2018 Guide to Effective Proxies

2.17.2 Executive summary | 259 6 TH EDITION | GUIDE TO EFFECTIVE PROXIES AMERICAN EAGLE OUTFITTERS, INC. COMPENSATIONDISCUSSIONANDANALYSIS • OurFiscal2017TSRwasapproximately25%,andourthree-yearrelativeTSRisatthetopofourproxypeergroupdescribed herein.Additionally,ourfinancialperformanceplacedusabovethe75 th percentileforcomparablesalesgrowth. -10% 0% 10% 20% 30% 40% 50% 1Year TSR Peergroup 75thPercen�le AEO Peergroup Median 3Year To achieve solid financial results in Fiscal 2017 and position the Company for profitable growth in the future, the executive leadership team successfully executed against our strategic initiatives. Specific achievements included making significant improvements to the merchandise assortments, introducing new product categories, creating new marketing campaigns, investing in talent, launching an improved loyalty program, executing a fleet optimization strategy, and fueling our digital sales whichroseover20%fortheyear. Webelievetheexecutivecompensation-relateddecisionsmadeduringachallengingyearfortheretailindustryandtheoutcomes we achieved by taking quick action to strengthen our business and executing against our initiatives highlight our ongoing commitmenttopayourexecutivesforperformanceandaligntheirinterestswiththoseofourstockholders.Specifically: • NoneofourNEOsreceivedincreasestotheirbasesalariesinFiscal2017; • Notwithstandingthestrong,absoluteandrelativetopeerfinancialperformanceforFiscal2017,ouractualresultsfellbelowthe threshold levels set for the year to pay bonus. As a result, none of our NEOs received a bonus payout under our annual incentivecompensationprograminFiscal2017; • Toretainourtoptalentandfurtheraligntheirinterestswiththoseofstockholdersandensurecontinuedfutureprofitabilityofthe Company,theCompensationCommitteegrantedthefollowinglong-termincentiveopportunitiestoourNEOsinFiscal2017in accordance with our Company’s compensation program: (i) performance share units (“PSUs”) that will vest after three years based on net income (1) growth performance goals (50% weighted), (ii) time-vesting stock options that vest over three years (25%weighted)and(iii)time-vestingrestrictedstockunits(“RSUs”)thatvestoverathreeyearperiod(25%weighted); • To reward the substantial efforts and leadership that ultimately led to the achievement of significantly improved second half resultsforFiscal2017,theCompensationCommitteeapprovedrecognitionawardsforourNEOswhichequaledonly50%of their respective annual target bonus opportunity for Fiscal 2017. This determination was made in light of the significant performanceachievedbytheCompanyduringthesecondhalfofFiscal2017,aswellastoaligntheircompensationintermsof rewardfortheFallandHolidayachievementswiththeotherAssociatesoftheCompany.Additionally,considerationwasgiven to compensate the NEOs for additional direct responsibilities assumed by them following organizational changes during the year,includingtheeliminationofMr.Horvath’spositionfollowinghisdepartureandthere-assignmentofhisdutiestotheNEOs; and • TotalcompensationforourNEOs,overall,decreasedyearoveryear. (1) Netincomeisdefinedasincomefromcontinuingoperationsandexcludes(1)anyaccrualforrestructuringprograms,includingleasebuyout chargesrelatedtostoreclosuresand/or(2)assetimpairmentcharges,asdeterminedbytheCompensationCommittee. 30 | Total of 05 pages in section COMPENSATIONDISCUSSIONANDANALYSIS • Fiscal2017representedourthirdconsecutiveyearofcomparablesalesgrowth,withconsolidatedcomparablesalesrisingby 4%; ComparableSalesGrowth +7% 2017 2015 2016 +3% +4% • TheAEbranddeliveredannualcomparablesalesgrowthof2%,withresultsequallystrongacrossmen’sandwomen’sapparel. Theteamcontinuedtodriveproductandmarketinginnovation,recordingrecordsalesincreasesacrossgendersintheanchor categoryofbottoms; • Aerie posted a comparable sales gain of 27%, building on double-digit comparable sales increases the prior two years. The brandreached$500millioninsalesandconsistentlyexpandeditscustomerbaseandmarketsharethroughouttheyear; • The Company’s store performance strengthened throughout the year, and AEO successfully capitalized on improved mall trendsandstrongermerchandisecollectionstoregisterpositivebrick-and-mortarcomparablesalesincreasesatbothAEan Aerie during the fourth quarter. AEO’s digital sales continued to increase, expanding by more than 20% for th year, nd delivering twelve straight quarters of double-digit growth. At $1 billion in annual sales and strong profit margins, our digital channelnowrepresents26%ofoursales.WealsolaunchedAEOConnected,ournewloyaltyprogram,inFiscal2017,which willdrivemarketsharegainstoouralreadystrongbrands; • We ended the year with $414 million in cash and no debt, after investing $169 million into capital projects and returning $176 million to stockholders through cash dividends and share repurchases. Operating and Free Cash Flow (1) continued to expandinFiscal2017,reaching$394millionand$222million,respectively;and OperatingandFreeCashFlow (1) ($ inMillions) $342 $366 $394 $188 $203 $222 2015 2016 2017 FreeCashFlow Opera�ngCashFlow (1) SeeAppendixAofthisproxystatementforadditionaldetailontheadjustedresultsandotherimportantinformationregardingtheuseofnon- GAAPoradjustedmeasures. 2018ProxyStatement | 29 COMPENSATION DISCUSSION AND ANALYSIS This Compensation Discussion and Analysis (“CD&A”) describes our compensation philosophy, objectives, policies, and practiceswithrespecttoourNEOsforFiscal2017.OurFiscal2017NEOsarecomprisedofthefollowingofficers: • JayL.Schottenstein,ourChiefExecutiveOfficer(the“CEO”); • RobertL.Madore,ourExecutiveVicePresident,ChiefFinancialOfficer(the“CFO”); • CharlesF.Kessler,ourGlobalBrandPresident,AmericanEagle(the“GlobalBrandPresident,AE”); • JenniferM.Foyle,ourGlobalBrandPresident,Aerie(the“GlobalBrandPresident,Aerie”); • MichaelR.Rempell,ourExecutiveVicePresident,ChiefOperationsOfficer(the“COO”);and • Peter Z. Horvath, our former Chief Global Commercial and Administrative Officer (the “Former CAO”) who left the Company effectiveSeptember29,2017. This CD&A is organized as follows: (i) an Executive Summary setting forth our Business & Leadership Overview for Fiscal 2017, our focus for Fiscal 2018, our Compensation Program Objectives and Philosophy, and our Executive Compensation Highlights; (ii) a discussion of our Executive Compensation Program, including our Fiscal 2017 Goal Setting Process and Compensation Considerations, Compensation Benchmarking, and details regarding each element of our annual compensation; and (iii)additionalcompensationinformation,includingtaxconsiderationsandchangeincontrolandotherarrangements. EXECUTIVE SUMMARY Fiscal 2017 Business & Leadership Overview Fiscal 2017 was a year of significant progress for AEO. Our achievements included record revenues of $3.8 billion – rising 5% overthepreviousyear–andourthirdstraightyearofpositivecomparablesales.Wesuccessfullyexecut dagainstourlong-term strategiesand,asaresult,ourbrandscontinuedtogainmarketshare. After a challenging start to the year, our teams took quick action to strengthen the merchandise assortments and elevate the customer experience. These efforts positively impacted our results. We saw sequential quarterly improvement to our adjusted operating income (1) throughout the year and posted year-over-year adjusted earnings per share (1) growth in the fourth quarter. Salestrendsalsoaccelerated,buildingtoan8%comparablesalesincreaseinthefourthquarter,ourbestoftheyear.Tofurther demonstratetheimprovement,revenuegrowthacceleratedtoa7%increaseinthesecondhalf,comparedto2%inthefirsthalf, and adjusted operating income (1) grew 3% in the second half compared to a 27% decline in the first half. These results were achieveddespiteon-goingchallengesintheretailindustry,includinghighlevelsofpromotionalactivityandweakmalltraffic. Financialhighlightsofouryearareasfollows: • TotalCompanyrevenuegrew5%toapproximately$3.8billion; $3.5 (+7%) $3.6 (+2%) $3.8 (+5%) 2015 2016 2017 Revenue ($ inBillions) (1) SeeAppendixAofthisproxystatementforadditionaldetailontheadjustedresultsandotherimportantinformationregardingtheuseofnon- GAAPoradjustedmeasures. 28 | AMERICAN ELECTRIC POWER COMPANY, INC. • TheCompanyperformedabovetargetonmostofitsstrategicmeasures. • Theseresultsproducedanoverallscoreof92percentoftargetundertheannualincentiveplan. 2015-2017EarnedLong-TermPerformanceAwards Withrespecttothelong-termincentiveperformanceunitaward,theHRCommitteecertifiedthefollowing resultsandpayoutcomes: • Cumulativetotalshareholderreturn(TSR)of38%placedtheCompanyatthe75thpercentilerelativeto theS&P500ElectricUtilitiesIndustryIndex,whichresultedin183.3percentofthetargetscore. • Cumulativeoperatingearningspersharewasabovethetargetsetforthisperformanceperiodand producedascoreof146.2percentoftarget. • Thesecombinedequallyweightedscoresresultedinapayoutof164.8percentoftargetforthis performanceperiod. CompensationGovernanceBestPractices Underlyingourexecutivecompensationprogramisanemphasisongoodcorporategovernancepractices. WhatWeHave WhatWeDon’tHave ✓ Significantstockownershiprequirementsfor executiveofficers,includingastockownership requirementfortheCEOofsixtimesbasesalary ✗ Noreimbursementortaxgross-upforexcise taxestriggeredunderchangeincontrol agreements ✓ Asubstantialportionofthecompensationfor executiveofficersistiedtoannualandlong-term performance ✗ Nocompanypaidcountryclubmembershipsfor executiveofficers ✓ ArecoupmentpolicythatallowstheCompanyto clawbackincentivecompensation ✗ GenerallyprohibitpersonaluseofCompany providedaircraft,totheextentthatsuchusehas anincrementalcosttotheCompany ✓ Aninsidertradingpolicythatprohibitsour executivesanddirectorsfromhedgingtheirAEP stockholdingsandfrompledgingCompanystock ✗ Notaxgross-ups,otherthanforrelocations ✓ Ifthereisachangeincontrol,long-termincentive awardshavedoubletriggervestingthatresultsin acceleratedvestingoftheseawardsonlyifthe changeincontrolisfollowedbyaninvoluntaryor constructiveseparationfromservice Resultsof2017AdvisoryVotetoApproveExecutiveCompensation AttheCompany’sannualmeetingofshareholdersheldinApril2017,approximately85percentofthevotes castontheCompany’ssay-on-payproposalvotedinfavoroftheproposal.Afterconsiderationofthisvote,the HRCommitteecontinuedtoapplythesameprinciplesandphilosophyithasusedinpreviousyearsin determiningexecutivecompensation.TheHRCommitteewillcontinuetoconsidertheoutcomeofthe Company’ssay-on-payvoteandothersourcesofstakeholderfeedbackwhenestablishingcompensation programsandmakingcompensationdecisionsforthenamedexecutiveofficers. 36 Total of 03 pages in section InOctober2017theCompanyincreaseditsquarterlydividendby5.1percent,theeighthconsecutiveyearly increase.Asshowninthechartbelow,AEP’sshareholdersreceiveda20.9percenttotalshareholderreturnin 2017,whichwaswellabovethetotalshareholderreturnfortheS&P500ElectricUtilitiesIndexof10.6percent, withcorrespondinglysimilarsuperiorresultsoverthelast3-and5-yearsaswell. Total Shareholder Return 110% 100% AEP S&P 500ElectricUtilities Index S&P 500 90% 80% 70% 60% 50% 40% 30% 20% 20.9% 10.6% 21.8% 34.9% 20.8% 38.3% 108.1% 108.1% 70.8% 10% 0% OneYear ThreeYear FiveYear 2017GoalsforIncentiveCompensationPlans Withrespecttoour2017annualincentivecompensation,theHRCommittee: • Settheoperatingearningspersharetargetgoalat$3.70,withnopayoutundertheannualincentiveplan ifoperatingearningswerebelow$3.55pershare.TheCompany’sannualoperatingearningsguidance atthetimetheHRCommitteesetthegoalwas$3.55-$3.75pershare. • Settheoperatingearningspershareneededforamaximumpayoutat$4.00pershare. Withrespecttothe2017long-termincentiveperformanceunitawards,theHRCommittee: • Setthetargetforthethreeyearcumulativeoperatingearningspersharebasedonthesame$3.70target usedfortheannualincentiveplanfor2017,withasixpercentgrowthrateinoperatingearningsfor 2018and2019. 2017ExecutiveCompensationEarnedAwardsunderAnnualIncentivePlan Withrespecttoearnedawardsundertheannualincentiveplan,theHRCommitteecertifiedthefollowing resultsandpayoutcomes: • 2017operatingearningspershareof$3.68,whichwasabovethemidpointoftheCompany’soriginal earningsguidance,producedascoreof83.9percent. 35 Compensation Discussion and Analysis ThissectionexplainsAEP’scompensationphilosophy,summarizesitscompensationprogramsandreviews compensationdecisionsforthefollowingnamedexecutiveofficers: Name Title Mr.Akins ............................ Chairman,ChiefExecutiveOfficerandPresident Mr.Tierney .......................... ExecutiveVicePresidentandChiefFinancialOfficer Mr.Feinberg ......................... ExecutiveVicePresidentandGeneralCounsel Ms.Barton ........................... ExecutiveVicePresidentTransmission Ms.Hillebrand ........................ ExecutiveVicePresidentandChiefAdministrativeOfficer Executive Summary 2017BusinessPerformanceHighlights In2017wecontinuedonourpathtorepositiontheCompanyasthenextpremierregulatedenergycompany. InJanuary2017,wecompletedthesaleofourunregulatedLawrenceburg,Waterford,DarbyandGavin generationplants.Webelievethatthiswillallowustoproducemoreconsistentearningsbyremovingthe volatilityassociatedwiththosecompetitivegenerationplantsandtheirexposuretothecapacityandenergy markets.Wehavesuccessfullyrefocusedourbusiness,withmostofourforecastedearningscomingfromour regulatedoperationsandcontractedrenewablesbusiness.Weanticipatedloweroperatingearningsthisyear, comparedwithlastyear,duetothesaleofthesecompetitivegenerationassets.Weusedthecashproceedsfrom thesaletofurtherinvestinourtransmissionbusinessandrenewableprojects.Althoughoperatingearningswere lowerin2017comparedto2016,webelievethatwemadetheappropriatestrategicdecision. Ourserviceareaexperiencedverymildweatherin2017whichnegativelyimpactedearningsby13centsper sharecomparedtoanormalweatheryearand19centscomparedto2016results,butwetookproactivestepsto reduceexpensestooffsettheimpactofthemildweather.Our2017non-GAAPoperatingearningswere$3.68 pershare,whichwasatthehighendofourrevisedoperatingearningsguidance.ThroughoutthisCD&A,we refertooperatingearnings,whichisanon-GAAPfinancialmeasure.For2017,GAAPearningspersharewere $3.89,whichis$0.21persharehigherthanoperatingearnings.Thedifferencebetween2017GAAPearningsand operatingearningswaslargelyduetoagainonthesaleofcompetitivegenerationassets.ExhibitAtothisproxy statementcontainsareconciliationofGAAPearningspersharetonon-GAAPoperatingearningspersharefor 2017. Wecontinuetoincreasethecapitalinvestmentincoreutilityoperationstosupportoperatingearnings growthof5to7percent.Thoseinvestmentswillprovideenhancedreliabilityforourcustomersalongwith stable,positivereturnsforourshareholders.AEPplanstoinvestapproximately$8.3billioninitstransmission businessesduring2018-2020,nearlyhalfoftheCompany’stotalcapitalinvestmentforecast. In2017,ourTransmissionHoldingCompanybusinessgrewandcontributed72centspersharetooperating earnings,anincreaseof33percentover2016.AEPTransmissionHoldingCompanyhasgrowntobecomeoneof AEP’slargestsubsidiarycompanies. Wealsocontinuedtoplaceaheavyfocusonoursafetyperformance.In2017,theCompanydidnot experienceafatalemployeeaccident,butdidsustaintwocontractorfatalities. 34