Windstream 2012 Annual Report Download - page 26

officers in consultation with the Compensation Committee’s consultant, except that no recommendation is made for Mr.
Gardner’s compensation. The Compensation Committee then meets to review and determine Mr. Gardner’s compensation
and reviews and recommends the compensation for all other executive officers. The Compensation Committee determines
Mr. Gardner’s compensation, and recommends the compensation of all other executive officers, based in part on discussions
with Windstream management, including Mr. Gardner, and discussions with the compensation consultant. The Windstream
Board approves or, in the case of Mr. Gardner’s compensation, ratifies the actions of the Compensation Committee.
Stockholder Outreach. Windstream management also reviewed the proxy advisory reports issued by Institutional
Shareholder Services, Inc. (ISS) and Glass Lewis & Co. regarding our executive compensation policies and practices.
Windstream management contacted ISS and Glass Lewis and two large institutional shareholders of Windstream to discuss
any concerns identified during the 2012 proxy season. The results of these discussions were reported to the Compensation
Committee.
Elements of 2012 Compensation. For 2012, the Compensation Committee approved compensation for named
executive officers after considering individual performance, Windstream’s performance, strategic importance of an
individual’s role, retention risk, and current compensation compared to competitive market data. The Committee also
considered the significant demands imposed on the senior leadership team by Windstream's difficult financial and operational
targets, its high volume of strategic initiatives and the success the relatively young team has achieved in a consolidating
industry with intense competition. For 2012, the compensation of Windstream’s named executive officers consists of three
principal components:
• Base salary;
• Short-term (annual) cash incentive payments; and
• Long-term incentives in the form of equity-based compensation.
The compensation program for the named executive officers also includes the Windstream 2007 Deferred
Compensation Plan, the Windstream 401(k) Plan, change-in-control agreements, and limited perquisites. In addition,
Windstream has an employment agreement with Mr. Gardner, and certain named executive officers have benefits in the
Windstream Pension Plan and the related Windstream Benefit Restoration Plan.
2012 Total Compensation. Base salaries and long-term incentives increased year-over-year for all named executive
officers. These changes were made as a result of the 50% increase in company revenue following the Paetec acquisition in
December 2011 and increased market comparisons. The increases were partially offset by decreased short-term incentive
payments based on plan performance in 2012 and for Mr. Gardner, a decrease in equity value due to a special grant received
in 2011.
Base Salary. Base salary is designed primarily to provide competitive compensation that reflects the contributions
and skill levels of each executive. Merit increases in base salary for 2012 for the NEOs ranged from 1% to 7% based on
individual performance and comparison to market levels, for specific positions.
Short-Term Cash Incentive Payments. Windstream maintains short-term cash incentive plans which are designed
primarily to motivate executives to achieve Company-wide performance goals over annual or quarterly periods. Under these
plans, the Compensation Committee sets different target payout amounts (as a percentage of base salary) for all executive
officers in order to reflect such individual’s contributions to Windstream and the market level of compensation for such
position. The Compensation Committee believes these short-term incentive plans are a key part of its goal to make a
substantial portion of total direct compensation at risk.
During 2012, the named executive officers participated in a short-term cash incentive plan based on Windstream’s
achievement of certain Adjusted OIBDA and Adjusted Revenue levels. Adjusted OIBDA, which is operating income before
it is reduced by depreciation and amortization, is a non-GAAP financial measure and is one of the principal measures used by
Windstream to communicate its financial performance in its quarterly earnings releases. The Adjusted OIBDA measure
excludes non-cash pension expense, equity compensation expense and restructuring expense. Adjusted Revenue is also a
non-GAAP measure and it is the Company’s total service revenue excluding wholesale, switched access and USF revenues
and revenue from PAETEC non-strategic businesses. Windstream provides the methodology for calculating Adjusted
OIBDA in the Current Report on Form 8-K that accompanies its quarterly earnings releases. Adjusted Revenue can be
calculated using information included in Annex A of this report. Payments under the short-term incentive plan have
historically been based solely on Adjusted OIBDA. The Compensation Committee has utilized Adjusted OIBDA as a
performance metric because it is a critical indicator of Windstream’s ability to generate sustainable cash flows over a long
period of time. For 2012, however, the Compensation Committee elected to diversify payouts under the plan by including a
revenue component as part of the performance criteria. The Committee determined that revenue was a strong indicator of the
Company’s performance year-over-year and overall financial condition. Adjusted Revenue was chosen as the performance
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