&C Committee establishes a target long-term incentive opportunity amount for each Named Executive Officer. The O&C Committee first sets the target dollar value of the long-term incentive package for each Named Executive Officer and, in doing so, considers data from the Company’s CPG and, for positions that are not adequately covered by the CPG data, the AON Survey and WTW Survey, as previously described. For reasons described above under “Executive Compensation Program Objectives and Principles”, we generally provide, and in 2018 did provide, long-term incentive awards at target levels that approximate an average of the 50th percentile of both the CPG and broad market taken from the AON Survey and WTW Survey.

Determining the Award Amounts

During the first quarter of each year, the O&C Committee determines the aggregate equivalent dollar value of the long-term incentive award for each Named Executive Officer and then makes annual grants of restricted common stock and contingent performance shares. The O&C Committee determines this dollar value by dividing this portion of the executive’s long-term incentive opportunity by the price of the Company’s common stock, which is calculated by taking an average of closing prices reported on the NYSE during the last twenty trading days of 2017. The equity awards are made after the O&C Committee has had an opportunity to evaluate the Company’s operating results for the prior year and at the same time that the Company is making its major compensation decisions for the current fiscal year.

The O&C Committee has the discretion to increase or decrease a Named Executive Officer’s long-term incentive award based on an assessment of the officer’s individual contribution to the Company’s results. Similar to potential AIP award adjustments, these adjustments must be based on individual performance relative to the Company’s key strategies. These adjustments, along with adjustments that may be made to the RSU awards of other plan participants, will not exceed the pre-approved total target pool available for RSU awards by more than 10% without specific O&C Committee consideration. In 2018, the O&C Committee did not adjust the long-term incentive award for any Named Executive Officer based on individual contribution.

The O&C Committee considers both the target dollar value of the long-term incentive package and the package’s potential dilutive effect on the Company’s outstanding shares of common stock in determining the aggregate equivalent dollar value available for individual long-term incentive awards, and the aggregate amount of total awards available for our executives.

The O&C Committee evaluates shareholder dilution based on equity compensation “burn rates,” which refers to the annual rate at which shares are awarded under our shareholder approved stock compensation plans compared to the total amount of the Company’s outstanding common stock. The O&C Committee then compares the rate to those of the companies in the CPG, guidelines used by certain institutional shareholder advisory services and the advice of its compensation consultant. Generally, the O&C Committee targets a maximum Company-wide “burn rate” of 1.0% of the Company’s outstanding common stock for each annual grant of long-term incentive awards for all Company employees. Based on projections of equity awards to be made to employees during the balance of 2018, the O&C Committee determined that the proposed awards to the Named Executive Officers and the projected additional awards to employees would enable the Company to remain comfortably within the annual “burn rate” of 1.0% of the Company’s outstanding common stock.

In past years, the O&C Committee has established the practice of annually approving and granting equity awards to long-term incentive plan participants at the O&C Committee’s meeting held in the first quarter of the year. Based on the criteria described above, the O&C Committee met on February 28, 2018 and approved the target long-term incentive opportunities for our Named Executive Officers as set forth in the table below:

Named Executive Officer

2018 LTI Target

 

R. Scott Rowe

$ 5,500,000

 

Lee S. Eckert

$ 1,500,000

 

David J. Wilson

$ 700,000

 

Keith E. Gillespie

$ 970,000

 

Elizabeth L. Burger(1)

$ 700,000

 

(1)

The O&C Committee determined Ms. Burger’s target long-term incentive opportunity separately as part of her hiring evaluation.

 

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Other Share Awards

On December 19, 2018, Mr. Wilson received a special contingent performance share award of 8,590 shares that will fully vest, if at all, on December 31, 2020. The award was granted in relation to the consolidation of the Industrial Product Division and Engineered Product Division into the Flowserve Pumps Division (“FPD”) which is being led by Mr. Wilson. These contingent performance shares are only earned if Mr. Wilson continues to be employed by the Company through the vesting date and specified financial targets are met related to: 1) the Company’s operating income growth, 2) FPD’s operating income growth and 3) FPD’s revenue growth. The respective performance periods for measurement of these specified financial targets are January 1, 2019 to December 31, 2019 and January 1, 2020 to December 31, 2020.

The material terms and conditions of these equity awards are determined under the provisions of our equity compensation plans that our shareholders previously approved. These plans are included as exhibits to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 20, 2019 (the “Annual Report”), which can be found on the Company’s website at www.flowserve.com under the “Investors — Financial Information — SEC Filings” caption.

Competitive Benchmarking

The O&C Committee believes that the use of internal (or absolute) performance metrics alone yields an incomplete picture of Company performance. Accordingly, the performance-based element of our executive compensation program also emphasizes and evaluates the Company’s performance relative to organizations in a benchmark “performance peer group” (“PPG”) of cyclical industrial manufacturers. This evaluation serves as a means to assess, on a comparative basis, how well we deliver results that build long-term shareholder value, which in turn enables us to better establish the performance expectations of senior management in leading the Company. The O&C Committee strives to reevaluate the PPG every year, and a detailed process is followed in identifying and evaluating organizations appropriate for inclusion.

For the 2017-2019 and 2018-2020 performance periods, our PPG consists of the following companies:

Colfax Corp.

ITT Inc.

Pentair plc

Weir Group plc

Crane Co.

KSB Aktiengesellschaft

Rotork plc

 

Donaldson Company

Lincoln Electric Holdings Inc.

Sulzer AG

 

Dover Corp.

Metso Corp.

Terex Corp.

 

 

The process for establishing the PPG for the 2017-2019 and 2018-2020 performance periods began by compiling an initial sample of potential comparable organizations from all publicly traded companies. We then used a top-down, multi-stage filtering approach to distill the comparable sample and establish the PPG. The first filter narrowed the list to publicly-traded companies that are industrial equipment manufacturers. The second filter focused on direct business peers of the Company. The next filter considered the financial comparative appropriateness and statistical validity (such as correlation between business results and crude oil prices) of the peer group. The process resulted in the final PPG identified above.

Aligned with our competitive market based executive compensation strategy, the O&C Committee also established a benchmark “compensation peer group” (“CPG”). The CPG, the AON Survey and WTW Survey are used to set target executive compensation levels. The data from the AON Survey and WTW Survey is utilized to set levels for positions that are not adequately covered by the CPG data. For 2018 our CPG consists of the following companies:

 

Ametek Inc.

IDEX Corp.

Rockwell Automation Inc.

Woodward Inc.

Colfax Corp.

Lincoln Electric Holdings Inc.

Snap-on Inc.

Xylem Inc.

Crane Co.

Nordson Corp.

Terex Corp.

 

Donaldson Company

Pentair plc

Trinity Industries Inc.

 

Dover Corp.

Regal Beloit Corp.

Westinghouse Air Brake Technologies Corp.

 

 

The process for establishing the CPG for 2018 began by compiling all US publicly traded companies with a revenue and market cap between one-third to three times of the Company’s. The first filter narrowed the list to public companies within the industrial machinery, electrical components and equipment, construction machinery and heavy trucks industry with similar business operations compared to the Company. The second filter considered reverse peer companies and peer companies identified by proxy advisors as well as companies with larger market caps within the specified revenue range. The process resulted in the final CPG identified above.

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Chief Executive Officer Compensation in 2018

The compensation of the CEO was set in a manner consistent with our compensation philosophy and the general compensation objectives and principles discussed above. The key results influencing the O&C Committee’s decisions on Mr. Rowe’s compensation are set forth below.

2018 Performance Highlights

KEY ACCOMPLISHMENTS

 

PEOPLE & CULTURE

Continued the Flowserve 2.0 transformation of the Company to focus on operational excellence

Built a leadership team to support the Company’s new growth strategy

Introduced new purpose statement, values and people-first culture to drive higher employee engagement

New safety campaign to drive improvements at all levels of organization

 

PROCESS & TECHNOLOGY

Implemented global system upgrades to improve manufacturing productivity and enable business to operate more efficiently

Continued investments in innovative products and future enabling technology

Improvements to supply chain centralization, selling productivity and finance shared services

 

CUSTOMER

Systematically improved customer lead time, on-time delivery and quality

Focused on aftermarket services and LifeCycle Advantage agreements

Implemented enterprise-wide strategic account management

Led efforts to change the Company’s culture to emphasize speed, agility, accountability and a test-and-learn approach

 

FINANCE

2018 Bookings of $4.0 billion, resulting in 5.7% growth year over year

2018 Earnings Per Share of $0.91, up from $.02 in 2017

Return to profitability of IPD business

Improvement in working capital efficiency due to increased focus on operations and delivery

 

Compensation Decisions

Base Salary

In February 2018, Mr. Rowe’s base salary was increased from $1,100,000 to $1,133,000 for 2018. In setting Mr. Rowe’s base salary, the Board primarily considered external market practices consistent with our compensation objectives, Mr. Rowe’s leadership and contribution to overall Company performance, and his performance during the year against his individual objectives.

Annual Incentive Opportunity

To recognize Mr. Rowe’s performance during 2018, the O&C Committee approved a cash award under the Annual Incentive Plan of $1,250,832. As discussed under “—Elements of the Executive Compensation Program—Annual Incentive Opportunity—Measuring Performance and Establishing Payout” above, the actual payout represented 92% of Mr. Rowe’s target annual incentive opportunity.

Long-Term Incentives

In accordance with the principles and practices set forth earlier, the O&C Committee approved a long-term incentive award to Mr. Rowe for 2018 consisting of 65,990 shares of RSUs, which vest ratably over three years, and 65,990 contingent performance units at the same time 2018 long-term incentive awards were made to key managers, including the Named Executive Officers.

Oversight of the Executive Compensation Program

Our executive compensation program is administered by the O&C Committee. Consistent with the NYSE corporate governance listing standards, the O&C Committee is composed entirely of independent, non-employee members of the Board. In addition, the Non-Executive Chairman of the Board generally attends the meetings of the O&C Committee.

As reflected in its charter, the O&C Committee has overall responsibility for setting the compensation for our CEO, which is approved by the full Board, and for approving the compensation of our other executive officers, including the other Named Executive Officers. The O&C Committee also oversees the alignment of organizational design and management development in support of achieving our operational objectives and strategic plans and monitors the policies, practices and processes designed to develop our core organizational capabilities and managerial competencies.

The O&C Committee is also responsible for reviewing the management succession plan and for recommending changes in director compensation to the Board. On matters pertaining to director compensation, the O&C Committee also receives data and advice from FW Cook. The O&C Committee periodically reviews the organizational design, management development plans and managerial capabilities of the Company. The O&C Committee also prepares and issues the Organization and Compensation Committee Report included in this proxy statement.

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The O&C Committee’s process of reviewing the executive compensation program and setting compensation levels for our Named Executive Officers involves several components. During the first quarter of each year, the O&C Committee reviews each Named Executive Officer’s total compensation. The O&C Committee members also meet regularly with the Named Executive Officers at various times during the year, both formally within Board meetings and informally outside of Board meetings, which allows the O&C Committee to assess directly each Named Executive Officer’s performance. The O&C Committee also solicits input from all non-employee members of the Board as to the CEO’s performance during the year.

Except in years of CEO transition where the incumbent officer has completed less than one year of service in this capacity, the O&C Committee considers the results of the CG&N Committee’s process for reviewing the CEO’s performance with all independent Board members. The CG&N Committee’s process includes the independent Board members individually and collectively presenting their assessment of the CEO’s performance, as well as the CEO presenting his self-assessment of his performance. The O&C Committee uses these results when determining the CEO’s recommended compensation, which is subject to the independent Board members’ approval.

In addition, the CEO annually presents an evaluation of each other Named Executive Officer’s performance to the O&C Committee, which includes a review of each officer’s contributions over the past year, and his or her strengths, weaknesses, development plans and succession potential. The CEO also presents compensation recommendations for each Named Executive Officer for the O&C Committee’s consideration. Following this presentation and a benchmarking review for pay, the O&C Committee makes its own assessments and formulates compensation amounts for each Named Executive Officer with respect to each of the elements in the Company’s executive compensation program as described above.

Independent Compensation Consultant

The O&C Committee has the authority to retain outside advisors as it deems appropriate. The O&C Committee has engaged FW Cook as its compensation consultant to provide advice and information. FW Cook has assisted and advised the O&C Committee on all aspects of our executive compensation program, and they provide no other services to the Company. The services they provide include:

providing and analyzing competitive market compensation data;

analyzing the effectiveness of executive compensation programs and making recommendations, as appropriate;

analyzing the appropriateness of the PPG and CPG; and

evaluating how well our compensation programs adhere to the philosophies and principles stated below under “—Executive Compensation Program Objectives and Principles.”

Additional Executive Compensation Information

Other benefits are provided to the Named Executive Officers that are generally consistent with those provided to other employees of the Company, including health plans and retirement benefits. These elements of our compensation program are outlined in more detail below:

 

 

Retirement

Qualified Pension Plan

Qualified pension plan, available to all salaried U.S. employees

 

Senior Management Pension Plan

Partially-funded, non-qualified defined benefit restoration plan, available to executive officers and other U.S. employees based on salary level

 

Supplemental Executive Pension Plan

Partially-funded, non-qualified supplemental defined benefit plan, available to eligible U.S. executives to maintain competitive total retirement benefits

 

401(k) Plan

Qualified 401(k) plan available to all U.S. employees; Company matches 75% of pre-tax contributions up to 6% of salary

Other

Executive Officer Severance Plan

Sets standard benefits for senior executives in the event of severance

 

Change-in-Control Plan

Sets standard benefits for senior executives upon a change-in-control

Other Benefits

Physical exam, enhanced vacation, relocation benefits

Flowserve Corporation Pension Plans

We provide pension benefits to U.S. salaried employees under the Flowserve Corporation Pension Plan (the “Qualified Plan”), which is a tax-qualified pension plan, subject to funding requirements, vesting rules and maximum benefit limitations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Named Executive Officers participate in the Qualified Plan on the same terms as the rest of our U.S. salaried employees. Because the Internal Revenue Code of 1986, as amended (the “Code”), limits the pension benefits (based on an annual compensation limit) that can be accrued under a tax-qualified pension plan, we established and maintain a partially funded, non-qualified defined benefit restoration pension plan, the Senior Management Retirement Plan (the “SMRP”), for our executives, including the Named Executive Officers, to compensate these individuals for the reduction in their pension benefit resulting from this limitation. The SMRP is purely a restoration plan to provide comparable level retirement benefits to those provided to other U.S. employees based on a comparable benefit formula. In addition, we also established and maintain a second partially-funded, non-qualified supplemental defined benefit pension plan, the Supplemental Executive Retirement Plan (the “SERP”), for our eligible U.S. executives, including the Named Executive Officers, to maintain a

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total retirement benefit level that is competitive with general industry companies similar in size. These programs are designed to provide eligible U.S. executives with income following retirement and to help ensure that we are able to attract and retain executive talent by providing comprehensive retirement benefits.

Participants in the Qualified Plan and the SMRP accrue contribution credits based on age and years of service at the rate of 3% to 7% for eligible earnings up to the Social Security wage base, and at the rate of 6% to 12% for eligible earnings in excess of the Social Security wage base. Participants in the SERP accrue contribution credits at the rate of 5% of all eligible earnings. Eligible earnings include base salary and annual incentive award. SERP participants also earn interest on the accrued cash balance based on the rate of return on 10-year Treasury bills.

Our Qualified Plan also confers competitive post-employment benefits to the executive officers upon a change-in-control. The additional years of credited service and additional age credit for purposes of determining an individual’s benefits under the Qualified Plan compensate that individual upon his or her early termination from the plan.

The actuarial present value of the accumulated pension benefits of the Named Executive Officers as of the end of 2018, as well as other information about the Company’s defined benefit pension plans, is shown in the “2018 Pension Benefits” table below. For a discussion regarding the valuation method and assumptions used in quantifying the present value of the current accrued pension benefits, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Pension and Postretirement Benefits Obligations — Accrual Accounting and Significant Assumptions” in the Company’s Annual Report.

Flowserve Corporation Officer Severance Plan

On November 2, 2018, the Board and the O&C Committee approved, and the Company adopted, an amended and restated severance plan for the Company’s senior executive officers and other corporate officers (the “Officer Severance Plan”) to maintain consistency with market practice and the Company’s other compensation plans and arrangements. The November 2, 2018 amendment revised the Officer Severance Plan’s eligibility and participation requirements (not affecting the Company’s executive officers), reduced the number of eligible key employees and provided for certain other administrative changes. The O&C Committee currently believes that having an Officer Severance Plan is a competitive compensation element in the current executive labor market and is more beneficial to the Company and its shareholders than conducting individual negotiations with each executive officer in the event of a termination of employment.

In addition, to protect the Company’s competitive position, each executive is required to sign an agreement with the Company that requires the executive to forfeit the proceeds from a portion of the executive’s long-term incentive awards if the executive engages in conduct that is detrimental to the Company. Detrimental conduct includes working for certain competitors, soliciting customers or employees after employment ends and disclosure of confidential information in a manner that may result in competitive harm to the Company.

Detailed information concerning the Officer Severance Plan and the November 2, 2018 amendment, including the events that trigger benefits and the severance benefits provided upon the occurrence of such events, is discussed below under “—Potential Payments Upon Termination or Change-in-Control—Flowserve Corporation Officer Severance Plan.”

Flowserve Corporation Change-in-Control Severance Plan

On November 2, 2018, to maintain consistency with market practice and the Company’s other compensation plans and arrangements, the O&C Committee adopted the Flowserve Corporation Change-in-Control Severance Plan (the “CIC Plan”), which amended and consolidated the Company’s prior Change-in-Control Severance Plan (the “Prior CIC Plan”). The CIC Plan provides certain specified severance benefits to the Named Executive Officers to promote financial protection and security of their long-term incentive compensation arrangements in the event of the loss of their positions following a transaction that involves a change in the ownership or control of the Company. The benefits under the CIC Plan, if payable, are in lieu of severance benefits payable to executive officers under the Officer Severance Plan described above.

The O&C Committee believes that it is in the best interests of the Company and its shareholders to offer such a plan to its Named Executive Officers and other executives. The O&C Committee believes that these change-in-control benefits are in the best interest of the Company and its shareholders because the Company competes for executives in a highly competitive market in which companies routinely offer similar benefits to senior employees. The O&C Committee views these amounts as reasonable and appropriate for the Named Executive Officers, who may not be in a position to obtain comparable employment following a change-in-control. The O&C Committee also believes that these benefits are important to encourage executives to support change-in-control transactions the Board deems to be in the best interest of our shareholders.

The O&C Committee, in consultation with its compensation consultant, reviews the CIC Plan periodically to evaluate both its effectiveness and competitiveness and to determine the value of potential awards.

Detailed information concerning the CIC Plan and the Prior CIC Plan, including the events that trigger benefits and the severance benefits provided upon the occurrence of such events, is discussed below under “—Potential Payments Upon Termination or Change-in-Control—Flowserve Corporation Executive Officer Change-in-Control Severance Plan.” The only material change to the Prior CIC Plan reduced the potential severance payments to vice presidents of the Company.

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End of Service Benefits

The Company’s long-term incentive program allows RSU awards and performance shares to continue to vest over the original vesting period for employees who retire at a minimum age of 55 years old and who have 10 years of continuous service with the Company. The O&C Committee believes that this encourages the participants to continue to focus on the Company’s performance through retirement.

Review and Assessment of Compensation Under Termination Scenarios

The O&C Committee also reviews each Named Executive Officer’s total compensation under several scenarios, including a change-in-control of the Company, termination of employment by management and resignation or retirement by the executive. Tally sheets setting forth all of the listed scenarios are prepared by management and reviewed by the O&C Committee with input from its compensation consultant. Based on the O&C Committee’s review of the tally sheets, the O&C Committee determined that the potential payments that would be provided to the Named Executive Officers were consistent with our executive compensation objectives and principles.

Employment Agreements

Consistent with its compensation philosophy, the Company generally does not enter into employment agreements with its Named Executive Officers, who are considered to serve at the will of the Company. No current executive has an employment agreement.

Other Benefits

As previously discussed, the O&C Committee strives to make our executive compensation program primarily performance-based and, as such, has eliminated perquisites for our executive officers, other than annual physical exams, enhanced vacation and standard relocation benefits. Our executive compensation program continues to provide these competitive and limited benefits in 2018:

Executive Physicals. All Named Executive Officers were eligible to receive an annual physical examination. This is a standard benefit provided by comparative companies.

Enhanced Vacation. All Named Executive Officers are eligible to receive an enhanced vacation benefit. Each officer is eligible for a minimum of four weeks’ vacation and may receive more, if the officer’s years of service so qualify under the Company’s regular employee vacation award schedule.

Relocation Benefits. All Named Executive Officers are eligible to receive standard, market competitive relocation benefits pursuant to the Company’s executive relocation policy. These benefits include travel costs, home finding trip, broker assistance, home sale and buyout assistance, new residence assistance, reimbursement for transportation, moving expenses and other relocation expenses.

The aggregate incremental cost of providing these benefits to the Named Executive Officers is included in the “Summary Compensation Table” under the “All Other Compensation” column and related footnotes.

Stock Ownership Requirements and Anti-Hedging and Pledging

Our executive compensation program requires executives own a minimum amount of Company common stock equal in value to a multiple of their respective annual base salaries. The O&C Committee believes that this ownership requirement further encourages the alignment of executive and shareholder interests by requiring executives to acquire and maintain a meaningful stake in the Company, which promotes the Company’s objective of building long-term shareholder value. Additionally, under the Company’s Insider Trading Policy executives are prohibited from pledging stock and engaging in transactions (such as trading in options) designed to hedge against potential changes in the value of the Company’s common stock.

The stock ownership requirements are designed to maintain stock ownership at levels high enough to indicate management’s commitment to share value appreciation to our shareholders while satisfying an individual executive’s prudent needs for personal asset diversification. The stock ownership requirements are set by the O&C Committee as a result of a competitive analysis prepared by management and reviewed by its compensation consultant. Requirements are reviewed each year and updated as necessary. The requirements were last reviewed by the O&C Committee in 2019. The Company’s current stock ownership requirements for the Named Executive Officers and the number of shares required thereby are shown in the following table.

Named Executive Officer

Ownership Requirement

Required Ownership at 12/31/2018 (# of Shares)(1)

R. Scott Rowe

5 x Annual Base Salary

130,051

Lee S. Eckert

3 x Annual Base Salary

39,015

David J. Wilson

3 x Annual Base Salary

30,992

Keith E. Gillespie

3 x Annual Base Salary

33,402

Elizabeth L. Burger

3 x Annual Base Salary

32,025

(1)

Based on an average price per share of $43.56, which is calculated using the average closing prices of our common stock between January 1st and June 31st of 2018, as reported by the NYSE. Shares have been rounded up to the nearest whole share.

 

The required stock ownership levels are expected to be achieved within five years from the date the guidelines are first applicable or within five years of the executive joining the Company. Recognizing the time required to achieve the ownership requirements, the O&C Committee approved the establishment of an interim retention requirement. Through this requirement, executives who do not meet the ownership requirement

 - 2019 PROXY STATEMENT    37


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must show that they have retained at least 60% of the vested RSUs and vested contingent performance shares from the time the ownership guidelines become applicable. The 60% retention level was established in recognition that executives may need to sell shares to satisfy tax obligations. As of December 31, 2018, all Named Executive Officers met their stock ownership requirements under these tests.

The O&C Committee annually reviews these stock ownership requirements and periodically monitors the executives’ progress toward meeting their respective target ownership levels. Shares held directly by an executive or shares held in the Flowserve Corporation Non-Qualified Deferred Compensation Plan also count toward satisfying the stock ownership requirements. Unvested contingent performance shares or unvested RSUs are not counted toward satisfying the stock ownership requirements.

Recoupment of Incentive Compensation Policy

Our Recoupment of Incentive Compensation Policy (the “Recoupment Policy”) reinforces our commitment to integrity and the highest standards of ethical conduct through our compensation program. Under the Recoupment Policy, the O&C Committee has the ability to recoup certain incentive compensation from an executive, within three years prior, if the Company is required to restate its financial statements or if the executive engages in misconduct. If a restatement occurs, the O&C Committee can require an executive to reimburse the Company for (1) compensation received under our AIP and (2) vested contingent performance shares, where the amount of compensation received, in either case, was greater than the amount the O&C Committee believes was actually earned based on the restated financial results. If an executive engages in misconduct, the O&C Committee can require the executive to repay the gross value of (1) all compensation received under the AIP during the calendar year(s) in which the misconduct occurred, (2) all vested RSUs granted during the calendar year(s) in which the misconduct occurred and (3) all vested contingent performance shares awarded to the executive for any performance period that includes the calendar year(s) in which the misconduct occurred.

Tax and Accounting Implications of Executive Compensation

Section 162(m) of the Code limits to $1.0 million per year the federal income tax deduction to public corporations for compensation paid for any fiscal year executive officers who are covered by Section 162(m) of the Code, including to the Company’s CEO or CFO, and the three other most highly-compensated executive officers as of the end of the fiscal year included in the “Summary Compensation Table.”

The AIP and the LTIP were adopted, and have the same expiration date as, the EICP, which was most recently approved by shareholders for Section 162(m) purposes at the 2015 annual meeting of shareholders. Prior to the U.S. tax law reform in December 2017, performance-based compensation under both the AIP and the LTIP that met the requirements of “qualified performance-based compensation” under IRC 162(m) was intended to be deductible for tax purposes because such compensation is dependent on fulfilling performance criteria approved by shareholders under the EICP.

Effective for tax years beginning after December 31, 2017, U.S. tax law changes expanded the definition of covered employees under Section 162(m) to include, among others, the Chief Financial Officer, and eliminated the performance-based compensation exception for taxable years beginning in 2018. We may be able to deduct in 2018 or thereafter certain compensation paid to “covered employees” to the extent it is eligible for transition relief under the newly modified Section 162(m) and any rules promulgated thereunder. However, there is no guarantee that any such compensation will be deductible, and the Company may determine that certain compensation cannot qualify for such transition relief or that it does not wish to take or refrain from taking steps necessary to qualify for such relief.

The O&C Committee has considered and will continue to consider tax deductibility in structuring executive compensation arrangements. However, the O&C Committee retains discretion to establish executive compensation arrangements that it believes are consistent with its principles described earlier and in the best interests of the Company and our shareholders, even if those arrangements are not fully deductible under Section 162(m).

The Company recognizes compensation expense in our financial statements for all equity-based awards pursuant to the principles set forth in FASB ASC 718, “Compensation — Stock Compensation”. The O&C Committee considered the GAAP accounting implications of the awards in setting the long-term incentive mix and further determined that the mix of time-vested restricted common stock and contingent performance shares was appropriate for 2018.

 - 2019 PROXY STATEMENT    38


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Annual Executive Compensation Program Review and Compensation Risk

It is the O&C Committee’s policy to regularly monitor and annually review our executive compensation program to determine, in consultation with its compensation consultant, whether the elements of the program are consistent with our stated executive compensation objectives and principles. Within this determination is an evaluation of whether the Company’s risk management objectives are being met with respect to the executive compensation program and our compensation programs as a whole. If the elements of the program are determined to be inconsistent with our objectives and principles, or if any incentives are determined to encourage risks that are reasonably likely to have a material adverse effect on us, the elements are adjusted as necessary.

Following the O&C Committee’s annual review of our executive and other compensation programs in 2018, in consultation with its compensation consultant, the O&C Committee concluded that no risks arising from our compensation policies and practices are reasonably likely to have a material adverse effect on the Company. In reaching this conclusion, the O&C Committee noted that:

Compensation elements are balanced

Metrics balance short-term and long-term goals

Individual performance is emphasized

Incentive programs are capped

Incentives have performance thresholds

Compensation is benchmarked

Executives have ownership requirements

Compensation can be recouped

Organization and Compensation Committee Report

The Organization and Compensation Committee of the Board of Directors of the Company is currently comprised of five independent directors, David E. Roberts (Chairman), Ruby R. Chandy, Leif E. Darner, John R. Friedery and John L. Garrison.

The Organization and Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis, set forth above in this proxy statement, with management. Based on this review and discussion, the Organization and Compensation Committee recommended to the Board of Directors that this Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2018.

David E. Roberts, Chairman
Ruby R. Chandy
Leif E. Darner
John R. Friedery
John L. Garrison

 - 2019 PROXY STATEMENT    39


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Summary Compensation Table

The following table sets forth compensation information for 2018, 2017 and 2016 for our Named Executive Officers — the individuals who served during 2018 as principal executive officer and principal financial officer of the Company and certain other highly compensated executive officers of the Company serving at the end of 2018.

Name and

Principal Position

 

Year

 

Salary

($)(2)

 

Bonus

($)

 

Stock

Awards

($)(3)

 

Option

Awards

($)

 

Non-Equity

Incentive

Plan

Compensation

($)(4)

 

Change in

Pension Value

and Non-

Qualified

Deferred

Compensation

Earnings

($)(5)

 

All Other

Compensation

($)(6)

 

Total

($)

R. Scott Rowe

 

2018

 

1,126,654

 

 

5,944,049

(7)

 

1,250,832

 

227,180

 

153,754

 

8,702,469

President and Chief Executive Officer (Principal Executive Officer)

 

2017

 

825,000

 

20,000

 

5,505,319

 

2,000,000

 

590,040

 

103,547

 

35,732

 

9,079,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lee S. Eckert

 

2018

 

563,327

 

 

1,666,626

(8)

 

390,885

 

75,861

 

35,951

 

2,732,650

Senior VP and Chief Financial Officer

(Principal Financial Officer)

 

2017

 

126,923

 

150,000

 

756,175

 

 

45,617

 

11,477

 

22,340

 

1,112,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David J. Wilson

 

2018

 

459,087

 

 

1,118,009

(9)

 

281,524

 

61,781

 

160,802

 

2,081,203

President, Flowserve Pumps Division

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Keith E. Gillespie

 

2018

 

485,000

 

 

1,077,752

(10)

 

406,042

 

84,258

 

44,976

 

2,098,028

Senior VP and Chief Strategy Officer

 

2017

 

485,000

 

 

1,011,786

 

 

140,917

 

67,604

 

45,085

 

1,750,392

 

2016

 

485,000

 

 

884,659

 

 

35,939

 

60,777

 

47,412

 

1,513,587

Elizabeth L. Burger(1)

 

2018

 

330,865

 

100,000

(11)

935,972

(12)

 

198,077

 

38,347

 

65,371

 

1,668,632

Senior VP and Chief Human Resources Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Ms. Burger was appointed as Senior Vice President, Chief Human Resources Officer effective April 16, 2018.

(2)

Salary reported for 2018 represents amounts earned by the Named Executive Officers in 2018.

(3)

Represents the grant date fair value of long-term equity incentive awards under the Company’s long-term incentive program computed in accordance with FASB ASC 718 “Compensation – Stock Compensation”, including the impact of forfeitures. The incentive awards are granted in the form of restricted stock units, which generally vest ratably over a three-year period, and contingent performance share units. The performance criteria for the 2018-2020 performance period for the contingent performance awards is based on: 1) three-year average ROIC improvement goals which closely correlate to the compounded annual share price growth rate of the S&P Industrial Machinery Index over a 10-year period and 2) relative TSR compared to that of the PPG. The performance criteria for the 2017-2019 performance period for the contingent performance awards is based on: 1) three-year average ROIC performance relative to the three-year average of WACC and compared to that of the PPG and 2) relative TSR compared to that of the PPG. The performance criteria for the 2016-2018 performance period for the contingent performance awards is based on: 1) the Company’s average RONA over a three-year period compared to the RONA averages of the Company’s PPG for the same period and 2) the Company’s bookings growth compared to targeted bookings growth under the Company’s operating plan. The performance criteria for these awards are described in further detail under “—Elements of the Executive Compensation Program—Long-Term Incentives—Contingent Performance Share Awards” above. The reported value of the contingent performance awards is computed based on the grant date estimate of compensation cost to be recognized over the three-year period, which was 100%, or “target”. Payout for the contingent performance awards can range from 0 shares to a maximum of 200% of target. Assumptions used in the valuations are discussed in Note 6 to the Company’s audited consolidated financial statements for the year ended December 31, 2018 in the Annual Report.

(4)

The 2018 amounts in this column represent an annual cash incentive bonus for 2018 under the Company’s Annual Incentive Plan.

(5)

There were no above-market or preferential earnings with respect to any deferred compensation balances.

(6)

The following table shows the components of this column for the Named Executive Officers for 2018, calculated at the aggregate incremental cost to the Company:

  Name  Retirement Plan
Contributions
   Insurance
Premiums(A)
   Dividends on
Restricted Stock
   Other   Total
  R. Scott Rowe  $  12,375   $   27,341   $      —     $  114,038(B)   $  153,754
  Lee S. Eckert   12,375    21,926    —      1,650(C)    35,951
  David J. Wilson   12,375    20,316    —      128,112(D)    160,802
  Keith E. Gillespie   12,375    22,784    5,700    4,117(E)    44,976
  Elizabeth L. Burger   12,375    16,055    —      36,941(F)    65,371

 

 - 2019 PROXY STATEMENT    40


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(A)

Includes annual premiums for group term life insurance, the Company’s portion of annual premiums for medical, dental and vision benefits and the Company’s portion of disability premiums.

(B)

Includes $3,595 attributable to an annual physical exam, $12,631 attributable to personal commuting expenses during relocation period and $97,812 attributable to relocation expenses ($10,000 for a relocation allowance, $53,258 for relocation expenses, and $34,554 for tax gross-up costs related to the relocation expenses).

(C)

Includes $1,650 attributable to an annual physical exam.

(D)

Includes $11,392 attributable to an annual physical exam and $116,720 attributable to relocation expenses ($10,000 for a relocation allowance, $66,286 for relocation expenses, and $40,434 for tax gross-up costs related to the relocation expenses).

(E)

Includes $4,117 attributable to an annual physical exam.

(F)

Includes $8,099 attributable to personal commuting expenses during relocation period and $28,842 attributable to relocation expenses ($20,000 for a relocation allowance, $5,549 for relocation expenses, and $3,293 for tax gross-up costs related to the relocation expenses).

(7)

Calculated using a price per share of $41.20, the closing market price of the Company’s common stock as reported by the NYSE on March 1, 2018, the date of the grant. Includes 65,990 shares ($2,718,788) of restricted stock units and 65,990 contingent performance units ($3,225,261), which represents the target award. The contingent performance units include 32,995 shares with a TSR metric and fair value of $56.55 calculated using the Monte Carlo simulation. The maximum potential value of the performance award, assuming the highest level of performance conditions, is 131,980 shares, or $6,450,523 at the date of grant.

(8)

Calculated using a price per share of $42.35, the closing market price of the Company’s common stock as reported by the NYSE on February 28, 2018, the date of the grant. Includes 18,000 shares ($762,300) of restricted stock units and 18,000 contingent performance units ($904,326), which represents the target award. The contingent performance units include 9,000 shares with a TSR metric and fair value of $58.1307 calculated using the Monte Carlo simulation. The maximum potential value of the performance award, assuming the highest level of performance conditions, is 36,000 shares, or $1,808,653 at the date of grant.

(9)

Calculated using a price per share of $42.35 and $39.61, the closing market prices of the Company’s common stock as reported by the NYSE on February 28, 2018 and December 18, 2018, respectively, the date of the grants. Includes 8,400 shares ($355,740) of restricted stock units and 16,990 contingent performance units ($762,269), which represents the target award; 8,590 shares of the contingent performance units were one-time performance grants. The contingent performance units include 4,200 shares with a TSR metric and fair value of $58.1307 calculated using the Monte Carlo simulation. The maximum potential value of the performance award, assuming the highest level of performance conditions, is 33,980 shares, or $1,524,538 at the date of grant.

(10)

Calculated using a price per share of $42.35, the closing market price of the Company’s common stock as reported by the NYSE on February 28, 2018, the date of the grant. Includes 11,640 shares ($492,954) of restricted stock units and 11,640 contingent performance units ($584,798), which represents the target award. The contingent performance units include 5,820 shares with a TSR metric and fair value of $58.1307 calculated using the Monte Carlo simulation. The maximum potential value of the performance award, assuming the highest level of performance conditions, is 23,280 shares, or $1,169,595 at the date of grant.

(11)

Includes a $100,000 one-time executive transition bonus.

(12)

Calculated using a price per share of $45.96, the closing market price of the Company’s common stock as reported by the NYSE on April 16, 2018, the date of the grant. Includes 10,400 shares ($477,984) of restricted stock units and 8,400 contingent performance units ($457,988), which represents the target award; 2,000 shares of the restricted stock units were one-time sign-on grants. The contingent performance units include 4,200 shares with a TSR metric and fair value of $63.0847 calculated using the Monte Carlo simulation. The maximum potential value of the performance award, assuming the highest level of performance conditions, is 16,800 shares, or $915,975 at the date of grant.

 

 - 2019 PROXY STATEMENT    41


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2018 Grants of Plan-Based Awards

The following table sets forth certain information with respect to 2018 plan-based awards granted to the Named Executive Officers for the year ended December 31, 2018.

Name

Grant Date

 

Estimated Future Payouts

Under Non-Equity Incentive

Plan Awards

 

Estimated Future Payouts

Under Equity Incentive Plan

Awards(1)

All Other

Stock

Awards:

Number of

Shares of

Stock or

Units

(#)

 

 

Grant Date

Fair Value

of Stock

and Option

Awards

($)(2)

 

 

Threshold

($)

Target

($)

Maximum

($)

Threshold

(#)

Target

(#)

Maximum

(#)

R. Scott Rowe

3/1/2018

(3)

679,800

1,359,600

2,719,200

 

 

 

 

3/1/2018

 

 

16,498

32,995

65,990

 

 

1,865,867

(4)

3/1/2018

 

 

16,498

32,995

65,990

 

 

 

1,359,394

(4)

3/1/2018

 

 

65,990

(5)

 

2,718,788

 

Lee S. Eckert

2/28/2018

(3)

212,438

424,875

849,750

 

 

 

 

2/28/2018

 

 

4,500

9,000

18,000

 

 

523,176

(4)

2/28/2018

 

 

4,500

9,000

18,000

 

 

381,150

(4)

2/28/2018

 

 

18,000

(5)

 

762,300

 

David J. Wilson

2/28/2018

(3)

149,906

299,813

599,625

 

 

 

 

2/28/2018

 

 

2,100

4,200

8,400

 

 

244,149

(4)

2/28/2018

 

 

2,100

4,200

8,400

 

 

177,870

(4)

12/18/2018

 

 

4,295

8,590

17,180

 

 

340,250

(4)

2/28/2018

 

 

8,400

(5)

 

355,740

 

Keith E. Gillespie

2/28/2018

(3)

157,625

315,250

630,500

 

 

 

 

2/28/2018

 

 

2,910

5,820

11,640

 

 

338,321

(4)

2/28/2018

 

 

2,910

5,820

11,640

 

 

246,477

(4)

2/28/2018

 

 

11,640

(5)

 

492,954

 

Elizabeth L. Burger

4/16/2018

(3)

151,125

302,250

604,500

 

 

 

 

 

4/16/2018

 

 

2,100

4,200

8,400

 

 

264,956

(4)

4/16/2018

 

 

2,100

4,200

8,400

 

 

193,032

(4) 

4/16/2018

 

 

8,400

(5)

 

386,064

 

4/16/2018

 

 

2,000

(6)

 

91,920

 

(1)

The number of shares listed represents long-term equity incentive awards in the form of contingent performance share units under the Company’s long-term incentive program. The performance criteria for these awards is based on: 1) three-year average ROIC improvement goals which closely correlate to the compounded annual share price growth rate of the S&P Industrial Machinery Index over a 10-year period and 2) relative TSR compared to that of the PPG for the period ending December 31, 2020 as described in further detail under“—Elements of the Executive Compensation Program—Long-Term Incentives—Contingent Performance Share Awards” above.

(2)

These amounts represent the fair value, as determined under FASB ASC Topic 718, of the stock awards based on the grant date fair value estimated by the Company for financial reporting purposes.

(3)

Under the Annual Incentive Plan, the primary performance measures are internally defined metrics based on operating income, sales and primary working capital. Actual amounts payable under the Annual Incentive Plan, if payable, can range from 50% (Threshold) to 200% (Maximum) of the target amounts for the Named Executive Officers based upon the extent to which performance under the foregoing criteria meets, exceeds or is below the target and can be further increased or decreased based on individual performance. These amounts represent amounts payable if the Named Executive Officer is employed for the full calendar year. Any Named Executive Officers who were not employed for the full calendar year were eligible for a pro-rated amount based on their time of employment. Actual payout for 2018 was 92% of the target amount for all Named Executive Officers other than Mr. Wilson and Mr. Gillespie. For Mr. Wilson the actual payout for 2018 was 93.9% of the target amount. For Mr. Gillespie the actual payout for 2018 was 128.8% of the target amount.

(4)

Represents the fair value on the date of grant, as described in footnote (2), of the “target” award for the contingent performance shares. During the performance period, as described in footnote (1), earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets. As of December 31, 2018, the Company estimated vesting of, and therefore expensed, this award at 100% of the “target” award based on expected achievement of performance targets.

(5)

The amounts shown reflect the numbers of shares of RSUs granted to each Named Executive Officer pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.

(6)

This amount represents RSUs granted to Ms. Burger as part of her sign-on compensation.

 

 - 2019 PROXY STATEMENT    42


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Outstanding Equity Awards at Year-End 2018

The following table sets forth certain information with respect to outstanding equity awards as of December 31, 2018 with respect to the Named Executive Officers.

Name

Option Awards

 

Stock Awards

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

 

Option

Exercise

Price

($)

Option

Expiration

Date

Number of

Shares or

Units of

Stock that

Have Not

Vested

(#)

 

Market Value

of Shares or

Units of

Stock that

Have Not

Vested(1)

($)

Equity Incentive

Plan Awards:

Number of

Unearned

Shares, Units or

Other Rights

that Have Not

Vested

(#)

 

Equity Incentive

Plan Awards:

Market or Payout

Value of Unearned

Shares, Units or

Other Rights that

Have Not Vested(1)

($)

R. Scott Rowe

114,943

(2) 

48.63

5/4/2027

 

105,382

(3)

4,006,634

 

 

 

 

 

 

 

 

 

57,750

(4)

4,391,330

 

 

 

 

 

 

 

 

66,798

(5)

5,079,331

Lee S. Eckert

 

 

36,012

(6)

1,369,188

 

 

 

 

 

 

 

 

 

 

18,220

(5)

1,385,482

David J. Wilson

 

 

28,927

(7)

1,099,807

 

 

 

 

 

 

 

 

 

 

 

8,503

(5)

646,559

 

 

 

 

 

 

 

 

8,590

(8)

653,184

Keith E. Gillespie 

 

 

 

 

 

22,533

(9)

856,720

 

 

 

 

 

 

 

 

 

12,048

(10)

916,115

 

 

 

 

 

 

 

 

10,103

(4)

768,247

 

 

 

 

 

 

 

 

11,783

(5)

895,944

Elizabeth L. Burger

 

 

10,481

(11)

398,502

 

 

 

 

 

 

 

 

 

 

 

8,466

(5)

643,736

(1)

Calculated using a price per share of $38.02 the closing market price of the Company’s common stock as reported by the NYSE on December 31, 2018, the end of the Company’s last completed fiscal year. The restricted share unit and contingent performance share unit amounts include regularly declared dividends accrued on the “target” award, which will vest only to the same extent as the underlying award, if at all. Concerning all contingent performance awards, the amounts of units used in calculating the payout values assumes the maximum level of performance target achievement, which would result in the target unit amounts presented in the table vesting at 200%.

(2)

All stock options vest on April 1, 2020.

(3)

22,377 RSUs vested on March 1, 2019 and 19,292 RSUs vested on April 1, 2019. Mr. Rowe’s remaining RSUs vest as follows: 22,211 shares of RSUs on March 1, 2020; 19,292 shares of RSUs on April 1, 2020; and 22,210 shares of RSUs on March 1, 2021.

(4)

These shares represent long-term equity incentive awards in the form of contingent performance share units under the Company’s long-term incentive program, plus accrued dividend equivalents. The targets set for the 2017 plan are based on: 1) three-year average ROIC performance relative to the three-year average of WACC and compared to that of the PPG and 2) relative TSR compared to that of the PPG for the same period. Payouts can range from 0 shares to a maximum of 200% of the target. As of December 31, 2018, the Company estimated vesting of, and therefore expensed, these awards at 100% of the target shares presented based on expected achievement of performance targets.

(5)

These shares represent long-term equity incentive awards in the form of contingent performance share units under the Company’s long-term incentive program, plus accrued dividend equivalents. The targets set for the 2018 plan are based on: 1) ROIC improvement goals which closely correlate to the compounded annual share price growth rate of the S&P Industrial Machinery Index over a 10-year period and 2) relative TSR compared to that of the PPG for the same period. Payouts can range from 0 shares to a maximum of 200% of the target. As of December 31, 2018, the Company estimated vesting of, and therefore expensed, these awards at 100% of the target shares presented based on expected achievement of performance target.

(6)

6,104 RSUs vested on February 28, 2019. Mr. Eckert’s remaining RSUs vest as follows: 6,058 RSUs on February 28, 2020; 17,792 of RSUs will cliff vest on October 9, 2020 and 6,058 RSUs on February 28, 2021.

(7)

2,849 RSUs vested on February 28, 2019. Mr. Wilson’s remaining RSUs vest as follows: 2,827 shares on February 28, 2020; 20,424 of restricted stock units will cliff vest on September 11, 2020 and 2,827 shares on February 28, 2021.

(8)

These shares represent a two-year cliff equity incentive award in the form of contingent performance share units under the Company’s long-term incentive program, plus accrued dividend equivalents. The target performance for this award are is based on 2019 Flowserve Operating Income ("OI"), Flowserve Pump Division ("FPD") OI and FPD Revenue, weighted 50% for Flowserve OI and 25% each for each of FPD OI and FPD Revenue.

(9)

3,384 RSUs vested on February 1, 2019, 4,016 RSUs vested on February 3, 2019 and 3,947 RSUs vested on February 28, 2019. Mr. Gillespie’s remaining RSUs vest as follows: 3,351 RSUs on February 1, 2020; 3,918 RSUs on February 28, 2020: and 3,918 RSUs on February 28, 2021.

(10)

These shares represent target long-term equity incentive awards in the form of contingent performance share units under the Company’s long-term incentive program, plus accrued dividend equivalents. The target set for the 2016 plan is based on: 1) the Company’s average RONA performance compared to that of the PPG; and 2) bookings growth compared to overall GDP growth of countries that are members of the OECD for the same period. Payouts can range from 0 shares to a maximum of 200% of the target. As of December 31, 2018, the Company estimated vesting of, and therefore expensed, these awards at 50% of the target shares presented based on expected achievement of performance targets.

(11)

2,836 RSUs vested on February 28, 2019 and 672 RSUs vested on April 16, 2019. Ms. Burger’s remaining RSUs vest as follows: 2,815 RSUs on February 28, 2020; 672 RSUs on April 16, 2020; 2,815 RSUs on February 28, 2021 and 671 RSUs on April 16, 2021.

 

 - 2019 PROXY STATEMENT    43


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2018 Option Exercises and Stock Vested

The following table sets forth certain information with respect to stock option exercises and restricted stock unit vesting during the fiscal year ended December 31, 2018 with respect to the Named Executive Officers.

Name

 

Option Awards

 

Stock Awards

 

 

Number of Shares

Acquired on Exercise

(#)

 

Value Realized

on Exercise

($)

 

Number of Shares

Acquired on Vesting

(#)(1)

 

Value Realized

on Vesting

($)

 

R. Scott Rowe

 

 

 

 

 

 

 

19,017

 

 

 

824,007

 

Lee S. Eckert

 

 

 

 

 

 

 

 

 

 

 

David J. Wilson

 

 

 

 

 

 

 

 

 

 

 

Keith E. Gillespie

 

 

 

 

 

 

 

22,295

 

 

 

981,482

 

Elizabeth L. Burger

 

 

 

 

 

 

 

 

 

 

 

(1)

The number of shares reported includes shares that were surrendered during the fiscal year ended December 31, 2018 to pay for taxes upon the vesting of restricted stock units.

2018 Pension Benefits

The following table sets forth certain information as of December 31, 2018 with respect to potential payments under our pension plans for each Named Executive Officer. Please refer to “—Elements of the Executive Compensation Program—Flowserve Corporation Pension Plans” above for a narrative description of the material factors necessary to an understanding of our pension plans.

Name

 

Plan Name

 

Number of

Years Credited

Service

(#)

 

 

Present Value

of Accumulated

Benefit

($)

 

 

Payments

During Last Fiscal

Year

($)

 

R. Scott Rowe

 

Qualified — Cash Balance(1)

 

 

1.8

 

 

 

34,986

 

 

 

 

 

Non-Qualified — SMRP

 

 

1.8

 

 

 

164,397

 

 

 

 

Non-Qualified — SERP

 

 

1.8

 

 

 

131,313

 

 

 

 

Lee S. Eckert

 

Qualified — Cash Balance(1)

 

 

1.2

 

 

 

22,648

 

 

 

 

Non-Qualified — SMRP

 

 

1.2

 

 

 

27,019

 

 

 

 

 

Non-Qualified — SERP

 

 

1.2

 

 

 

37,671

 

 

 

David J. Wilson

 

Qualified — Cash Balance(1)

 

 

1.3

 

 

 

23,584

 

 

 

 

 

Non-Qualified — SMRP

 

 

1.3

 

 

 

18,342

 

 

 

 

Non-Qualified — SERP

 

 

1.3

 

 

 

32,844

 

 

 

 

Keith E. Gillespie

 

Qualified — Cash Balance(1)

 

 

3.7

 

 

 

71,887

 

 

 

 

Non-Qualified — SMRP

 

 

3.7

 

 

 

74,178

 

 

 

 

 

Non-Qualified — SERP

 

 

3.7

 

 

 

104,704

 

 

 

Elizabeth L. Burger

 

Qualified — Cash Balance(1)

 

 

0.7

 

 

 

17,089

 

 

 

 

 

Non-Qualified — SMRP

 

 

0.7

 

 

 

4,490

 

 

 

 

Non-Qualified — SERP

 

 

0.7

 

 

 

16,767

 

 

 

 

(1)

The Company sponsors cash balance designed pension plans for eligible employees. Each executive accumulates a notional amount derived from the plan provisions; each Named Executive Officer’s account balances as of December 31, 2018 are presented above. We believe that this is the best estimate of the present value of accumulated benefits.

Potential Payments upon Termination or Change In Control

On November 2, 2018, in connection with an annual review of the compensation plans and arrangements of the Company, the O&C Committee amended and restated the Prior CIC Plan by adopting the CIC Plan. In addition, the O&C Committee approved the amendment and restatement of the Company’s prior Amended and Restated Officer Severance Plan, as amended on February 14, 2017 (the “Prior Severance Plan”) by the adoption of the Officer Severance Plan. The information below describes certain compensation that would have been paid under existing plans and contractual arrangements to the Named Executive Officers in the event of a termination of such executive’s employment with the Company or change in control of the Company, assuming such events occurred on December 31, 2018. Amounts shown thus include amounts earned through such time and are estimates of the amounts that would have been paid out to the executives upon their termination or a change-in-control (based upon the executive’s compensation and service levels as of such date and the closing price of the Company’s common stock on December 31, 2018 of $38.02). The actual amounts to be paid out can only be determined at the time of a change-in-control or

 

 - 2019 PROXY STATEMENT    44


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such executive’s termination of employment with the Company. Upon any termination of employment, each of the Named Executive Officers would also be entitled to the vested amounts and contributions shown in the “2018 Pension Benefits” table above.

In addition to the amounts shown in the “2018 Pension Benefits” table above, each of the Named Executive Officers are entitled to payments and benefits under the Company’s Officer Severance Plan and the CIC Plan in the event of a termination of such executive’s employment with the Company or change in control of the Company. In addition, the Company sponsors several non-qualified pension plans and equity and non-equity incentive compensation plans that provide the Named Executive Officers with additional compensation in connection with a change in control or termination of employment under certain circumstances. The following is a description of the compensation payable to the Named Executive Officers in connection with a termination of employment and/or change in control under these arrangements and a table summarizing the estimated payouts assuming that a termination of employment and/ or change in control occurred on December 31, 2018.

Flowserve Corporation Executive Officer Severance Plan

All of the Named Executive Officers currently participate in the Company’s Officer Severance Plan, as described under “—Elements of the Executive Compensation Program” above. Under the Officer Severance Plan, the Company’s officers are provided the following benefits for a termination of employment as a result of a reduction in force or if the executive is terminated without cause: (i) two years of the officer’s current base salary, paid on a bi-weekly basis in accordance with the Company’s regular salary payments and (ii) a lump sum payment, payable at the time annual incentive awards are paid to officers still employed by the Company, substantially equivalent to the AIP payment, at target, the officer would have otherwise received under the Company’s AIP (provided that the Company actually satisfies the threshold performance results for the performance period) if the officer had been employed at the end of the applicable performance period and was otherwise eligible for a payment under the AIP. To the extent an affected officer has outstanding contingent performance shares or time-vested restricted stock units, the officer would also be eligible to receive (i) a pro-rated amount of the performance shares or units, if any, that have a performance cycle that would end in the year that contains the termination date, and (ii) a cash payment in lieu of any time vested restricted stock units that would otherwise vest within 90 calendar days following the termination date.

In addition, in order to receive such payments, the executive must execute a release and covenant not to sue and must continue to comply with any non-competition or non-solicitation agreements in effect with the Company following his or her termination of employment. No benefits are payable under the Officer Severance Plan to any officer who receives benefits under the CIC Plan. The Officer Severance Plan does not provide for any additional payments or benefits upon a termination of employment by the Company for cause, upon the executive’s resignation for any reason (including “good reason” or “constructive termination”) or upon the executive’s death or disability.

For purposes of the Officer Severance Plan, the term “cause” generally means the covered executive’s (i) willful and continued failure to perform basic job duties after written demand for substantial performance is delivered to the executive by the Board, which specifically identifies the manner in which the Board believes that the executive has not substantially performed the executive’s duties, or (ii) willful engagement in conduct materially and demonstrably injurious to the Company, monetarily or otherwise.

In addition, to protect the Company’s competitive position, each executive is required to sign an agreement with the Company that requires the executive to forfeit the proceeds from some or all of the executive’s long-term incentive awards if the executive engages in conduct that is detrimental to the Company. Detrimental conduct includes working for certain competitors, soliciting customers or employees after employment ends and disclosure of confidential information in a manner that may result in competitive harm to the Company.

Flowserve Corporation Change-in-Control Severance Plan

All of the Named Executive Officers currently participate in the Company’s CIC Plan, as described under “—Elements of the Executive Compensation Program” above. Benefits under the CIC Plan are triggered if, within two years following a change-in-control of the Company (as defined in the CIC Plan and discussed below), (i) the employment of the Named Executive Officer is terminated involuntarily other than for cause, death or disability, or (ii) for reasons constituting a “constructive termination.” In addition, benefits are triggered when a Named Executive Officer is terminated within the 90-day period immediately prior to a change-in-control if such termination (i) occurs after the initiation of discussions leading to such change-in-control and (ii) can be demonstrated to have occurred at the request or initiation of parties to such change-in-control.

The severance benefits provided upon a termination of employment covered under the CIC Plan include:

A target bonus or target annual incentive award in effect at the time of termination (or if higher, at the time of the change-in-control), pro-rated based on the number of days the Named Executive Officer was employed during the performance period.

A lump sum cash payment equal to, as applicable, (i) three times the sum of the CEO’s then-current annual base salary and target bonus or other annual incentive award; (ii) two and half times an executive vice president’s then-current annual base salary and target bonus or other annual incentive award; and (iii) two times a president's or senior vice president’s then-current annual base salary and target bonus or other annual incentive award; provided that if a change in control occurs prior to November 2, 2019, any executive who was a participant in the CIC Plan prior to November 2, 2018 shall receive a lump sum payment equal to the higher of the benefit calculated under the CIC Plan or the Prior CIC Plan. For purposes of this calculation, the base salary is the highest of: (i) the highest-annualized monthly base salary during the twelve months preceding the termination; (ii) the base salary in effect on the date of termination; and (iii) the base salary in effect on the date of the change-in-control. For purposes of this calculation, the target bonus or annual incentive award is the higher of the target bonus or annual incentive award in effect on (i) the date of termination or (ii) the date of the change-in-control.

Payment of awards granted under the long-term incentive program and any other stock option or other stock-based long-term incentive

 

 - 2019 PROXY STATEMENT    45


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award that have been earned and not yet paid, pursuant to the terms of the applicable plan.

Full vesting at target of each cash or stock-based long-term incentive award or grant. Named Executive Officers have 90 days following the date of employment termination to exercise vested stock options.

Continuation of participation in the life insurance, medical, health and accident benefit plans for a period following the date of termination equal to the severance multiplier used to calculate the lump sum payment, multiplied by 12 months.

Calculation of benefits under the Company’s defined benefit pension plan including supplemental retirement plan benefits.

A “best-after-tax” cutback payment that would modify the payments to the greatest, net after-tax amount of (i) the amounts payable to the covered executive due to the change in control or (ii) one dollar less than the amounts payable to the covered executive due to the change in control that would subject the covered executive to an excise tax.

For purposes of the CIC Plan, “change in control” generally means the occurrence of any of the following events:

any person acquires more than 30% of the Company’s total voting power represented by the Company’s then outstanding voting securities other than in specific circumstances;

a majority of the members of the Board are replaced in any 12-month period other than in specific circumstances;

the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation in which (i)the holders of the Company’s outstanding shares of common stock and outstanding voting securities immediately prior to such merger or consolidation receive securities possessing at least 50% of the total voting power represented by the outstanding voting securities of the surviving entity (or parent thereof) immediately after such merger or consolidation, and (ii) the elected members of the Board immediately prior to such merger or consolidation constitute at least half of the board of directors of the surviving entity (or parent thereof) immediately after such merger or consolidation; or

any person acquires more than 50% of the total gross fair market value of the assets of the Company other than in specific circumstances.

For purposes of the CIC Plan, the term “cause” generally means: (i) the willful and continued failure by a covered executive to substantially perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the covered executive by the Board that specifically identifies the manner in which the Board believes that he has not substantially performed his duties, or (ii) the willful engagement by the covered executive in conduct materially and demonstrably injurious to the Company, monetarily or otherwise.

For purposes of the CIC Plan, the term “constructive termination” generally means the occurrence of any one of the following events within two years after the effective date of a change in control without the express written consent of the covered executive:

a material reduction in the authority, duties or responsibilities held by the covered executive immediately prior to the change in control;

a material reduction by the Company of the covered executive’s base salary;

the relocation (without the covered executive’s consent) of the covered executive’s principal place of employment by more than 35 miles from its location immediately prior to a change-in-control; or

any other material failure of the Company to honor all the terms and provisions of the CIC Plan or any agreement with the covered executive.

A “constructive termination” shall only occur if the covered executive provides notice to the Company of the occurrence of an event that constitutes “constructive termination” within 30 days of the initial occurrence of such event, the Company fails to cure such event within the first 30 days following the receipt of such notice, and the covered executive terminates his employment in the first 30 days following the end of the Company’s opportunity to cure.

Participation in the CIC Plan is contingent upon the covered executive executing a confidentiality and non-competition agreement and release in favor of the Company at the time the executive is notified that he or she has been chosen to participate in the CIC Plan.

The Company’s supplemental pension and incentive plans for senior management contain provisions that serve to implement the provisions of the CIC Plan. Our Qualified Plan also confers competitive post-employment benefits to the executives upon a change-in-control.

The principle difference between the Prior CIC Plan and the CIC Plan is that the severance multiplier has been reduced to two for senior vice presidents and to one and half for vice presidents of the Company, provided that if a change in control occurs prior to November 2, 2019, any executive who was a participant in the Prior CIC Plan on November2, 2018 shall be entitled to a severance benefit calculated using the higher of the severance multiplier the executive would have received under the Prior CIC Plan or the CIC Plan.

 

 - 2019 PROXY STATEMENT    46


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Quantification of Potential Payments

The following table sets forth the estimated value of the potential payments to each of the Named Executive Officers who were employed as of December 31, 2018, assuming the executive’s employment had terminated on December 31, 2018.

For the events of termination involving a change-in-control, we assumed that the change-in-control also occurred on December 31, 2018. In addition to the payments set forth in the following tables, the Named Executive Officers may receive certain payments upon their termination or a change-in-control pursuant to our Deferral Plan, Qualified Plan, SERP and SMRP. Previously vested amounts and contributions made to such plans by each Named Executive Officer are disclosed in the “2018 Pension Benefits” table.

 

Triggering Event

Compensation Component

 

Payout($)

 

 

 

 

R. Scott

Rowe

 

Lee S.

Eckert

 

 

David J.

Wilson

 

Keith E.

Gillespie

 

Elizabeth

L. Burger

 

Death

Life insurance benefit (1.5x base salary capped at $1.5M; third party payment)

 

1,500,000

 

849,750

 

 

691,875

 

727,500

 

697,500

 

Immediate vesting of outstanding equity awards(1)(2)

 

10,741,949

 

1,385,466

 

 

646,525

 

2,146,853

 

643,745

 

Total

 

12,241,949

 

2,235,216

 

 

1,338,400

 

2,874,353

 

1,341,245

 

Disability

Short-term and long-term disability benefit to age 65 (third party payment)

 

4,568,025

 

3,226,870