UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.           )

Filed by the Registrant ☒

Filed by a Party other than the Registrant ☐

Check the appropriate box:

GRANITE CONSTRUCTION INCORPORATED

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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GRANITE CONSTRUCTION INCORPORATED

585 West Beach Street

Watsonville, California 95076

 

Notice of Annual Meeting of Shareholders

April 13, 2018

 

 

 

 

Purposes of the Meeting:

 

 

Who May Attend the Meeting:

 

Only shareholders, persons holding proxies from shareholders and invited representatives of the media and financial community may attend the meeting.

 

What to Bring:

 

If you received a Notice of Internet Availability of Proxy Materials, please bring that Notice with you. If your shares are held in the name of a broker, trust, bank, or other nominee, you will need to bring a proxy or letter from that broker, trust, bank, or other nominee that confirms you are the beneficial owner of those shares. If you hold shares through the Granite Construction Profit Sharing and 401(k) Plan, you will need to bring proof of ownership of the shares.

 

Record Date:

 

The record date for the 2018 Annual Meeting of Shareholders is April 12, 2018. This means that if you own Granite stock at the close of business on that date, you are entitled to receive notice of the meeting and vote at the meeting and any adjournments or postponements of the meeting.

 

Annual Report:

 

We have included a copy of the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 with the proxy materials on Granite's website.

 

Shareholder List:

 

For 10 days prior to the meeting, a complete list of shareholders entitled to vote at the meeting will be available for examination by any shareholder for any purpose related to the meeting during regular business hours at Granite's headquarters located at 585 West Beach Street, Watsonville, CA 95076. The shareholder list will also be available at the annual meeting.

 

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Information about the Notice of Internet Availability of Proxy Materials:

 

Instead of mailing a printed copy of our proxy materials, including our Annual Report, to each shareholder of record, we will provide access to these materials online. This reduces the amount of paper necessary to produce these materials, as well as the costs associated with mailing these materials to all shareholders. Accordingly, on or about April 23, 2018, we will begin mailing a Notice of Internet Availability of Proxy Materials to all shareholders of record as of April 12, 2018, other than persons who hold shares in the Granite Construction Profit Sharing and 401(k) Plan (such persons, the "401(k) Participants" and such plan, the "401(k) Plan"). We will also post our proxy materials on the website referenced in the notice (https://www.proxyvote.com). All 401(k) Participants will receive a package in the mail that includes all proxy materials. The proxy materials will be mailed to all 401(k) Participants on or about April 23, 2018.

 

All shareholders may choose to access our proxy materials online or may request to receive a printed set of our proxy materials. In addition, the notice and website provide information regarding how you may request to receive proxy materials in printed form by mail on an ongoing basis.

 

Proxy Voting:

 

Your vote is important. Please vote your proxy promptly so your shares can be represented at the annual meeting even if you plan to attend the meeting. Shareholders, including 401(k) Participants, can vote by Internet, telephone or mail. Shareholders, other than 401(k) Participants, may revoke a proxy and vote in person if attending the meeting.

 

To get directions to the 2018 Annual Meeting of Shareholders, call our Investor Relations Department at 831.724.1011 or visit our website at www.graniteconstruction.com at the "Investors" site.

 

By Order of the Board of Directors,

 

 

Richard A. Watts

Senior Vice President, General Counsel and Secretary

 

 

 

 

 

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GRANITE CONSTRUCTION INCORPORATED

585 West Beach Street

Watsonville, California 95076

 

PROXY STATEMENT

 

As more fully described in the Notice of Internet Availability of Proxy Materials, Granite Construction Incorporated, a Delaware corporation (referred to herein as "we," "us," "our," "Granite" or the "Company"), on behalf of its Board of Directors, has made its proxy materials available to you on the Internet in connection with Granite's 2018 Annual Meeting of Shareholders, which will take place on June 7, 2018 at 10:30 a.m., Pacific Time, at the Monterey Plaza Hotel, 400 Cannery Row, Monterey, California. The Notice of Internet Availability of Proxy Materials was mailed to all Granite shareholders of record, except 401(k) Participants, on or about April 23, 2018, and our proxy materials were posted on the website referenced in the Notice of Internet Availability of Proxy Materials and made available to shareholders on April 23, 2018. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials, please follow the instructions included in the Notice of Internet Availability of Proxy Materials. The proxy materials were mailed to all 401(k) Participants on or about April 23, 2018.

 

Granite, on behalf of its Board of Directors, is soliciting your proxy to vote your shares at the 2018 Annual Meeting of Shareholders or any subsequent adjournment or postponement. We solicit proxies to give all shareholders of record an opportunity to vote on the matters listed in the accompanying notice and/or any other matters that may be presented at the annual meeting. In this proxy statement you will find information on these matters, which is provided to assist you in voting your shares.

 

Granite was incorporated in Delaware in January 1990 as the holding company for Granite Construction Company, which was incorporated in California in 1922. All dates in this proxy statement referring to service with Granite also include periods of service with Granite Construction Company, if applicable.

 

VOTING INFORMATION

 

Who Pays for This Solicitation?

 

Granite pays for the cost of this proxy solicitation. We will request brokers, trusts, banks and other nominees to solicit their customers who own our stock. We will reimburse their reasonable, out-of-pocket expenses for doing this. Our directors, officers and employees may also solicit proxies by mail, telephone, personal contact, or through online methods without additional compensation.

 

Who Can Vote?

 

You will have received notice of the annual meeting and can vote if you were a shareholder of record of Granite's common stock as of the close of business on April 12, 2018. You are entitled to one vote for each share of Granite common stock that you own. You may vote all shares owned by you as of the record date, including shares held directly in your name as the shareholder of record and shares held for you as the beneficial owner through a broker, trust, bank or other nominee. As of the close of business on April 12, 2018, there were 40,047,483 shares of common stock issued and outstanding.

 

How Do I Vote and What Is the Deadline for Voting My Shares?

 

Shareholders, other than 401(k) Participants, have the option to vote by proxy in the following three ways:

 

 

 

 

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Please refer to the Notice of Internet Availability of Proxy Materials or the information your broker, trust, bank or other nominee provides you for more information on the above options. If you vote your shares over the Internet or by telephone, you should not return a proxy card by mail (unless you are revoking your previous proxy).

 

All 401(k) Participants have the option to vote by proxy in the following three ways:

 

 

 

 

If you vote your shares over the Internet or telephone, you should not return a proxy card by mail (unless you are revoking your previous proxy).

 

What Is the Voting Requirement To Approve the Proposals?

 

If there is a quorum, nominees for election to the Board who receive the affirmative vote of a majority of the votes cast will be elected as members of our Board of Directors for the upcoming three-year term and until his/her successor is elected and qualified or he/she resigns or until his/her death, retirement or removal, or other cause identified in Granite's bylaws. This means that a majority of votes cast "for" the election of a nominee must exceed the number of votes cast "against" the nominee's election. Each of the other matters identified in the Notice of Meeting will be approved if it receives the affirmative vote of a majority of the votes cast affirmatively or negatively on such matter. Any other matters properly proposed at the meeting, including a motion to adjourn the annual meeting to another time or place (including for the purpose of soliciting additional proxies), will also be determined by a majority of the votes cast affirmatively or negatively, except as otherwise required by law or by Granite's Certificate of Incorporation, as amended, or bylaws.

 

If you hold shares through a broker, trust, bank or other nominee (i.e., in "street name"), and you do not provide your broker, trust, bank or other nominee with voting instructions, "broker non-votes" may occur. Generally, a broker non-vote occurs when a broker, trust, bank or other nominee who holds shares for a beneficial owner does not vote on a particular matter (i.e., a non-routine matter) because the broker, trust, bank or other nominee does not have discretionary voting power with respect to that matter and has not received instructions on such matter from the beneficial owner. Among our proposals, a broker, trust, bank or other nominee will have discretionary voting power only with respect to the proposal to ratify the appointment by the Audit/Compliance Committee of PricewaterhouseCoopers LLP as Granite's independent registered public accounting firm for the fiscal year ending December 31, 2018.

 

How Are Votes Counted?

 

In the election of directors and all proposals, you may vote "For," "Against" or "Abstain" with respect to each of the nominees and proposals. If you elect to abstain in the election of directors or any of the other matters, the abstention will not impact the outcome of these matters. In tabulating the voting results for the election of directors and such other matters, only "For" and "Against" votes are counted for purposes of determining whether a majority has been obtained. Abstentions and broker non-votes are not considered to be votes cast affirmatively or negatively and therefore will have no effect on the outcome of the vote on any of these matters.

 

If you vote by proxy card, telephone or the Internet, your shares will be voted at the annual meeting in the manner you indicated. James H. Roberts and Laurel J. Krzeminski are officers of the Company and were named by our Board of Directors as proxy holders. They will vote all proxies, or record an abstention, in accordance with the directions on the proxy. If no contrary direction is given, the shares will be voted as recommended by the Board of Directors. This proxy statement contains a description of each item that you are to vote on along with our Board's recommendations. Below is a summary of our Board's recommendations:

 

 

 

 

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As to any other matter that may be properly proposed at the annual meeting, including a motion to adjourn the annual meeting to another time or place, the shares will be voted in the discretion of the persons named on your proxy card.

 

After I Vote by Proxy Can I Change or Revoke My Proxy?

 

You can change your vote or revoke your proxy at any time before the annual meeting. Shareholders, other than 401(k) Participants, may change their vote by: (i) voting again by Internet at any time prior to 11:59 p.m., Eastern Time, on June 6, 2018, if you originally voted by Internet, (ii) voting again by telephone at any time prior to 11:59 p.m., Eastern Time, on June 6, 2018, if you originally voted by telephone, or (iii) returning a later dated proxy card such that it is received prior to 11:59 p.m., Eastern Time, on June 6, 2018, if you voted by mail. Shareholders, other than 401(k) Participants, may revoke their proxy by filing with our Secretary a written revocation that is received by us before the polls close at the annual meeting. All 401(k) Participants may change their vote by: (i) voting again by Internet at any time prior to 12:00 p.m. (noon), Eastern Time, on June 5, 2018, if you originally voted by Internet, (ii) voting again by telephone at any time prior to 12:00 p.m. (noon), Eastern Time, on June 5, 2018, if you originally voted by telephone, or (iii) returning a later dated proxy card such that it is received prior to 12:00 p.m. (noon), Eastern Time, on June 5, 2018, if you voted by mail. Except for 401(k) Participants, shareholders may also change their vote or revoke their proxy by attending the annual meeting and voting in person if they are a shareholder of record.

 

If you hold your shares through a broker, bank, trust or other nominee, please refer to the information forwarded by your broker, bank, trust or other nominee for procedures on revoking your proxy.

 

Can I Vote at the Annual Meeting Instead of Voting by Proxy?

 

You may attend the annual meeting and, except for 401(k) Participants, vote in person instead of voting by proxy. However, even if you intend to attend the meeting we strongly encourage you to vote by Internet, telephone or mail prior to the meeting to ensure that your shares are voted. Although Granite's 401(k) Participants may attend the meeting, they cannot vote in person at the meeting.

 

What Constitutes a Quorum?

 

Granite's bylaws require a quorum to be present in order to transact business at the meeting. A quorum consists of a majority of the shares entitled to vote, either in person or represented by proxy. In determining a quorum, we count shares voted for or against, abstentions and broker non-votes as being present.

 

Who Supervises the Voting at the Meeting?

 

Granite's bylaws and policies specify that, prior to the annual meeting; management will appoint an independent Inspector of Elections to supervise the voting at the meeting and count the votes for each proposal following the closing of the polls at the annual meeting. The Inspector decides all questions as to the qualification of voters, the validity of proxy cards and the acceptance or rejection of votes. Before assuming his or her duties, the Inspector will take and sign an oath that he or she will faithfully perform his or her duties both impartially and to the best of his or her ability.

 

How Can I Find Out the Voting Results?

 

We will announce preliminary voting results at the annual meeting, and final results will be published on a Form 8-K to be filed with the Securities and Exchange Commission (the "SEC") within four business days following the annual meeting. If the final results are not available at that time, we will provide preliminary results in the Form 8-K, and we will provide the final results in an amendment to the Form 8-K as soon as they become available.

 

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Proposal 1: Election of Directors

 

The Board of Directors is divided into three classes. We keep the classes as equal in number as reasonably possible; however, the number of directors in a class depends on the total number of directors at any given time. Each director serves for a term of three years. The classes are arranged so that the terms of the directors in each class expire at successive annual meetings. This means that shareholders annually elect approximately one-third of the members of the Board. The Board currently consists of ten directors.

 

The terms of James W. Bradford, Jr., David H. Kelsey and Michael F. McNally will expire at the 2018 Annual Meeting. The Board has nominated James W. Bradford, Jr., David H. Kelsey and Michael F. McNally for new terms. If elected, each of the nominees will serve as a director until the 2021 Annual Meeting and until his successor is elected and qualified or he resigns or until his death, retirement or removal, or other cause identified in Granite's bylaws.

 

Claes G. Bjork was elected to his present term of office at the 2016 Annual Meeting. Pursuant to Granite’s retirement policy, Mr. Bjork’s service on the Board would normally conclude at this year’s Annual Meeting. However, upon recommendation of the Nominating and Corporate Governance Committee, the Board, at its December 7, 2017 meeting, approved an amendment to its retirement policy that will allow Mr. Bjork to remain on the Board until 2020.

 

Management knows of no reason why any of these nominees would be unable or unwilling to serve. All nominees have accepted the nomination and agreed to serve as a director if elected by the shareholders. However, if any nominee should for any reason become unable or unwilling to serve between the date of the proxy statement and the annual meeting, the Board may designate a new nominee and the persons named as proxies will vote for that substitute nominee.

 

BOARD OF DIRECTORS RECOMMENDATION

 

The Board of Directors unanimously recommends a vote "FOR" each of the above-named nominees.

 

 

Director Qualifications

 

The following paragraphs provide information as of the date of this proxy statement about each director and director nominee. The information presented includes information each director or director nominee has given us about his or her age, all positions he or she holds with Granite, his or her principal occupation and business experience for the past five years, and the names of other publicly-held companies of which he or she currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding each director's and director nominee's specific experience, qualifications, attributes and skills that led our Board to the conclusion the he or she should serve as a director, the Board also believes that all of our directors and director nominees have a reputation for integrity, honesty and adherence to high ethical standards. The Board also believes that all of our directors have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to Granite and our Board.

 

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Nominees for Director with Terms Expiring at the 2021 Annual Meeting

 

 

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Continuing Directors with Terms Expiring at the 2019 Annual Meeting

 

 

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Continuing Directors with Terms Expiring at the 2020 Annual Meeting

 

 

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Retiring Director

 

Mr. Powell has served as Chairman of our Board since September 2009. He retired in 2006 as Chairman and Chief Executive Officer of National Starch and Chemical Company, a position he had held since 1999.  Mr. Powell is also currently a member of the boards of directors of PolyOne Inc. and FMC Corporation. Until June 2009, Mr. Powell was Chairman of the Board of Trustees of the State Theatre Performing Arts Center in New Brunswick, New Jersey. We believe that Mr. Powell’s knowledge and experience as chief executive officer of a major global company qualify him to serve on our Board. Mr. Powell holds a B.A. degree in Chemistry and an M.S. in Chemical Engineering from Case Western Reserve University and an M.A. in Business Administration from the University of North Dakota. Age 72.

 

Information About the Board of Directors and Corporate Governance

 

Committees of the Board

 

The following chart shows the standing committees of the Board of Directors, the current membership of the committees and the number of meetings held by each committee in 2017.

 

⁽¹⁾ Independent directors pursuant to the listing standards of the NYSE.

⁽²⁾ Mr. Dorey retired from the Board effective June 9, 2017.

⁽³⁾ Chairman of the Board.

 

Audit/Compliance Committee

 

All members of the Audit/Compliance Committee are non-employee directors who are determined by the Board to be independent under the listing standards of the NYSE. Each member also satisfies the independence requirements for audit committee members of public companies established by the SEC. The Board has determined that Mr. Kelsey meets the criteria as an audit committee financial expert as defined by the SEC rules. The Board of Directors has also determined that all members of the Audit/Compliance Committee are financially literate as required by the listing standards of the NYSE. The Audit/Compliance Committee has direct responsibility for risk oversight related to accounting matters, financial reporting, and enterprise, legal and compliance risks. A more complete description of the risk responsibility, functions and activities of the Audit/Compliance Committee can be found under "Board Leadership Structure and its Role in Risk Oversight" on page 12 of this proxy statement and in "Report of the Audit/Compliance Committee" on page 41 as well as in the Audit/Compliance Committee charter. You can view and print the Audit/Compliance Committee charter on Granite's website. See "Granite Website" below.

 

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Compensation Committee

 

All members of the Compensation Committee are non-employee directors who are determined by the Board to be independent under the listing standards of the NYSE. The Compensation Committee reviews and approves all aspects of compensation for our directors, our Chief Executive Officer and our other executive officers. In addition, the Compensation Committee is responsible for risks related to employment policies and our compensation and benefit systems, including consideration of whether any risks associated with such policies and systems are likely to have a material adverse effect on Granite. The Compensation Committee also reviews our overall compensation plans and strategies and makes recommendations to the Board for their consideration and approval. The Chief Executive Officer attends Compensation Committee meetings and recommends annual salary levels, incentive compensation and payouts for other executive officers for the Compensation Committee's approval. The Compensation Committee also administers the 2012 Equity Incentive Plan and the Amended and Restated 1999 Equity Incentive Plan, as amended (the "1999 Equity Plan"), with respect to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Compensation Committee may delegate any of its responsibilities to a subcommittee composed of one or more members of the Committee. If you desire additional information concerning the Compensation Committee, you can read the Compensation Committee charter on Granite's website. See "Granite Website" below.

 

Nominating and Corporate Governance Committee

 

All members of the Nominating and Corporate Governance Committee are non-employee directors who are determined by the Board to be independent under the listing standards of the NYSE. The Nominating and Corporate Governance Committee recommends and nominates persons to serve on the Board. The Nominating and Corporate Governance Committee also develops and recommends corporate governance principles and practices to the Board and oversees the annual evaluations of the Board and certain senior executive officers of the Company. Additionally, the Nominating and Corporate Governance Committee oversees risks associated with our Corporate Governance Guidelines and Policies and Code of Conduct. The Nominating and Corporate Governance Committee's policy for considering director candidates, including shareholder recommendations, is discussed in more detail below under the heading "Board of Directors' Nomination Policy." This policy and the Nominating and Corporate Governance Committee charter are available on Granite's website. See "Granite Website" below.

 

Executive Committee

 

The Executive Committee's responsibility is to carry out the powers and authority of the Board in the management of Granite's business within limits set by the Board. The Executive Committee also meets regularly to consider the approval of certain large project bidding decisions, as well as to assess and monitor ongoing risks and contingencies related to large projects. The scope of the Executive Committee's authority is determined in accordance with the "Delegation of Authority and Policy" as adopted and revised from time to time by the Board.

 

Role of the Compensation Consultant

 

The Compensation Committee directly retained the services of Mercer (US) Inc. ("Mercer"), a wholly owned subsidiary of Marsh & McLennan Companies, Inc., to provide advice and recommendations to the Compensation Committee on executive officer and Board of Director compensation programs through September 30, 2017. Mercer's fees paid for executive compensation consulting to the Committee in 2017 were $228,045.

 

During 2017, Mercer provided the following services to the Compensation Committee related to executive officer compensation:

 

 

 

 

 

 

 

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During 2017, management retained the services of Mercer to provide compensation consulting, and employee total rewards communications. The fees paid for these services in 2017 were $210,300.

 

Based in part on the policies and procedures Mercer and the Compensation Committee have in place, the Compensation Committee believes that the advice it receives from the executive compensation consultant, a Mercer representative, is objective and not influenced by Mercer's or its affiliates' relationships with Granite. These policies and procedures include:

 

 

 

 

 

 

 

 

In retaining Mercer, the Compensation Committee considered the six factors set forth in Exchange Act Rule 10C-1(b)(4)(i) through (vi), and concluded that no conflict of interest existed that would prevent Mercer from serving as an independent compensation consultant to the Compensation Committee.

 

Effective September 22, 2017, the Compensation Committee retained the services of Frederic W. Cook & Co., Inc. ("FW Cook") to provide advice and recommendations to the Compensation Committee on executive officer and Board of Director compensation programs on a forward-looking basis.

 

From September through December 2017, FW Cook’s work primarily focused on compensation planning considerations for 2018; no input was provided as it related to the design of the executive compensation program for 2017. In the future, FW Cook will conduct substantially similar services to the Committee as previously conducted by Mercer, which are noted above.  FW Cook provides no other services to the Company.  

 

In retaining FW Cook, the Compensation Committee considered the six factors set forth in Exchange Act Rule 10C-1(b)(4)(i) through (vi) of the Exchange Act, and concluded that no conflict of interest exists that would prevent FW Cook from serving as an independent compensation consultant to the Compensation Committee.  Prior to retaining FW Cook, the Committee also reviewed FW Cook’s conflict of interest policy.

 

While it is necessary for the executive compensation consultant to interact with management to gather information, the Compensation Committee has adopted protocols governing if and when the executive compensation consultant's advice and recommendations can be shared with management. These protocols are included in the Compensation Committee’s engagement letters with Mercer and FW Cook. The Compensation Committee also determines the appropriate forum for receiving the executive compensation consultant's recommendations. Where appropriate, management invitees are present to provide context for the recommendations.

 

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The Lead Director and Executive Sessions

 

Our bylaws provide that in the event the Chairman of the Board does not meet the independence requirements of the rules and regulations of the SEC and the listing standards of the NYSE, the directors shall elect a Lead Director to serve for a two-year term or until such time, if earlier, at which an independent Chairman is elected. Because William H. Powell, the current Chairman of the Board, is an independent director, we currently do not have a Lead Director. In his capacity as Chairman, Mr. Powell chairs all Board meetings and presides over all executive sessions of the non-employee members of the Board.  As Mr. Powell will retire at our Annual Meeting of Shareholders this year, the Board elected Mr. Claes G. Bjork Chairman of the Board effective June 7, 2018.

 

Board Leadership Structure and Its Role in Risk Oversight

 

The Board of Directors has determined that having an independent director serve as the Chairman of the Board is in the best interest of Granite and its shareholders at this time. The Board believes that having a strong independent director serve as Chairman promotes greater oversight of Granite by the independent directors and provides for greater management accountability. The structure ensures more active participation by the independent directors in setting the Board's agenda and establishing the Board's priorities. However, the Board, in accordance with its Corporate Governance Guidelines and Policies, retains the flexibility to decide, as new circumstances arise, whether or not to combine or separate the position of Chairman and Chief Executive Officer.

 

As with all companies, we face a variety of risks in our business. Our Board of Directors is responsible for oversight of our Company's risks and effective risk management is a top priority of the Board and management. The Board believes that having a system in place for risk management and implementing strategies responsive to our risk profile and exposures will adequately identify in a timely manner our material risks. In order to more efficiently manage these risks, the Board has delegated certain risk management oversight responsibilities to relevant Board committees, as follows below.

 

The Audit/Compliance Committee has the direct responsibility for risk oversight relating to accounting matters, financial reporting and enterprise, legal and compliance risks. Our Chief Financial Officer (who is responsible for managing the risk management function), General Counsel (who serves as our Corporate Compliance Officer), Director of Internal Audit, management and independent registered public accounting firm, PricewaterhouseCoopers LLP, all report directly to, and meet with, the Audit/Compliance Committee on a regular basis. The Audit/Compliance Committee and the Board also meet periodically with management to review Granite's major financial risk exposures and the steps that management has taken to monitor and control such exposures, which include Granite's risk assessment and risk management policies.

 

The Executive Committee is responsible for overseeing management's efforts to assess risks related to the decision to bid on large projects and monitor ongoing risks and contingencies related to those projects. The Compensation Committee is responsible for overseeing risks related to employment policies and our compensation and benefits systems, and the Nominating and Corporate Governance Committee oversees risks associated with our Corporate Governance Guidelines and Policies and Code of Conduct, including compliance with listing standards for independent directors and committee assignments. The committee chairs report on risk related matters to the full Board from time to time as appropriate.

 

 

 

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Board of Directors' Nomination Policy

 

Evaluation Criteria and Procedures

 

Members of the Board of Directors of Granite are divided into three classes and are nominated for election for staggered three-year terms. The Board, its members, its committee structure, its governance performance and its overall performance are continuously reviewed. Included in this review is a careful evaluation of the diversity of skills and experience of Board members weighed against Granite's current and emerging operating and strategic challenges and opportunities. The Board of Directors makes every effort to nominate individuals who bring a variety of complementary skills and, as a group, possess the appropriate skills and experience to oversee our business. Accordingly, although diversity is a consideration in the nominating and evaluation process, the Nominating and Corporate Governance Committee and the Board of Directors do not have a formal policy with respect to the consideration of diversity. Evaluations are made on the basis of observations and interviews with management and with Board members conducted annually by the Nominating and Corporate Governance Committee.

 

Current Board members whose performance, capabilities, and experience meet Granite's expectations and needs are nominated for re-election in the year of their respective term's completion. In accordance with Granite's Corporate Governance Guidelines and Policies, Board members will not stand for re-nomination and no proposed candidate will be re-nominated if the nominee’s 72^nd birthday occurs prior to the annual meeting of shareholders in the year of re-nomination or nomination. Moreover Directors will retire no later than the first annual meeting of shareholders immediately following their 72^nd birthday. Mr. Powell is retiring at the 2018 Annual Meeting as required by Granite’s Corporate Governance Guidelines and Policies.

 

Each member of the Board of Directors must meet a set of core criteria, referred to as the "three C's": Character, Capability and Commitment. Granite was founded by persons of outstanding character, and it is Granite's intention to ensure that it continues to be governed by persons of high integrity and worthy of the trust of its shareholders. Further, Granite intends to recruit and select persons whose capabilities, including their educational background, their work and life experiences, and their demonstrated records of performance will ensure that Granite's Board will have the balance of expertise and judgment required for its long-term performance and growth. Finally, Granite will recruit and select only those persons who demonstrate they have the commitment to devote the time, energy, and effort required to guarantee Granite will have the highest possible level of leadership and governance.

 

In addition to the three C's, the Board recruitment and selection process assures that the Board composition meets all of the relevant standards for independence and specific expertise. For each new recruitment process, a set of specific criteria is determined by the Nominating and Corporate Governance Committee with the assistance of the Chairman of the Board and an executive search firm, if the Committee deems engagement of such a firm appropriate. These criteria may specify, for example, the type of industry or geographic experience that would be useful to maintain and improve the balance of skills and knowledge on the Board. After the search criteria are established, an executive search firm is typically engaged to use its professional skills and its data sources and contacts, including current Granite Board members and officers, to seek appropriate candidates. The credentials of a set of qualified candidates provided by the search process are submitted for review by the Nominating and Corporate Governance Committee, the Chairman of the Board and senior officers. Based on this review, the Nominating and Corporate Governance Committee invites the top candidates for personal interviews with the Nominating and Corporate Governance Committee and Granite's executive management team.

 

Normally, the search, review and interview process results in a single nominee to fill a specific vacancy. However, a given search may be aimed at producing more than one nominee and the search for a single nominee may result in multiple candidates of such capability and character that might be nominated and the Board may be expanded accordingly.

 

It is Granite's intention that this search and nomination process consider qualified candidates referred by a wide variety of sources, including all of Granite's constituents - its customers, employees and shareholders and members of the communities in which it operates. The Nominating and Corporate Governance Committee is responsible for assuring that relevant sources of potential candidates have been appropriately canvassed.

 

The Board used the evaluation criteria and procedures listed in this section to nominate and appoint Mr. Bradford, Mr. Kelsey and Mr. McNally for election at the Annual Meeting.

 

 

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Shareholder Recommendation and Direct Nomination of Board Candidates

 

Consistent with our bylaws and the Nominating and Corporate Governance Committee charter, Granite will review and consider for nomination any candidate for membership to the Board recommended by a shareholder, utilizing the same evaluation criteria and selection process described in “Evaluation Criteria and Procedures” above. The Committee will consider nominees to the Board recommended by shareholders. Shareholders wishing to recommend a candidate for consideration in connection with an election at a specific annual meeting should notify Granite well in advance of the meeting date to allow adequate time for the review process and preparation of the proxy statement, and in no event later than December 24, 2018 with respect to direct nominations.

 

In addition, Granite's bylaws provide that any shareholder entitled to vote in the election of directors may directly nominate a candidate or candidates for election at a meeting provided that timely notice of his or her intention to make such nomination is given. To be timely, a shareholder nomination for a director to be elected at an annual meeting must be received at Granite's principal office, addressed to the Corporate Secretary, not less than 120 days prior to the first anniversary of the date the proxy statement for the preceding year's annual meeting of shareholders was released to shareholders and must contain the information specified in our bylaws. If no meeting was held in the previous year, the date of the annual meeting is changed by more than 30 calendar days from the previous year, or in the event of a special meeting, to be on time, the notice must be delivered by the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public announcement of the date of the meeting was made.

 

To be timely, a shareholder nomination for a director to be elected at the 2019 Annual Meeting of Shareholders must be received at Granite's principal office, addressed to the Corporate Secretary, on or before December 24, 2018. For further information, see "Shareholder Proposals to be Presented at the 2019 Annual Meeting of Shareholders."

 

Director Independence

 

Under the listing standards of the NYSE, a director is considered independent if the Board determines that the director has no material relationship with Granite. In determining independence, the Board considers pertinent facts and circumstances including commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others. The Board follows these guidelines, established by the NYSE, when assessing the independence of a director:

 

 

 

 

 

 

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The Board reviews the independence of all non-employee directors every year. For the review, the Board relies on information from responses to questionnaires completed by directors and other sources. Directors are required to immediately inform the Nominating and Corporate Governance Committee of any material changes in their or their immediate family members' relationships or circumstances that could impact or change their independence status.

 

The following non-employee directors are independent under the listing standards of the NYSE: Claes G. Bjork, James W. Bradford, Jr., David C. Darnell, Patricia D. Galloway, David H. Kelsey, Celeste B. Mastin, Michael F. McNally, William H. Powell and Gaddi H. Vasquez.

 

Board and Annual Shareholder Meeting Attendance

 

During 2017, the Board of Directors held six regular meetings. Each of the directors attended at least 75% of the aggregate of the total number of meetings of the Board and the total number of meetings of any committee(s) on which he or she served. Except for irreconcilable conflicts, directors are expected to attend the annual meeting of shareholders.

 

The annual meeting attendance policy is a part of Granite's Board of Directors Corporate Governance Guidelines and Policies and is posted on Granite's website. See "Granite Website" below. All nine directors then in office attended Granite's 2017 Annual Meeting of Shareholders.

 

Communications with the Board

 

Any shareholder or other interested party wishing to communicate with the Board of Directors, or any particular director, including the Chairman of the Board or the Lead Director, if there is one, can do so by following the process described in the Communications with the Board of Directors Policy. The policy is posted on Granite's website. See "Granite Website" below.

 

Corporate Governance Guidelines and Policies

 

Granite's Board of Directors is subject to the Board of Directors Corporate Governance Guidelines and Policies. The Board of Directors Corporate Governance Guidelines and Policies is available on our website. See "Granite Website" below.

 

Code of Conduct

 

Granite's Code of Conduct applies to all Granite employees, including the Chief Executive Officer and the Chief Financial Officer, and to all directors, including the Chairman of the Board. The Code of Conduct is available on Granite's website. We will also post any amendments to the Code of Conduct, or waivers of the application of provisions of the Code of Conduct to any of our directors or executive officers, on our website. See "Granite Website" below.

 

Granite Website

 

The following charters and policies are available on Granite's website at www.graniteconstruction.com at the "Investors" site, then under "Corporate Governance": the Audit/Compliance Committee Charter, the Nominating and Corporate Governance Committee Charter, the Compensation Committee Charter, the Board of Directors Corporate Governance Guidelines and Policies, the Board of Directors' Nomination Policy, and the Communication with the Board of Directors Policy. You can also obtain copies of these charters and policies, without charge, by contacting Granite's Investor Relations Department at 831.724.1011. The Code of Conduct is available on Granite's website at www.graniteconstruction.com at the "Our Company" site under "Code of Conduct." You can obtain a copy of the Code of Conduct and any amendments to the Code of Conduct, without charge, by contacting Granite's Human Resources Department at 831.724.1011.

 

 

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Executive and Director Compensation and Other Matters

 

Compensation Discussion and Analysis

 

Objective of the Compensation Program

 

The market for executive talent is highly competitive and the objective of our executive compensation program is to attract and retain talented, creative, and experienced executives with the skills and leadership qualities necessary to compete in the marketplace, deliver consistent financial performance and grow shareholder value. The Compensation Committee believes that an effective way to enhance Granite's performance is through variable compensation structured to align our executives’ interests with the Company’s short and long-term performance objectives. Key elements of the program are as follows:

 

 

 

 

 

 

Executive Officer Compensation Program

 

During fiscal year 2017, we conducted our annual “Say on Pay” shareholder advisory vote, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Securities and Exchange Commission (“SEC”) rules. This resulted in the approval of the compensation of our Named Executive Officers for 2016 by approximately 96% of the votes cast. The Compensation Committee considers these voting results when planning compensation for subsequent years and believes the results affirm the Company’s executive compensation program. Accordingly, the Compensation Committee did not adopt any changes to this program as a result of this vote, although the Compensation Committee is continually evaluating our executive compensation to further align the program with shareholders’ interests. In addition to this endorsement by our shareholders of our executive compensation programs and practices, management values the views of our largest institutional shareholders and proxy advisory firms on our compensation practices and disclosures.  

 

The key components of the 2017 program for compensating our Named Executive Officers as set forth in the table below are as follows:

 

 

 

 

The specific provisions of the compensation opportunity, plan design, and performance objectives are described in greater detail in the remainder of this Compensation Discussion and Analysis.

 

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The following table identifies our Named Executive Officers for 2017:

 

⁽¹⁾ Mr. Larkin was appointed Senior Vice President & California Group Manager effective October 16, 2017.

⁽²⁾ Mr. Swanberg was appointed Senior Vice President & Large Projects Group Manager effective January 1, 2017.

⁽³⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017.

⁽⁴⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017.

 

Role of the Compensation Committee and Chief Executive Officer in Determining Executive Compensation

 

The Compensation Committee is actively engaged in the design and approval of all elements of the compensation program for our executive officers. Compensation and potential payouts are determined with assistance and recommendations from the compensation consultant as discussed below. The Compensation Committee determines the compensation of the Chief Executive Officer. The annual salary levels, incentive compensation targets and potential payouts of the other executive officers are reviewed and approved by the Compensation Committee based on recommendations of the Chief Executive Officer and the compensation consultant. For a detailed explanation, please refer to “Information About the Board of Directors and Corporate Governance — Committees of the Board — Compensation Committee”.

 

Role of the Compensation Consultant

 

The Compensation Committee retained the services of Mercer (US) Inc. (“Mercer”) as its compensation consultant to provide information, analysis, and advice with regard to executive officer compensation through September 30, 2017. Effective October 2017, the Compensation Committee retained the services of Frederic W. Cook & Co., Inc. (“FW Cook”) as its Compensation Consultant to provide advice and recommendations on executive officer and Board of Director compensation programs on a prospective basis. Representatives of the compensation consultants attended Compensation Committee meetings and provided guidance and expertise on competitive pay practices and plan designs that are consistent with the key objectives of the compensation program. For a detailed explanation, please refer to “Information About the Board of Directors and Corporate Governance — Role of the Compensation Consultant”.

 

Annual Risk Assessment

 

The Compensation Committee annually reviews the balance between risk and reward in the design of the executive officer and employee incentive compensation programs. The AIP and LTIP utilize a portfolio of performance metrics across the company designed to balance short and long-term financial objectives and generate shareholder value. Performance goals are set as a range for each objective with a maximum payout opportunity assigned to each performance goal. The Compensation Committee carefully reviews incentive plan goals to ensure the appropriate levels of difficulty, and reviews Granite and its peer groups’ financial performance to ensure performance goals and payout opportunities are appropriately calibrated. The performance measures, maximum payout opportunities and the calibration of achievability of incentive plan goals are all designed to help ensure that the incentive plans appropriately balance risk and reward, limiting excessive risk-taking and the potential for windfall payouts. Finally, the Company maintains several risk mitigating governance policies such as executive stock ownership guidelines, anti-hedging/pledging policies and an incentive compensation recoupment policy. As a result of the above, the Committee believes that the compensation program is not reasonably likely to have a material adverse effect on the Company.

 

Market Data Considered in Determining Executive Compensation

 

The Compensation Committee reviews available industry compensation data to establish competitive compensation levels which will reward our executive officers if performance targets are achieved. Benchmark data is obtained from a single peer group consisting of eleven public companies representing the construction, engineering and construction materials industries. The Compensation

 

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Committee believes that industry-specific companies are the most appropriate source of benchmark data as they are most representative of Granite’s market for talent. The data from the peer group of eleven public companies is used by the Compensation Committee to establish base salary, target total cash and long-term incentive compensation levels and as the comparative group for measuring relative Total Shareholder Return performance. For a detailed explanation, please refer to “Long Term Incentive Compensation – Performance Awards”.

 

Peer Group of Public Companies

 

The eleven public companies selected for the peer group are in the construction, engineering and/or construction materials industries and compete for executive talent in the same market as Granite. The table below names each of the companies in the peer group for its 2017 fiscal year.

 

 

 

Compensation Elements

 

Base Salaries

 

Effective January 1, 2017, Mr. Roberts’s base salary increased from $800,000 to $850,000, Mr. Miller’s base salary increased from $530,000 to $550,000, Ms. Krzeminski’s base salary increased from $475,000 to $500,000 and Mr. Swanberg’s salary increased from $365,000 to $400,000. These increases are based on individual performance and are supported by market data from Granite’s peer group shown in the table above and by the peer group median in the following Base Salary Positioning Chart. Salary increases also reflect increased tenure and performance in respective positions. Effective October 16, 2017, Mr. Larkin was appointed from Vice President, Nevada Region to Senior Vice President & California Group Manager with a base salary increase to $350,000. No other changes to the base salaries of our Named Executive Officers were made for 2017.

 

For amounts paid as base salary during 2017, please refer to the Summary Compensation Table.

 

Base Salary Positioning Chart

 

⁽¹⁾ Peer Group median compensation data as used by the Compensation Committee in making 2017 compensation decisions was based on peer group data reported in 2016 proxy filings.

⁽²⁾ Prior to his appointment to Senior Vice President & California Group Manager effective October 16, 2017, Mr. Larkin earned a base salary of $242,500 in his role as Vice President for the Nevada Region.

⁽³⁾ Mr. Swanberg was appointed Senior Vice President & Large Projects Group Manager effective January 1, 2017.

⁽⁴⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017.

⁽⁵⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017.

 

 

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Annual Incentive Compensation

 

The Named Executive Officers participate in the AIP pursuant to which annual incentive compensation is determined by overall company performance and/or applicable group performance. As described in more detail below, each Named Executive Officer's targeted annual incentive opportunity is based on external benchmark data for similar positions and is expressed as a percentage of base salary. Maximum cash payouts cannot exceed the lesser of three times the target opportunity or $2,500,000.

 

Annual Incentive Opportunity

 

⁽¹⁾ The “target” annual incentive opportunity is competitive with those offered by peer group companies, and is the basis for establishing the maximum annual incentive.

⁽²⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽³⁾ In connection with his appointment to Senior Vice President & Large Projects Group Manager, Mr. Swanberg was guaranteed a minimum award of $200,000, provided that if actual performance under the AIP resulted in a greater award, the award would be based on actual performance.

⁽⁴⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Annual Incentive Opportunity was forfeited.

⁽⁵⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance with the terms of his AIP, he was eligible to receive a prorated award.

 

2017 Annual Incentive Plan

 

Named Executive Officer AIP awards incorporate two funding ratio levels. The initial funding ratio applies once Company Net Income and/or Group Operating Income achieve “threshold” performance levels. A higher funding ratio level is applied once financial performance is at or above “expectations” performance levels for Company Net Income and/or Group Operating Income. The “expectations” performance levels of Company Net Income and Group Operating Income are typically greater than budgeted amounts and are intended to encourage plan participants to deliver superior financial performance. No funding of individual bonuses will occur if the performance of the Company and/or Group is below the specified “threshold” level of performance.  

 

Once threshold is achieved, then individual awards under the AIP are paid out/determined based on a pre-determined percentage (funding ratio) of Company Pre-Bonus Net Income and/or Group Operating Profit.

 

2017 Annual Incentive Plan Performance Measure Definitions

 

Company Net Income is actual consolidated Net Income attributable to Granite Construction Incorporated calculated in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”);

 

Company Pre-Bonus Net Income is defined as Company Net Income before the cost of annual incentive plan cash bonuses which are calculated based on Company performance;

 

Operating Income is actual operating income for the applicable Group calculated in accordance with U.S. GAAP, excluding allocated Selling, General and Administrative Expense (“SG&A”);

 

 

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Operating Profit is defined as Operating Income after the cost of pre-bonus allocated SG&A and before the cost of annual incentive plan cash bonuses which are calculated based on the performance of the applicable Group;

 

Granite uses the OSHA Recordable Incident Rate (“ORIR”), a nationally recognized metric, to benchmark its safety performance against the construction industry. ORIR tracks all injuries serious enough to require OSHA documentation (i.e., those that result in medical treatment, restricted duty or lost time) and represents the number of events per 100 full-time employees. It is calculated by multiplying the number of OSHA recordable injuries (total injuries or lost time injuries) by 200,000 (2,000 hours per employee per year x 100 employees) and dividing by the total number of hours of employee exposure. The ORIR target and payout levels are reviewed and approved annually by the Compensation Committee.  

 

2017 Annual Incentive Plan Performance Objectives

 

At the beginning of the annual performance period (January 1^st – December 31^st), the Compensation Committee approved the 2017 AIP financial performance goals. Named Executive Officer annual incentive bonuses are funded once threshold performance levels are achieved. Higher funding levels are applied once performance is at or above expectations. Bonus payouts are calculated as a percentage of Company Pre-Bonus Net Income and Group Operating Profit.

 

Company Performance

 

 

Group Performance

 

 

 

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2017 Annual Incentive Plan Company and Group Funding Ratios

 

Funding ratios are individualized to account for the Named Executive Officer’s respective roles and responsibilities.  Mr. Roberts, Ms. Krzeminski, and Mr. Miller’s bonus opportunities are based on Company financial performance. This is intended to relate the bonus opportunities for Mr. Roberts, Ms. Krzeminski, and Mr. Miller to the overall results of the Company for the current year. Mr. Richards, Mr. Swanberg, and Mr. Matheson have two funding ratios with a larger ratio tied to their Group’s performance and a smaller ratio tied to overall Company performance. This is intended to relate bonus opportunities for Mr. Richards, Mr. Swanberg, and Mr. Matheson to both their Group’s performance, as well as the overall results of the Company for the current year. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.” Bonuses are adjusted based on a safety multiplier from -10% to +10%, with safety at target performance resulting in no adjustment.

 

Company Bonus Funding Ratios

(Percentage of Company Pre-Bonus Net Income)

 

⁽¹⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP.

⁽²⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Annual Incentive Opportunity was forfeited.

⁽³⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance to the terms of his AIP, he was eligible to receive a prorated award.

 

Group Bonus Funding Ratios

(Percentage of Group Operating Profit)

 

⁽¹⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP.  For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽²⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance to the terms of his AIP, he was eligible to receive a prorated award.

 

Safety Multiplier

 

2017 Annual Incentive Plan bonus awards are subject to adjustment by a safety multiplier, which is calculated based on year-end safety results. Awards for Mr. Roberts and Ms. Krzeminski are subject to adjustment based on the overall safety results of the Company. Awards for Mr. Richards, Mr. Swanberg, and Mr. Matheson are subject to adjustment based upon both the overall safety results of the Company and of their assigned Groups. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

 

The values of the 2017 AIP awards are subject to adjustment based on safety results as follows:

 

 

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2017 Company and Group Safety Goals

 

 

2017 Annual Incentive Plan Company and Group Performance Results and Bonus Payouts

 

2017 year-end Company and Group safety performance results were as follows:

 

2017 Safety Performance Results

 

⁽¹⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽²⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Annual Incentive Opportunity was forfeited.

⁽³⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance to the terms of his AIP, he was eligible to receive a prorated award.

 

Based on actual performance, individual incentives earned by the Named Executive Officers were as follows:

 

2017 AIP Company Bonus Payouts

 

⁽¹⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP.  For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

 

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⁽²⁾ In connection with his appointment to Senior Vice President & Large Projects Group Manager, Mr. Swanberg was guaranteed a minimum award of $200,000, provided that if actual performance under the AIP resulted in a greater award, the award would be based on actual performance.

⁽³⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Annual Incentive Opportunity was forfeited.

⁽⁴⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance to the terms of his AIP, he was eligible to receive a prorated award.

 

2017 AIP Group Bonus Payouts

 

⁽¹⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽²⁾ In connection with his appointment to Senior Vice President & Large Projects Group Manager, Mr. Swanberg was guaranteed a minimum award of $200,000, provided that if actual performance under the AIP resulted in a greater award, the award would be based on actual performance.

⁽³⁾ Mr. Matheson ceased to serve as an Executive Officer of Granite effective August 12, 2017 and in accordance to the terms of his AIP, he was eligible to receive a prorated award.

 

2017 Actual AIP Total Bonus Payouts⁽¹⁾

 

⁽¹⁾ Represents the sum of 2017 Company bonus payouts and 2017 Group bonus payouts.

⁽²⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the AIP. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽³⁾ In connection with his appointment to Senior Vice President & Large Projects Group Manager, Mr. Swanberg was guaranteed a minimum award of $200,000, provided that if actual performance under the AIP resulted in a greater award, the award would be based on actual performance. The amount included under “Other” reflects a payment to Mr. Swanberg as a result of his guaranteed minimum award.

⁽⁴⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Annual Incentive Opportunity was forfeited.

⁽⁵⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance to the terms of his AIP, he was eligible to receive a prorated award.

 

Long Term Incentive Compensation

 

In order to emphasize and reward sustained long term performance, all Named Executive Officers participated in the 2017 LTIP. The Compensation Committee reviewed peer group compensation data for comparable positions and established incentive target opportunities which approximate peer group median compensation levels. Effective January 1, 2017, Mr. Miller’s LTIP incentive target opportunity increased from $800,000 to $850,000.  No other changes to the LTIP incentive target opportunity of our Named Executive Officers were made for 2017.

 

 

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The LTIP incentive target opportunities for the Named Executive Officers under the 2017 LTIP are presented below:

 

⁽¹⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and was not eligible to participate in the LTIP. For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽²⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Long Term Incentive Opportunity was forfeited.

⁽³⁾ Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and in accordance to the terms of his LTIP, he was eligible to receive a prorated award.

 

Each Named Executive Officer’s target award is divided into two components – Performance Awards and Service Awards.  The table below reflects the weighting of the two components

 

LTIP Components Weighting

 

 

Performance Awards

 

The Compensation Committee set payouts for the 2017 – 2019 performance period to be calculated based on Granite’s TSR rank relative to a peer group of companies in the Standard & Poor’s Construction Materials and Construction Equipment classification. The higher Granite’s overall performance ranking is, the greater the payout percentage. However, the Compensation Committee has the ability to reduce the payout percentage for the performance period in its sole discretion.

 

The following are the 2017 – 2019 peer group companies and funding mechanism.  

 

The TSR award calculation methodology will remove acquired peers from the measurement group.

 

 

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2017 – 2019 TSR Funding Mechanism

(Utilizes a Relative TSR Percentile Ranking System to determine payout as a percentage of Target.)

 

Linear interpolation applies between performance levels.

 

Total Shareholder Return Performance Calculation

 

TSR is calculated by dividing (i) the sum of the closing price on the last trading day of the performance period and all dividends and per-share cash equivalents paid during the performance period, by (ii) the closing price on the day before the first day of the performance period. The performance awards are calculated at the end of a three-year performance period. The 2014 performance awards were calculated for the three-year period ending December 31, 2016 with vesting and payment in 2017. The 2015 performance awards will be calculated for the three-year period ending December 31, 2017 with vesting and payment the following year. The 2016 performance awards will be calculated for the three-year period ending December 31, 2018 with vesting and payment the following year. The 2017 performance awards will be calculated for the three-year period ending December 31, 2019 with vesting and payment the following year.

 

 

2017 Performance Award Payouts

 

Payouts for the 2014 - 2016 TSR performance period are reflected in the 2017 Summary Compensation and 2017 Grant Plan Based Award tables. TSR was calculated on Granite’s performance relative to the industry peer group of construction, engineering and construction materials used for benchmarking data as approved by the Compensation Committee effective January 1, 2014.

 

The following are the 2014 – 2016 peer group companies and funding mechanism.

 

 

 

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2014 – 2016 TSR Funding Mechanism

(Utilizes a Discrete Number Ranking System to determine payout as a percentage of Target.)

 

 

 

Total Shareholder Return Awards Earned in 2014 – 2016 and Paid in 2017

 

Granite’s three-year TSR ranking as of December 31, 2016 for the performance period from January 1, 2014 through December 31, 2016 was 5 out of 14 companies, or 140% of the TSR target opportunity. See “2014 – 2016 TSR Funding Mechanism” above. The earned awards for the performance period are presented in the following table.  

 

TSR Performance Period January 1, 2014 – December 31, 2016

 

⁽¹⁾ Awards are denominated as a cash value until earned based on performance. The number of restricted stock units awarded was calculated by dividing the actual long-term incentive value by $34.77, which was the average stock price over the first 30 days of January 2014.

⁽²⁾ Mr. Larkin became an Executive Officer effective October 16, 2017 and therefore was not eligible to participate in the LTIP.  For a detailed explanation of Mr. Larkin’s incentive compensation program, please refer to the section “2017 Incentive Compensation Plan for Kyle T. Larkin.”

⁽³⁾ Due to the performance period beginning prior to their employment, Messrs. Swanberg and Miller were not eligible to participate in the 2014 – 2016 TSR program.

 

Service Awards

 

The Compensation Committee believes granting a portion of equity awards as Restricted Stock Units (“RSUs”) assists in maintaining competitive levels of compensation, encourages the continued retention of key management, and aligns the interest of Named Executive Officers with that of the shareholders. Service Awards vest ratably over three years.

 

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Service Awards Paid in 2017

 

⁽¹⁾ The number of RSUs awarded was calculated by dividing the service award by the closing stock price of $50.82 on March 14, 2017.

⁽²⁾ Mr. Larkin was not eligible to participate in the LTIP.

⁽³⁾ Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and as a result, his 2017 Service Award RSUs were forfeited.

 

2017 Incentive Compensation Plan for Kyle T. Larkin

 

Mr. Kyle T. Larkin continued to participate in the Granite 2017 Regional Incentive Compensation Plan after his promotion to Senior Vice President, California Group Manager until December 31, 2017.  As a result of Mr. Larkin’s promotion, he began participating in the Named Executive Officer Compensation Program effective January 1, 2018.

 

In his role as a Region Vice President, in the Construction segment, Mr. Larkin was eligible to participate in the 2017 Regional Annual Incentive Plan based on applicable Operating Income and a 2017 Long Term Incentive Plan based on the performance of the Company’s Return on Net Operating Assets (“RONA”).  

 

2017 Regional Annual Incentive Plan

 

In his role as Region Vice President, Mr. Larkin was eligible to receive an award for Regional AIP based on a fixed percentage of the Region’s Operating Profit for performance at or above a threshold amount, and a higher fixed percentage at or above an expectations amount. The calculated bonus was subject to a safety multiplier from -10% to +10% based on the Region’s safety performance (for a detailed explanation, please refer to “Safety Multiplier”).  

 

2017 Actual Performance

 

The Region’s Operating Income performance was in excess of the expectations, and the Region safety performance multiplier was 110%.  Mr. Larkin’s actual AIP award is as follows:

 

2017 Incentive Compensation Plan - Region Bonus Payouts

 

In addition, Mr. Larkin received a discretionary bonus award of $100,000 for his contributions to the 2017 California Group’s performance (for a detailed explanation, please refer to “Flexible Bonus Policy”).

 

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Long Term Incentive Plan

 

In his role as Region Vice President, Mr. Larkin was eligible to participate in the 2017 LTIP with an established incentive target opportunity divided into two components – Performance Awards and Service Awards.  The table below reflects the weighting of the two components:

 

LTIP Components Weighting

 

 

Performance Award

 

Under the 2017 LTIP, a performance award is achieved if RONA performance exceeds a pre-established threshold goal for the year. Once the performance threshold is achieved, the first dollar of eligible RONA incentive is earned. For 2017, performance exceeded threshold and Mr. Larkin earned $229.

 

Service Award

 

Under the 2017 LTIP, Mr. Larkin received a service award that ratably vests over three years.

 

Service Awards Paid in 2017

 

⁽¹⁾ The number of RSUs awarded was calculated by dividing the service award by the closing stock price of $50.82 on March 14, 2017.

 

Policy Regarding Recovery of Award if Basis Changes Because of Restatement

 

If the basis upon which a previous compensation award was made is determined to have been in error due to a restatement of a prior year's financial results, it is Granite's policy to either recover the amount overpaid or to offset the overpayment against future incentive compensation earned. This policy applies to AIP and LTIP awards. There were no adjustments to calculations that affected incentive compensation calculated or paid in 2017.

 

Stock Ownership Guidelines

 

Our Board of Directors has adopted Stock Ownership Guidelines to align the interests of Granite's Named Executive Officers with the interests of shareholders and to promote Granite's commitment to sound corporate governance. Named Executive Officers are expected to own and hold a minimum number of shares of Granite common stock based on relevant market standards. Stock ownership guidelines are determined as a multiple of the Named Executive Officer's base salary, and are as follows:

 

 

 

Minimum stock ownership levels are to be achieved within five years following the later of the May 13, 2009 adoption of the Stock Ownership Guidelines and the date an individual becomes a Named Executive Officer. Compliance with the guidelines is reviewed by the Compensation Committee on an annual basis. Shares that count toward the satisfaction of the guidelines include:

 

 

 

 

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Until the applicable guideline is achieved, the Named Executive Officer is required to retain an amount equal to 25% of net shares received as a result of the vesting of Restricted Stock or RSUs through Granite's stock incentive plans.

 

Stock Ownership

 

⁽¹⁾ To be achieved within five years after becoming a Named Executive Officer.

⁽²⁾ As of January 1, 2018.

⁽³⁾ Based on the 2017 annual average stock price of $54.53.

 

Anti-Hedging Policy

 

The Company’s Insider Trading Policy, which applies to employees, officers and directors of the Company and their family members and affiliates, provides that such individuals are prohibited from engaging in hedging transactions involving the Company’s securities.

 

Anti-Pledging Policy

 

In accordance with the Company’s Insider Trading Policy, a transaction in which a holder of a security of the Company uses that security as collateral for a loan or other extension of credit (a “pledge”) is prohibited.

 

Non-Qualified Deferred Compensation

 

Granite offers its executive officers, Board of Directors, and other key executives participation in the Granite Construction Key Management Deferred Compensation Plan II (the “NQDC”), which:

 

 

 

 

 

 

Flexible Bonus Policy

 

The Compensation Committee has the authority to award discretionary bonuses to employees of the Company. In 2013, our Compensation Committee determined that it would be beneficial to define and limit its authority to award discretionary bonuses and adopted the Flexible Bonus Policy pursuant to which employees of the Company, including our Named Executive Officers, are

 

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eligible to receive a discretionary bonus, which may be based on Company performance, individual performance or such other factors as our Compensation Committee may consider appropriate. In determining Company performance, our Compensation Committee may consider the achievement of corporate financial, strategic and operational objectives including, but not limited to, revenue, income, and backlog. In determining individual performance, our Compensation Committee may consider the achievement of personal objectives including, but not limited to, business targets, budgetary targets, succession planning, and safety targets. It is our intention that the discretionary bonuses be fixed and determinable as of year-end; this would require approval prior to year-end. The aggregate amount of any bonus or bonuses payable under the Flexible Bonus Policy to any one participant in any calendar year may not exceed $250,000. Our Compensation Committee believes that the flexible design of the Flexible Bonus Policy is necessary in order to consider the effects of unanticipated events and circumstances on the Company’s business or on a participant’s performance. A discretionary bonus award of $100,000 was approved by the Compensation Committee in recognition of Mr. Larkin’s contributions to the California Group’s performance in 2017.

 

Other Compensation

 

The Named Executive Officers are eligible to participate in the 401(k) Plan. Granite provides matching contributions up to 6% of an employee’s gross pay at the discretion of the Board of Directors. Under the terms of a policy applicable to Mr. Roberts and Ms. Krzeminski each are required to maintain a $5,000,000 personal umbrella liability insurance policy to provide coverage while conducting company business. They are reimbursed for the costs incurred to purchase and maintain the required insurance. Mr. Roberts and Ms. Krzeminski receive a $1,417 per month vehicle allowance which includes reimbursement for the personal umbrella liability insurance.  Messrs. Miller, Richards, and Swanberg receive a $1,000 per month vehicle allowance. Mr. Matheson was provided a company vehicle and received a $60 per month vehicle allowance. Prior to Mr. Larkin’s promotion, he participated in a Vehicle Reimbursement Program where he received $410 per month. Beginning in November 2017, Mr. Larkin began to receive a $1,000 per month vehicle allowance.

 

Impact of Accounting and Tax Treatments of a Particular Form of Compensation

 

In connection with its determination of the various elements of compensation for our executive officers, the Compensation Committee has taken into account the impact of Section 162(m) of the Internal Revenue Code on the deductibility of compensation for federal income tax purposes. Section 162(m) limits the deductibility of compensation paid to our Chief Executive Officer, our Chief Financial Officer (for years prior to 2018 our Chief Financial Officer is exempt from the limitation) and our next three highest paid individuals to $1 million annually. For years prior to 2018, some of the elements of our executive compensation package, including certain payments under our AIP and LTIP, were intended to qualify as “performance-based” compensation, which is exempt from the limitation on deductibility under Section 162(m).  The performance-based compensation exemption under Section 162(m) has been repealed effective January 1, 2018, except for certain grandfathered arrangements in effect as of November 2, 2017; and we cannot guarantee that future compensation paid to our covered officers will qualify for grandfathered status.  Therefore, to the extent that in 2018 or any later year, the aggregate amount of any covered officer’s salary, bonus, and amounts realized from RSUs or other equity awards, including under our AIP and LTIP, and certain other compensation amounts that are recognized as taxable income by the officer exceeds $1 million in any year, we may not be entitled to a U.S. federal income tax deduction for the amount over $1 million in that year. The Compensation Committee has the discretion to design and implement elements of executive compensation that may not be fully deductible for income tax purposes.

 

Change-in-Control Arrangements

 

All of our Named Executive Officers are participants in the Executive Retention and Severance Plan. The purpose of the plan is to:

 

 

 

The Executive Retention and Severance Plan originally provided that if a participant’s employment with Granite is terminated by Granite within three years after a “change-in-control” (as defined below) of Granite other than for cause, or if the participant resigns from such employment within three years after a “change-in-control” of Granite for “good reason,” (as defined below) the participant would be entitled to the following benefits:

 

 

 

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Payments made to the terminated participant do not include tax gross-up payments, and are capped. The amount of the payment will not exceed, and will be reduced if required in order not to exceed, the “safe harbor” amount allowable under Section 4999 of the Internal Revenue Code, but only if the reduction would increase the net after-tax amount received by the participant.

 

In August, 2010, the Compensation Committee approved changes to the Executive Retention and Severance Plan for future participants that the Compensation Committee believed to be in alignment with emerging best practices. Benefits to subsequent new participants will be dependent upon their level of responsibility within the organization and will include the following severance multiples:

 

 

Mr. Roberts and Ms. Krzeminski are entitled to a severance multiple of 3x under the Executive Retention and Severance Plan because they were participants in the plan before the changes were made to the plan in August 2010. Mr. Larkin, Mr. Richards, and Mr. Swanberg are entitled to a severance multiple of 1x under the Executive Retention and Severance Plan because they became participants in the plan after the changes were made to the plan in August 2010.

 

Change in control and good reason have the following meanings under the Executive Retention and Severance Plan:

 

 

The 2012 Equity Incentive Plan authorizes the Compensation Committee to set the terms of any equity award to provide that there will be no acceleration of the exercisability, vesting or payment of such award upon the occurrence of a change-in-control unless the change-in-control is accompanied by the award recipient’s involuntary termination without cause or the award recipient’s resignation for good reason. However, under the Executive Retention and Severance Plan, restricted stock and restricted stock unit awards vest in full upon the consummation of a change-in-control, provided the award recipient remains an employee prior to the change-in-control. In addition, the Executive Retention and Severance Plan provides that if the surviving, successor or acquiring corporation does not either assume, continue or substitute outstanding option awards and the award recipient remains an employee prior to the change-in-control, then the vesting and exercisability of such option awards will be accelerated in full upon the consummation of the change-in-control.

 

 

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2018 Annual Incentive Compensation

 

In February 2018, the Compensation Committee approved design changes to the 2018 Annual Incentive Program to be focused on goal attainment. For 2018, the CEO and CFO are to be rewarded based on Net Income attributable to Granite Construction Incorporated performance while the Named Executive Officers with financial accountability for the performance of an operating group are to be incentivized primarily on their individual group’s operating income with a smaller incentive component tied to the Company’s net income.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed with management the "Compensation Discussion and Analysis" contained in this proxy statement. Based on such review and discussions, the Committee recommended to the Board of Directors that the "Compensation Discussion and Analysis" be included in this proxy statement and incorporated by reference into Granite's Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

Members of the Compensation Committee:

 

 

This Report of the Compensation Committee does not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other filing made by us under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate this Report of the Compensation Committee by reference therein.

 

 

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Executive compensation tables

 

Summary Compensation Table

2017

 

The following table summarizes, for the fiscal years specified, the compensation for our Chief Executive Officer, our Chief Financial Officer and other Named Executive Officers.

 

⁽¹⁾ The amount in column (d) reflects a discretionary bonus award approved by the Compensation Committee in recognition of Mr. Larkin’s contributions to the California Group in 2017. In connection with his appointment to Senior Vice President & Large Projects Group Manager, Mr. Swanberg was guaranteed a minimum award of $200,000, provided that if actual performance under the AIP resulted in a greater award, the award would be based on actual performance. The amount included reflects a payment to Mr. Swanberg as a result of his guaranteed minimum award.

⁽²⁾ The awards in column (e) reflect the grant date fair value of stock awards granted pursuant to (i) service in the stated year based on the Service Award feature of the LTIP and (ii) the grant date fair value of stock awards granted in the stated year based on performance for the three-year performance period, including the prior year pursuant to the performance based component of the LTIP. Mr. Miller ceased to serve as an Executive Officer of Granite effective June 22, 2017 and forfeited all RSUs upon his separation from the company. For a detailed explanation, regarding RSUs granted during 2017 to the Named Executive Officers, please refer to the Grants of Plan-Based Awards table. The grant date fair value is determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 718, without regard to potential forfeitures and is determined using the fair value of the Company’s common stock based on the market price at the date of grant. For additional information about the assumptions used in these calculations, see Note 13 of the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. For a detailed explanation, please refer to the “Compensation Discussion and Analysis — Compensation Elements — Long Term Incentive Compensation”

⁽³⁾ The amounts in column (f) reflect the cash awards earned for performance in 2017 and paid in March 2018. For a detailed explanation of cash awards for performance in 2017, please refer to “Compensation Discussion and Analysis — Compensation Elements — Annual Incentive Compensation”.

 

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⁽⁴⁾ Please refer to the Other Compensation Table below for details with respect to all other compensation.

 

Other Compensation Table

2017

 

⁽¹⁾ The amounts in column (b) reflect the company matching contribution, not to exceed 6% on compensation deferred into the 401(k) Plan.

⁽²⁾ The amounts in column (c) reflect Restricted Stock and Employee Stock Ownership Plan (“ESOP”) dividends, and Restricted Stock dividend equivalent units.

⁽³⁾ The amounts in column (d) reflect the vehicle allowances provided to the Named Executive Officers. Mr. Larkin’s Vehicle Reimbursement amount includes $4,912 of taxable income. Beginning in November 2017, Mr. Larkin began to receive a $1,000 per month vehicle allowance. For a detailed explanation, please refer to “Other Compensation”.

⁽⁴⁾ The amounts in column (e) reflect the company expense for medical, dental, vision, life, short and long-term disability insurance, Accidental Death & Dismemberment, Executive Liability Insurance, and Employee Assistance Program.

⁽⁵⁾ The amounts in column (f) include; (i) Under the 2017 LTIP Program, Mr. Larkin received an award that was converted in cash due to the nominal amount of the award, (ii) Mr. Miller ceased to serve as an Executive Officer effective June 22, 2017 and under his separation agreement received a payment by the Company for unused accrued vacation of $39,706, $7,803 of COBRA Insurance and $1,192,000 pursuant to the terms of his separation agreement, (iii) Mr. Matheson ceased to serve as an Executive Officer effective August 12, 2017 and upon his separation received a payment by the Company for unused accrued vacation of $48,212 and a gross up of withholding taxes paid by the Company of $310.

 

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Grants of Plan-Based Awards Table

2017

 

The following table provides additional information about incentive plan awards and other equity awards granted to our Named Executive Officers during the year ended December 31, 2017.

 

⁽¹⁾ Amounts in columns (c) through (e) reflect threshold, target and maximum incentives, as applicable (subject to rounding), under the 2017 AIP. Under the 2017 AIP, each Named Executive Officer, except for Mr. Larkin, had the opportunity to earn up to 300% of their target annual incentive compensation based on achievement of performance goals (not to exceed a maximum award payout of $2,500,000). For a more detailed discussion of annual incentive compensation and the payout actually received by each Named Executive Officer under the 2017 AIP, please refer to “Compensation Discussion and Analysis — Compensation Elements — Annual Incentive Compensation” and “Compensation Discussion and Analysis — Compensation Elements — Annual Incentive Compensation — 2017 Annual Incentive Plan Company and Group Performance Results and Bonus Payouts” and “2017 Incentive Compensation Plan for Kyle T. Larkin”.