RISK ASSESSMENT OF COMPENSATION PROGRAMS
The Company undertook a comprehensive review of the various compensation programs maintained throughout the organization to determine whether any of those programs encouraged excess risk taking that might create a material risk to the Company’s economic viability. As the first step in that process, the Human Resources Department compiled an inventory of the various compensation plans and programs, noting their principal features, the potential risks posed to the Company and any mitigating factors, such as payment caps, internal processes for the review and validation of the applicable performance measures and levels of attainment, and the reservation of discretion by the Company or other plan administrator to effect reductions and adjustments to the payout amounts when warranted.
The plan inventory was presented to the Compensation Committee for review. The findings reached by the Compensation Committee with respect to its risk assessment of the compensation programs maintained for the Company’s executive officers are set forth in the Compensation Discussion and Analysis section of this Information Statement.
In conducting their respective reviews, both the Company and the Compensation Committee noted the following additional points with respect to the inventoried plans:
The Company’s cash and equity compensation structure is in general applied on a uniform basis throughout the organization.
The Company’s management-level employees receive equity awards on a recurring basis. Those awards are either in the form of restricted stock units or a combination of stock option grants, restricted stock units and performance share unit awards that are settled in shares of the Company’s Class A Common Stock. Although stock options have the potential to encourage risk taking, the equity awards of which they are a component vest over a period of years so as to encourage the award recipients to focus on sustaining the Company’s long-term performance. In addition, the equity awards are generally made on an annual basis, and as a result, the Company’s executive officers and other management-level employees typically have unvested awards outstanding that could decrease significantly in value if the Company’s business is not managed for the long-term.
The Company also implemented a performance share unit/performance cash bonus award program for key employees of Apollo Global and certain employees of the Company who are significantly involved in the business operations of that entity. The applicable performance-vesting condition for those awards is generally tied to a free cash flow or operating free cash flow metric measured at the Apollo Global level over a multi-fiscal-year period. The awards are more leveraged than the performance share unit awards tied to the Company’s performance in that the maximum payout level under the Apollo Global awards is 600% of target, whereas the maximum payout rate under the Company’s performance share units is set at either 200% or 300% of target. However, the more leveraged nature of the Apollo Global awards is not considered to pose a material adverse risk to the Company. First, the awards are only made to a limited and select group of individuals within the organization. Secondly, there is a cap on both the maximum number of shares issuable and the maximum dollar amount payable on those awards, and such awards are expected to be made on an annual basis to the selected individuals so that they will eventually hold a number of outstanding awards under the program with different performance targets and vesting schedules. Excessive risk taking to earn a maximum return on one year’s award could jeopardize the potential return on the awards for other years. Although most Apollo Global employees receive their long-term incentive awards solely or primarily in the form of such special performance shares and performance cash bonus awards, there are only a small number of employees who receive these Apollo Global awards compared to the overall number of employees who receive long-term incentive awards. Consequently, the aggregate grant-date value of these Apollo Global awards is relatively small in comparison to the aggregate grant-date value of the annual long-term incentive awards made to other individuals throughout the organization that are tied to the Company’s performance or the price of its Class A Common Stock. In addition, for the limited number of Apollo Education Group employees who receive Apollo Global performance share unit/performance cash bonus awards, the total grant-date value of their annual long-term incentive award is allocated in accordance with a portfolio approach that directs the predominant portion of that value into equity awards tied to Company-level performance or the price of its Class A Common Stock. Accordingly, for those Company employees, the special Apollo Global performance share unit/performance cash bonus awards they receive do not comprise a significant component of their total equity compensation package that is likely to encourage excessive risk taking.
The Company’s overall compensation structure is not overly weighted toward short-term incentives and, for management-level employees, there is a significant long-term equity award component tied to the value of the Company’s Class A Common Stock. The short-term incentive programs the Company has implemented are subject to a dollar cap per individual tied to a percentage of his or her base salary. As a result, there is a meaningful limitation on the amount of compensation that can be generated from such short-term incentive programs, thereby mitigating the potential for excessive risk taking with respect to short-term goals. In addition, at the executive officer level, the Compensation Committee has reserved