Severance Payments/Change of Control
We have determined that it is appropriate to formally document the employment relationships that we have with certain executive officers of the Company, and we have entered into employment agreements with each of our NEOs that offer severance payments and other benefits following termination of the applicable executive officer’s employment under various scenarios, as described below. The Company believes that offering severance benefits is beneficial in attracting and retaining key executive officers, encourages the retention of such executive officers during the pendency of a potential change of control transaction or other organizational changes within the Company and protects the Company’s interest.
We have employment arrangements in place with each of the NEOs providing for severance compensation for a period of up to three years if the executive’s employment is terminated for a variety of reasons, including a change of control of Key. We have provided more information about these benefits, along with estimates of the value under various circumstances, under the heading “Compensation of Executive Officers-Payments upon Termination or Change of Control” below.
Change of control benefits are structured as “double trigger” benefits. In other words, the change of control does not itself trigger benefits. Rather, benefits are paid only if the employment of the executive is terminated during a specified period after a change of control. We believe a “double trigger” benefit maximizes stockholder value because it prevents an unintended windfall to executives in the event of a friendly change of control, while still providing appropriate incentives to cooperate in negotiating any change of control. In addition, these agreements avoid distractions involving executive management that arise when the Board is considering possible strategic transactions involving a change of control, and assure continuity of executive management and objective input to the Board when it is considering any strategic transaction. For additional information concerning our change of control agreements, see “Compensation of Executive Officers-Payments upon Termination or Change of Control” below.
The tax and accounting consequences of utilizing various forms of compensation are considered by the compensation committee when adopting new or modifying existing compensation.
Under Section 162(m) of the Code, publicly held corporations may not take a tax deduction for compensation in excess of $1 million paid to our chief executive officer, and our three most highly compensated executive officers other than our chief financial officer during any fiscal year. Prior to the federal tax reform legislation enacted in December 2017, Section 162(m) included an exception to this $1 million limit for performance-based compensation meeting certain requirements. However, the new tax legislation removed this performance-based compensation exception. To maintain flexibility in compensating executives in a manner designed to promote varying corporate goals, the compensation committee has not adopted a policy requiring all compensation to be deductible under Section 162(m) and the compensation committee reserves the right to grant non-deductible compensation.
Accounting for Equity-Based Compensation
We account for equity-based compensation in accordance with the requirements of FASB ASC Topic 718, “Stock Compensation.”
Compensation Committee Report
The compensation committee reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with our management. Based on this review and discussion, the compensation committee recommended to the Board that the Compensation Discussion and Analysis be included in this Form 10-K for the year ended December 31, 2017.
By the compensation committee of the Board of Directors of Key Energy Services, Inc.
Bryan Kelln, Chair
Scott D. Vogel
H. H. Tripp Wommack, III