2018 Annual Meeting of Shareholders

Compensation Highlights

Executive Summary

Our management has a strong focus on delivering long-term profitable growth and returning value to our shareholders. This long-term focus has contributed significantly to the Company’s total shareholder return as seen below. Also below is an adjusted earnings per share graph and an adjusted operating cash flow graph representing the Company’s 2017 performance.

2017 Company Performance

Adjusted Earnings Per Share and Adjusted Operating Cash Flow are non-GAAP financial measures. Please see Annex A for disclosures and reconciliations to the appropriate GAAP measure.

As detailed in the Q&A with our Chairman and CEO earlier in this Proxy Statement, the Company delivered outstanding financial results in 2017, including the following:

  • Maintained our position as the largest provider in the Company’s industry, with 15%-16% market share and $3.1 billion in revenue.

  • Increased adjusted earnings per share by approximately 20% compared to 2016.

  • Adjusted operating cash flow excluding recurring cash taxes was approximately $687 million, which is an 11% increase over the prior year.

  • We deployed capital of $402 million to acquisitions, dividends, and share repurchases.

  • Achieved a total shareholder return (TSR) of 194% over the last five fiscal years, outpacing the return of the S&P 500 of 108%.

Key Features of Our Compensation Programs

Over the course of the past several years, acting in the interests of the stockholders, the Compensation Committee in conjunction with management has adjusted compensation programs toward greater performance-based compensation. In addition, we have collectively modified or eliminated certain components of our programs to better align with prevailing standards. The following are highlights of our compensation programs, including our emphasis on pay commensurate with performance and actions taken to align aspects of our programs with evolving standards.

WHAT WE DO: WHAT WE DON’T DO:
  • We pay for performance. A significant portion of the compensation of our Named Executive Officers is directly linked to the Company’s performance, as demonstrated in the historical payouts related to our annual and long-term incentive plans.
  • We require stock ownership. We maintain stock ownership guidelines for officers and Directors. Under the guidelines, an officer should retain all SCI stock acquired from grants of restricted stock and stock options (net of acquisition and tax costs and expenses) until that officer has met the stock ownership guidelines.
  • We have claw-backs. The Company maintains claw-back provisions that are triggered in certain circumstances. If triggered, the provisions provide for a claw-back of annual performance-based incentives paid in cash, stock options, restricted stock, and performance units.
  • We seek independent advice. We engage independent consultants to review executive compensation and provide advice to the Compensation Committee.
  • We have an ongoing shareholder outreach program. As part of our commitment to effective corporate governance practices, we regularly engage with shareholders. We specifically discussed executive compensation along with other important topics (see page 9).
  • We do not allow tax gross-ups. We do not provide tax gross-ups in our compensation programs, and we do not have provisions in our executive employment agreements that provide for tax gross-ups in the event of a change of control of the Company.
  • We do not allow hedging or pledging. We have policies that prohibit officers and Directors from hedging or pledging their SCI stock ownership.
  • We do not allow the repricing of stock options. We have policies that prohibit subsequent alterations of stock option pricing.

Consideration of 2017 "Say-on-Pay" Vote

At our Annual Meeting of shareholders held on May 10, 2017, over 90% of the shares voted were in favor of the proposal for an advisory vote to approve Named Executive Officer compensation (“say-on-pay” vote) versus over 80% in favor in 2016. These votes represented a majority of our outstanding shares. The Compensation Committee believes this result is an indication that a substantial majority of our shareholders are satisfied with our executive compensation policies and decisions, and that our executive compensation program effectively aligns the interests of our Named Executive Officers with the interests of our shareholders.

In April and May of 2017, we engaged with shareholders representing approximately 44% of the Company’s common stock. We specifically discussed executive compensation programs and as a result of feedback received, we added a return on equity modifier to the total shareholder return metric for the performance unit plan beginning in 2018. We also changed the denomination of the award to share units rather than cash units, which closer aligns our compensation plan to stock performance.

During this process, shareholders communicated support for the philosophy and compensation program and agreed that they are aligned with the Company’s performance. The Compensation Committee considered results of the “say-on-pay” vote, shareholder feedback, input from its independent compensation consultants, and compensation benchmarking tools, in the context of the Committee’s fiduciary duty to act on behalf of the shareholders’ interests. We will continue to consider the outcome of our “say-on-pay” vote results when determining future compensation policies and pay levels for our Named Executive Officers.

Compensation Philosophy and Process

The Company’s compensation philosophy as implemented through the Compensation Committee is to align executive compensation with the performance of the Company and the individual by using several compensation components for our executives.

Our overall compensation philosophy is to target our direct compensation for executives within a competitive range of benchmark pay levels of general industry companies (the “Peer Group” (see Annex B)), with opportunities to exceed the target direct compensation levels through annual performance-based incentives paid in cash and through long-term performance-based incentives paid in cash and stock. However, if performance targets are not met, then the resulting performance-based award payouts will be below target levels. We believe these target levels of direct compensation are appropriate to motivate, reward, and retain our executives, each of whom has leadership talents and expertise that make them attractive to other companies. In making annual compensation decisions, the Compensation Committee reviews each Named Executive Officer’s total compensation, as well as the compensation components, for reasonableness and comparability to market levels and the prior year’s compensation.

The compensation components are designed to motivate our senior leadership to operate as a team to achieve Company-wide goals. This approach serves to align the compensation of our most senior leadership team with the performance of the Company.

In the first quarter of each year, our independent consultant presents to the Compensation Committee comparative market information, including benchmarking data discussed below. For the Chairman and CEO, the Compensation Committee is exclusively responsible for the final determination of all components of compensation, but requests input and recommendations from Meridian. For other Named Executive Officers, the Compensation Committee receives additional recommendations from our CEO for all components of compensation. In the first quarter of each year, the Compensation Committee reviews the market data and recommendations and sets the compensation components of annual base salary, annual performance-based incentives, and long-term incentives for that year. Below is a graph aligning CEO pay and performance, using the five year total shareholder return.

Below is an overview of SCI’s elements of compensation and a graph showing the percentage of the total for each element.

Approximately 3/4ths of our NEOs' compensation is performance-based.

Element Description Objective Recent Changes

Annual Base Salary
page 34

Fixed cash element of compensation established within a competitive range of benchmark pay levels.

Serves to attract and retain executive talent and may vary with individual or due to marketplace competition or economic conditions.

Reduced peer group for 2016 benchmark studies.

Annual Performance-Based Incentive Compensation

page 34

Performance–based element of compensation tied to the attainment of performance measures. Paid in cash.

Rewards achievement of shorter term financial and operational objectives that we believe are primary drivers of our common stock price over time.

For 2018, we have transitioned return on equity to a modifier for the performance unit plan under Long-Term Incentive Compensation.

Long-Term Incentive Compensation

page 36

Stock Options – granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date and vest at a rate of 1/3rd per year.

Rewards for the Company’s stock price appreciation.

 

Restricted Stock – awards are made in February each year at the same time as the stock option grants and vest at a rate of 1/3rd per year.

Supports retention and furthers stock ownership.

 

Performance Units – The performance unit plan measures the three-year total shareholder return (“TSR”) relative to a comparator group of public companies (see Annex B).

Rewards for effective management of Company business over a multi-year period and delivering superior TSR.

> Reduced peer group for 2016 comparator group.

> Added a return on equity modifier for 2018 awards.

> Changed denomination to award in share units for 2018 awards.

Other Compensation

page 37

Retirement Plans – Executive Deferred Compensation Plan and 401(k) Plan.

Provide financial security for retirement.

 

Perquisites and Personal Benefits – reasonable benefits as described on page 38.

To enhance executive performance by facilitating effective management of personal matters.

 

Annual Base Salaries

We target the base salary levels of our Named Executive Officers within a competitive range of benchmark pay levels defined in the competitive benchmarking study described on page 42. We believe these levels are appropriate to motivate and retain our Named Executive Officers, who each have leadership talents and business expertise that make them attractive to other companies. In addition, when adjusting salaries, we may also consider the individual performance of the executive. The Compensation Committee made the adjustments reflected below based on consideration of benchmark pay levels for each executive and in recognition of the officers’ strong performance during 2016. In the first quarter of 2017, the Compensation Committee made the following salary adjustments:

  2017 Salary 2016 Salary Change % Change

Thomas L. Ryan

$    1,200,000

$    1,200,000

$    —

—%

Michael R. Webb

 750,000

 750,000

 —

—%

Eric D. Tanzberger

 600,000

 550,000

 50,000

9.1%

Sumner J. Waring, III

 570,000

 550,000

 20,000

3.6%

Gregory T. Sangalis

480,000

480,000

—%

Annual Performance-Based Incentives Paid in Cash

We use annual performance-based incentives paid in cash to focus our executive officers on financial and operational objectives that the Compensation Committee believes are primary drivers of our common stock price over time. In the first quarter of 2017, the Compensation Committee established the performance measures as the basis for annual performance-based incentive awards for our Named Executive Officers. In addition, the Compensation Committee established an Umbrella Program as a gateway performance metric for certain incentives.

The Umbrella Program is designed to generate a performance-based bonus pool to fund award payouts based on the performance measures discussed below and to maximize the benefit of tax deductibility of the bonuses paid to our Named Executive Officers. The Compensation Committee set the funding for the bonus pool for 2017 as 3.0% of the Company’s adjusted reported earnings before interest, taxes, depreciation and amortization calculated from the Company’s financial statements, but only if the Company achieved adjusted reported earnings before interest, taxes, depreciation and amortization in excess of $750 million for 2017. The Compensation Committee also established individual shares of the bonus pool for each executive covered under the Umbrella Program, including each Named Executive Officer. Award amounts that may be paid under the Umbrella Program are subject to the Compensation Committee’s authority to reduce, but not increase, the amount of the actual cash amount earned and payable to each designated participant. With regard to award amounts calculated under the performance measures discussed above, the Compensation Committee may elect to increase or decrease the award amount in its sole discretion; provided, however, that the amount determined under such performance measures shall not exceed the amount determined under the Umbrella Program. Further, in the event the amount calculated under such performance measures is lower than the amount calculated under the Umbrella Program, the Compensation Committee intends to reduce the amount payable under the Umbrella Program to not exceed the award amount calculated under such performance measures.

As a result of the Tax Act passed on December 22, 2017, we terminated the Umbrella Program for 2018. The target award opportunities for the Named Executive Officers for 2017 were as follows:

  Target Award Opportunity (% of Base Salary) 

Thomas L. Ryan

120%

Michael R. Webb 

100%

Eric D. Tanzberger

 80%

Sumner J. Waring, III

80%

Gregory T. Sangalis

70%

We believe normalized earnings per share, free cash flow per share and return on equity drive the current performance of the Company and enhances shareholder value. Comparable preneed cemetery property production is a key driver of current performance, as we are generally able to recognize this revenue at the time of sale when the property is ready and available for use. While all other comparable preneed funeral and cemetery production is generally deferred and does not have an immediate impact on earnings, we believe such production is driving future market share growth, adding stability to our revenue stream, and creating value for our shareholders over the long-term. The 2017 performance measures discussed below are similar to the performance measures utilized in 2016:

  • Normalized Earnings per Share, which we calculate by applying a 36.6% effective tax rate to the Company’s calculation of its reported diluted earnings per share and further adjusting to exclude the items listed below.

  • Normalized Free Cash Flow per Share, which we calculate by (1) adjusting reported cash flows from operating activities to exclude the cash impact of the items listed below, (2) deducting forecasted capital improvements at existing facilities and capital expenditures to develop cemetery property, (3) utilizing the forecasted amounts of cash taxes paid in 2017 that relate to normal operating activities, and (4) dividing the result by the reported diluted number of shares outstanding in 2017.

  • Normalized Return on Equity is calculated as net income divided by average equity. Net income is calculated using normalized net income as defined above in the Normalized Earnings Per Share performance measure. Average equity is defined as the sum of Adjusted Prior Year Equity and Adjusted Current Year Equity divided by two. Adjusted equity excludes other comprehensive income and adjusted current year equity is inclusive of the adjustments defined for Normalized Earnings Per Share, net of tax, minus any estimated amount of share repurchases. In certain future years when applicable, we may not use Return on Equity as a performance metric if certain events happen outside routine business activities. For 2018, we have decided to not use Return on Equity as a metric for our short-term incentive program. We will instead incorporate Return on Equity as a modifier for our long-term incentive performance unit plan.

  • Comparable Preneed Production, which we define as the percentage of growth over prior year in combined total preneed funeral sales production and total preneed cemetery sales production at comparable same-store locations in mixed currency dollars (USD and Canadian dollars).

For 2017, we weighted each of the performance measures at 25%. The Compensation Committee established ranges for performance measures and their related payouts as a percentage of the target award for the performance period from January 1 through December 31, 2017. We calculated awards for performance levels between threshold and target or target and maximum using straight-line interpolation. The 2017 performance targets, SCI’s actual performance, and resulting payout percentages are set forth below.

2017 Performance Targets and Actual Performance
Performance Measure Threshold
for 0%
Payout (1)
Target for
100%
Payout
Maximum
for 200%
Payout
2017 Actual
Performance
2017
Performance
as % of Target
Payout
Percentage

Normalized Earnings per Share

$    1.26    

$    1.34    

$    1.42    

$    1.38    

102.77 %

146.72 %

Normalized Free Cash Flow per Share

$    1.37    

$    1.51    

$    1.67    

$    1.72    

113.39 %

200.00 %

Normalized Return on Equity

20.83 %

22.33 %

23.83 %

23.09 %

103.40 %

150.54 %

Comparable Preneed Production (2)

102.50 %

105.00 %

107.50 %

102.74 %

97.85 %

9.79 %

Total Payout Percentage

 

 

 

 

 

126.76 %

  1.  Any performance above the threshold results in a payout.
  2.  Expressed as a percentage of comparable 2016 performance.

The Compensation Committee believes it is appropriate to exclude certain non-routine items from performance metrics to encourage appropriate decision making regarding operations and capital deployment. For 2017, the Compensation Committee approved the exclusion of gains on dispositions, disaster recovery costs, a pension termination settlement, certain legal settlements, special trust withdrawals, currency losses, losses associated with the early extinguishment of debt, and favorable adjustments to certain tax reserves as a result of the Tax Act passed on December 22, 2017 as well as IRS settlements related to prior years.

As a result of the foregoing and giving effect to the weightings described above, our Named Executive Officers received annual performance-based incentives paid in cash at 126.76% of their individual incentive targets. The actual dollar amounts of the payouts are set forth in footnote (2) to the Summary Compensation table below. The Company also exceeded the Umbrella Program’s threshold metric regarding adjusted reported earnings before interest, taxes, depreciation and amortization and, consistent with the Umbrella Program, the Compensation Committee reduced the amounts payable under the Umbrella Program to the amounts payable under the performance measures as discussed above.

The Compensation Committee established each Named Executive Officer’s target opportunity for 2017 to be consistent with our overall compensation philosophy to align compensation with our performance and to motivate and retain the executive level talent. The target award opportunities were generally positioned within the mid-range of the competitive benchmark market data. If SCI achieves the performance targets established by the Compensation Committee, executive officers would receive incentive awards at this targeted level. Actual incentive awards may be higher or lower than the target levels based on SCI’s performance relative to the performance goals. The range of performance goals establishes a lower threshold to achieve a minimal annual performance-based incentive but with a higher threshold to achieve a payout at or near the maximum award of 200% of the targeted incentive levels. The award is based on base salary on the last day of the measurement period.

Long-Term Incentive Compensation

In February of each year, the Compensation Committee approves the long-term incentive award grants for that year. Awards granted in 2017 under our long-term incentive compensation program consisted of three types of awards to provide balance and focus for the Named Executive Officers. Specifically, the awards consist of a mix of stock options, restricted stock, and performance units, which are designed to ensure focus on driving an appropriate culture and healthy operating platform for the Company, managing our on-going risk profile, and implementing strategies to generate superior total long-term shareholder returns. The Compensation Committee considered several factors in determining the total target value of long-term incentive compensation for Named Executive Officers, including Peer Group benchmark pay levels, the individual performance of each executive officer, the job responsibilities of each executive officer, and the overall Company performance in light of the then current economic environment. Once the total target value was established for each executive officer, we calculated and granted to the executive officer (i) the number of stock options which had a value equal to one-third of the total target value, (ii) the number of shares of restricted stock which had a value equal to one-third of the total target value, and (iii) the number of performance units which had a value equal to one-third of the total target value. We believe that the grant of significant annual equity awards further aligns the interests of senior management and the Company’s shareholders. Therefore, the grant of stock options and the award of restricted stock are important components of annual compensation. Although the Compensation Committee does not consider current stock ownership levels in determining equity awards, we do annually review the ownership levels and progress towards established ownership guidelines, as discussed below.

Stock Options

The purpose of using stock options is to provide executive officers a reward value that is directly attributable to their ability to increase the value of the business and our stock price. Stock options are granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date. Stock options vest at a rate of one-third per year and have an eight-year term.

Restricted Stock

The purpose of using restricted stock with service-based vesting provisions is to assist in retaining our executive officers and encourage stock ownership. The restricted stock awards are made in February each year at the same time as the stock option grants and vest at a rate of one-third per year.

Performance Units

The performance units are intended to reward executive officers for effective management of the business over a multi-year period. In addition, the performance units allow executive officers to retain or build their SCI stock ownership by providing liquidity that can be applied to taxes associated with option exercises and restricted stock vestings. The performance unit plan measures the three-year total shareholder return (“TSR”) relative to public companies that are a subset of the Peer Group (see Annex B). The subset of the Peer Group is selected based on correlation in size, certain business characteristics, and stock price as well as others.

TSR is defined as the percentage computed from $100 invested in SCI common stock on the first day of the performance cycle, with dividends reinvested, compared to $100 invested in each of the public companies in the Peer Group, with dividend reinvestment during the same period.

The Compensation Committee believes TSR is an appropriate metric because it (i) aligns the interests of management with the interests of shareholders, and (ii) provides a useful means of comparing Company performance relative to the performance of public companies in the Peer Group. Each performance unit has a value of $1.00 and the actual payout may vary by a range of 0% to 200% of each executive’s target award opportunity established by the Compensation Committee. Earned performance unit awards are settled in cash at the end of each three-year performance period. The chart below sets forth the range of payouts as a percent of a target award at various levels of relative performance.

The Board approved changes to the performance unit plan to add a return on equity modifier to the total shareholder return metric to respond to shareholder feedback and a change in the denomination to award in share units rather than cash units, which will be effective for 2018.

Performance Unit Range of Payouts
 Award Payout Level SCI Weighted Average Total Shareholder Return Ranking Relative to Comparator Group at End of Performance Cycle % of Target Award Paid as Incentive*
Maximum 75th Percentile or greater 200%
Target 50th Percentile 100%
Threshold 25th Percentile 25%
Below Threshold Less than 25th Percentile —%
  • Calculation of awards for performance levels between threshold and target or target and maximum are calculated using straight-line interpolation.

We believe superior relative performance in a down year deserves a reward, but should be limited. Therefore payouts are capped at target if SCI experiences negative TSR for a performance cycle but performs well in relation to the Peer Group.

For the 2015 - 2017 performance cycle, the closing stock price determinations as of December 31, 2014 and December 31, 2017 were used to calculate the awards due participants. For this performance cycle, the participants earned an award of 200% of the target award opportunity based on the Company’s TSR greater than 73% (compared to S&P TSR of 38%) and at the 77th percentile or better ranking relative to the Peer Group used in 2015.

For the 2017 - 2019 performance cycle, the Compensation Committee granted performance units with performance awards ranging from 0% to 200% as set forth below in the “Grants of Plan-Based Awards” table. A target award is earned if SCI’s TSR relative ranking is at the 50th percentile of the TSR of the public companies in the 2017 Peer Group.

Other Compensation

Retirement Plans

We believe that financial security during retirement can be as important as financial security before retirement. We previously maintained a Supplemental Executive Retirement Plan for Senior Officers, which ceased accruing benefits in 2000. In 2005, we implemented an Executive Deferred Compensation Plan, which includes a Company contribution for retirement.

Our Supplemental Executive Retirement Plan for Senior Officers is a non-qualified plan under which our Named Executive Officers accrued benefits until December 31, 2000. No additional benefits have been accrued after 2000. Each participant is vested in the full benefit at age 60.

To help retain and recruit executive level talent, the Company maintains the Executive Deferred Compensation Plan. This plan allows for an annual retirement contribution of 7.5% of eligible compensation and a performance-based contribution targeted at 7.5%, with a range of 0% to 15% based on achievement of Company performance measures established in the first quarter of each year. These are the same performance measures described in the annual performance-based incentives paid in cash above. The percentages are applied to the combined eligible compensation of base salary and annual performance-based incentives paid in cash. The plan allows for individual deferral of base salary, annual performance-based incentives paid in cash, restricted stock awards, and performance unit awards. The plan also allows for the restoration of Company matching contributions that are prohibited in the Company’s 401(k) plan due to tax limits on contributions to qualified plans. In February 2018, the Company made the following contributions under the plan with respect to 2017 service and performance:

Name  7.5%
Retirement
Contribution
Performance
Contribution
Total
Thomas L. Ryan $     226,904  $     287,714  $     514,618
Michael R. Webb 127,554 161,738 289,292
Eric D. Tanzberger 90,635 114,925 205,560
Sumner J. Waring, III 86,103 109,178 195,281
Gregory T. Sangalis 67,944 86,153 154,097

We also offer a 401(k) plan to our employees, including our executive officers. In 2000, the Company initiated the 401(k) Retirement Savings Plan for elective contributions by participants and matching contributions by the Company up to prescribed limits established by the Board of Directors and specific IRS limitations. Participants may elect to defer up to 50% of salary and bonus into the Plan subject to the annual IRS contribution limit of $18,000 excluding the $6,000 catch-up contributions for eligible participants age 50 and older. The Company’s match ranges from 75% to 125% of employee deferrals based on their years of Company service. The match is applied to a maximum of 6% of an officer’s salary and annual performance-based incentive, subject to the IRS compensation limits.