Document
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  X
Filed by a Party other than the Registrant  
Check the appropriate box:
X
 
Preliminary Proxy Statement
 
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
 
Definitive Proxy Statement
 
Definitive Additional Materials
 
Soliciting Material under §240.14a-12
DAVITA INC.
 
(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):
X
 
No fee required.
 
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
 
 
(1)
 
Title of each class of securities to which transaction applies:
     
 
 
(2)
 
Aggregate number of securities to which transaction applies:
     
 
 
(3)
 
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
     
 
 
(4)
 
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(5)
 
Total fee paid:
     
 
Fee paid previously with preliminary materials.
 
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
 
(1)
 
Amount Previously Paid:
     
 
 
(2)
 
Form, Schedule or Registration Statement No.:
     
 
 
(3)
 
Filing Party:
     
 
 
(4)
 
Date Filed:
     
























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Notice of Special Meeting and Proxy Statement
 
 
 
 



 
PRELIMINARY PROXY STATEMENT
SUBJECT TO COMPLETION
DATED NOVEMBER 25, 2019

 
 
 
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December __, 2019

Dear Fellow Stockholder:

We are pleased to invite you to attend a Special Meeting of Stockholders of DaVita Inc., which will be held on Thursday, January 23, 2020, at 10:00 a.m., Mountain Time, at our principal executive offices located at 2000 16th Street, Denver, Colorado 80202.

The purpose of the Special Meeting is to seek your approval of an amendment (the "Plan Amendment") to the DaVita HealthCare Partners Inc. 2011 Incentive Award Plan (the "2011 Incentive Plan"), that would lift the plan provision that limits to 2,250,000 the number of shares of Common Stock that may be subject to awards made to any one person during any consecutive twelve-month period, so as to allow for a grant of a one-time award of 2,500,000 premium-priced stock-settled appreciation rights (the "Premium-Priced SSAR Award") to Javier J. Rodriguez, our Chief Executive Officer ("CEO").

We granted the Premium-Priced SSAR Award to Mr. Rodriguez on November 4, 2019 (the “Grant Date”), subject to stockholder approval of the Plan Amendment, for the following reasons:

Alignment of CEO Incentives with Stockholder Interests: Because the Premium-Priced SSAR Award is in lieu of any other long-term incentive awards to Mr. Rodriguez for the next five years, the Company does not intend to grant any additional equity awards to Mr. Rodriguez for five years following the Grant Date. The $67.80 base price (similar to strike price on an option) on the Premium-Priced SSARs was set at a 20% premium to the price per share at which the Company purchased shares in its “Dutch auction” tender offer that closed on August 22, 2019, which the Compensation Committee felt was a meaningful indicator of value based on the views of our stockholders. The Premium-Priced SSAR Award incentivizes the creation of sustained and meaningful long-term value, as the base price is not a performance hurdle triggering exercisability at some lower price. Rather, Mr. Rodriguez only participates in the upside above this price, and would potentially receive no value for five years’ worth of equity awards if the required stockholder returns are not sustained. On December __, 2019, the closing sale price of a share of Common Stock on the New York Stock Exchange ("NYSE") was $__.__.

Stockholder Feedback: In connection with the transition to a new CEO in 2019 and leading up to the decision to grant the Premium-Priced SSAR Award, we received and proactively sought feedback from the Company’s largest stockholders on the structure of the executive compensation program. While we considered a number of alternatives, we believe long-term sustained stock price appreciation is the most direct link to long-term stockholder interests. Among the investors who provided input on the Company’s executive compensation program was Berkshire Hathaway, the Company’s largest stockholder, who has indicated support for the Premium-Priced SSAR Award and its intention to vote in favor of the Plan Amendment.

Based on discussions with its independent compensation consultant, the Compensation Committee structured the Premium-Priced SSAR Award to reflect stockholder feedback and incentivize the creation of sustained stockholder value, resulting in the following features in the Premium-Priced SSAR Award design:




Premium-Price: As noted above, the base price on the Premium-Priced SSARs was set at a 20% premium to the price per share at which the Company purchased shares in its recently completed “Dutch auction” tender offer and a 56% premium to the price per share on the day before Mr. Rodriguez assumed the CEO role on June 1, 2019.

Multi-Year Vesting: The Premium-Priced SSAR Award vests 50% three years from the Grant Date and 50% four years from the Grant Date.

Five-Year Holding Period: There is a five-year holding period requirement from the Grant Date with respect to the after-tax Gain Shares (as defined in the Proxy Statement), subjecting the shares underlying the Premium-Priced SSAR Award to a full five years of potential stock price fluctuations.

Our Board is committed to soliciting input from and being responsive to our stockholders on a variety of topics, including executive compensation. Engaging with our investors is fundamental to our commitment to good governance and essential to evolving our executive compensation program and governance practices. The Premium-Priced SSAR Award is a product of that commitment and aligns with our philosophy of linking pay with performance. The Premium-Priced SSAR Award creates the incentives needed during a time of leadership transition and strategic transformation Mr. Rodriguez will not realize meaningful value, or potentially any value, from the Premium-Priced SSAR Award if he is not able to deliver sustained returns to stockholders.

The Proxy Statement includes, among other items, information about our historical compensation practices, the Premium-Priced SSAR Award and the Plan Amendment. Please review the enclosed Proxy Statement for more information regarding the Premium-Priced SSAR Award.

We hope that you will participate in our Special Meeting, either by attending and voting in person or voting by other available methods as promptly as possible. Your vote is very important to us. Voting by any of the available methods will ensure that you are represented at the Special Meeting, even if you are not present. You may vote your proxy via the Internet, by telephone or by mail. Please follow the instructions on the Notice of Internet Availability of Proxy Materials that you received in the mail and/or your proxy card.

As always, we appreciate your support and look forward to seeing you at the Special Meeting.

Sincerely,
    
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http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13221346&doc=9
Peter T. Grauer
Lead Independent Director
 
Pamela M. Arway
Chair, Compensation Committee







 
Notice of Special Meeting of Stockholders

 

Thursday, January 23, 2020
10:00 a.m., Mountain Time

DaVita Inc.
2000 16th Street
Denver, Colorado 80202
A Special Meeting of the Stockholders of DaVita Inc., a Delaware corporation, will be held on January 23, 2020 at 10:00 a.m., Mountain Time, at our principal executive offices located at 2000 16th Street, Denver, Colorado 80202. As further described in the accompanying Proxy Statement, the Special Meeting is being held to approve an amendment to the DaVita HealthCare Partners Inc. 2011 Incentive Award Plan to allow an award of premium-priced stock-settled appreciation rights to our Chief Executive Officer.
The Board recommends that DaVita stockholders vote "FOR" this proposal.
We will transact no other business at the Special Meeting except such business as may properly be brought before the Special Meeting and any adjournment or postponement thereof by the presiding person of the Special Meeting.
We will mail, on or about December __, 2019, a Notice of Internet Availability of Proxy Materials to stockholders of record and beneficial owners as of the close of business on December 5, 2019. On the date of mailing of the Notice of Internet Availability of Proxy Materials, the proxy materials will be accessible on a website referred to in the Notice of Internet Availability of Proxy Materials. These proxy materials will be available free of charge.
The Notice of Internet Availability of Proxy Materials will identify a toll-free telephone number, an e-mail address and a website where stockholders can request a paper or e-mail copy of the Proxy Statement and a form of proxy relating to the Special Meeting; information on how to access the form of proxy over the Internet and how to vote over the Internet; and information on how to vote in person. If you attend the Special Meeting and previously used the telephone or Internet voting systems, or mailed your completed proxy card, you may vote in person at the meeting if you wish to change your vote in any way.
Please note that all votes cast via telephone or the Internet must be cast prior to 11:59 p.m., Eastern Time, on Wednesday, January 22, 2020. Be aware that earlier voting deadlines apply for shares held through the DaVita Retirement Savings Plan. Additional information on voting deadlines and voting instructions are set out in the Proxy Statement under the heading "How to Vote."
 
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 23, 2020:

The Notice of Special Meeting of Stockholders and Proxy Statement are available at http://www.proxyvote.com.
 
By order of the Board of Directors,
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Samantha A. Caldwell
Corporate Secretary
DaVita Inc.
December __, 2019 



Table of Contents
Votes Required for the Plan Proposal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6
 
 



 
Proxy Statement
 

 
General Information
We are delivering this Proxy Statement in connection with the solicitation of proxies by our Board of Directors (the "Board"), for use at a Special Meeting of Stockholders (the "Special Meeting") to be held on Thursday, January 23, 2020 at 10:00 a.m., Mountain Time, at the principal executive offices of DaVita Inc. (the "Company" or "DaVita"), located at 2000 16th Street, Denver, Colorado 80202. The proxies will remain valid for use at any meetings held upon adjournment or postponement of the Special Meeting. The record date for the Special Meeting is the close of business on December 5, 2019 (the "Record Date"). All holders of record of our common stock ("Common Stock") on the Record Date are entitled to notice of the Special Meeting and to vote at the Special Meeting and any meetings held upon adjournment or postponement of that meeting. To obtain directions to our Special Meeting, visit our website at http://www.davita.com.
We are using the "e-proxy" rules adopted by the Securities and Exchange Commission (the "SEC") to furnish proxy materials to our stockholders over the Internet. Under these e-proxy rules, we will mail a Notice of Internet Availability of Proxy Materials ("e-proxy notice") to our stockholders of record and beneficial owners of our Common Stock. This e-proxy notice will be mailed in lieu of a printed copy of our proxy materials. We believe using this notice model allows us to reduce costs and helps reduce our carbon footprint.
If you receive an e-proxy notice by mail, you will not receive a printed copy of the proxy materials unless you have previously made a permanent election to receive these materials in paper copy. The e-proxy notice provides instructions on how you may access and review our proxy materials, including this Proxy Statement and the accompanying e-proxy notice, as well as instructions on how you may submit your vote by proxy on the Internet. If you received an e-proxy notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the e-proxy notice.
 
The e-proxy notice will be first mailed on or about December __, 2019 to our stockholders of record as of the Record Date.
Whether or not you plan to attend the Special Meeting in person, we encourage you to vote prior to the Special Meeting by telephone, Internet, or by requesting a proxy card to complete, sign, date and return by mail. Voting in advance will help ensure that your shares will be voted at the Special Meeting.
If you plan to attend the Special Meeting in person, please so indicate when you submit your proxy by mail, by telephone or via the Internet and bring with you the items that are required pursuant to the Company's admission process for the Special Meeting. A description of the admission process can be found below in this Proxy Statement under the heading "General Information — Admission to Special Meeting."
Unless you instruct otherwise in your proxy, any proxy that is given and not revoked will be voted at the Special Meeting:
For the approval of the amendment to the DaVita Healthcare Partners Inc. 2011 Incentive Award Plan (the "2011 Incentive Plan"); and
As determined by the proxy holders named in the proxy card in their discretion, with regard to all other matters as may properly be brought before the Special Meeting and any adjournment or postponement thereof by the presiding person of the Special Meeting.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
7


                
Proxy Statement
 


 
Voting Information 
Our only voting securities are the outstanding shares of our Common Stock. As of December 5, 2019, we had approximately shares of Common Stock outstanding. Each stockholder is entitled to one vote per share of Common Stock with respect to the proposal to amend the DaVita HealthCare Partners Inc. 2011 Incentive Plan (“Plan Proposal”). Under the rules of the NYSE, your broker, bank or other nominee may not vote your uninstructed shares on the Plan Proposal unless you give them specific voting instructions. If the broker does not receive specific instructions, the broker will note this on the proxy form or otherwise advise us that it lacks voting authority. Because there are no routine matters on the agenda for the Special Meeting for which brokers may vote uninstructed shares, there will be no “broker non-votes” permitted at the Special Meeting. Thus, if you

 

hold your shares in “street name,” meaning that your shares are registered in the name of your broker, bank or other nominee, and you do not instruct your broker, bank or other nominee how to vote, no votes will be cast on your behalf at the Special Meeting. If the stockholders of record present in person or represented by their proxies and entitled to vote at the Special Meeting hold at least a majority of our shares of Common Stock outstanding as of the Record Date, a quorum will exist for the transaction of business at the Special Meeting. Stockholders attending the Special Meeting in person or represented by proxy at the Special Meeting who abstain from voting are counted as present for quorum purposes. Broker non-votes will not be permitted for the Special Meeting and as a result, will not be counted as present for quorum purposes and will have no effect on the vote.


 
How to Vote
Stockholders
Shares of our Common Stock may be held directly in your own name or may be held beneficially through a broker, bank or other nominee in street name. We have summarized below the distinctions between shares held of record and those owned beneficially.
Stockholder of Record - If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the stockholder of record with respect to those shares and we are providing proxy materials directly to you. As the stockholder of record, you have the right to vote in person at the Special Meeting or to grant your voting proxy to the persons designated by us or a person you select.
Beneficial Owner - If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of the shares held in street name, and you have been provided proxy materials from your broker, bank or other nominee who is considered the stockholder of record with respect to the shares. As the beneficial owner, you have the right to direct the broker, bank or nominee on how to vote your shares and are also invited to attend the Special
 
Meeting. Your broker, bank or nominee is obligated to provide you with a voting instruction form for you to use. However, since you are not the stockholder of record, you may not vote these shares in person at the Special Meeting unless you bring with you to the Special Meeting a legal proxy, executed in your favor, from the stockholder of record. For additional information regarding admission to and voting at the Special Meeting, see the information under the heading "General Information - Admission to Special Meeting."
Voting
Whether you hold our shares as a stockholder of record or as a beneficial owner, you may vote before the Special Meeting by granting a proxy or, for shares held in street name, by submitting voting instructions to your bank, broker or nominee. Most stockholders will have a choice of voting through the Internet or by telephone or, if you received a printed copy of the proxy materials, by completing a proxy card or voting instruction form and returning it in a postage-prepaid envelope. Please refer to the instructions below and in the e-proxy notice. Please note that if you are a Company teammate that holds our shares through the DaVita Retirement Savings Plan (the "401(k) Plan"),

8
 
 



certain earlier voting deadlines apply as indicated below under the heading "-Teammate 401(k) Stockholders."
Through the Internet
 
You may vote through the Internet by going to www.proxyvote.com and following the instructions. You will need to have the e-proxy notice, or if you received a printed copy of the proxy materials, your proxy card or voting instruction form, available when voting through the Internet. If you want to vote through the Internet, you must do so prior to 11:59 p.m., Eastern Time, on January 22, 2020. If you vote through the Internet, you do not need to return a proxy card.
By Telephone
 
You may vote by touchtone telephone by calling 1-800-579-1639. You will need to have your e-proxy notice, or if you received a printed copy of the proxy materials, your proxy card or voting instruction form, available when voting by telephone. If you want to vote by telephone, you must do so prior to 11:59 p.m., Eastern Time, on January 22, 2020. If you vote by telephone, you do not need to return a proxy card.
By Mail
 
If you are a beneficial owner, you may vote by mail by signing and dating your voting instruction form provided by your broker, bank or nominee and mailing it in a postage-prepaid envelope. If you are a stockholder of record and you received a printed copy of our proxy materials, you may vote by signing and dating your proxy card and mailing it in a postage-prepaid envelope. If you are a stockholder of record and received the e-proxy notice, in order to obtain a proxy card, please follow the instructions on the e-proxy notice. If you want to vote by mail, the proxy card or voting instruction form must be received prior to 11:59 p.m., Eastern Time, on January 22, 2020.

Teammate 401(k) Stockholders - If you participate in the 401(k) Plan and you are invested in our Common Stock fund in your account, you may give voting instructions to the 401(k) Plan trustee, Voya Institutional Trust (the "plan trustee"), as to the number of shares of Common Stock equivalent to the interest in our Common Stock fund credited to your account as of the most recent valuation date coincident with or preceding the Record Date. The plan trustee will vote your shares in accordance with your instructions received by January 20, 2020 at 11:59 p.m., Eastern Time. You may also revoke previously given voting instructions by January 20, 2020 at 11:59 p.m., Eastern Time, by filing with the plan trustee either written notice of revocation or a properly completed and signed voting instruction form bearing a later date. If you do not send instructions for the Plan Proposal, the plan trustee will vote the number of shares equal to
 
the share equivalents credited to your account in the same proportion that it votes shares for which it did receive timely instructions.
Changing Your Vote - You may revoke your proxy at any time prior to the Special Meeting by submitting to the Corporate Secretary an instrument revoking it. In addition, if you provide more than one proxy, the proxy having the latest date will revoke any earlier proxy. If you attend the Special Meeting and you are a stockholder of record, you will be given the opportunity to revoke your proxy and vote in person. However, your attendance at the Special Meeting will not automatically revoke your proxy unless you vote in person at the Special Meeting. If you are a beneficial owner, you must have a legal proxy from your bank, broker or nominee with you in order to vote in person at the meeting.
 
Votes Required for the Plan Proposal
The table below details information regarding the Plan Proposal to be voted on at the Special Meeting, the Board's recommendation on how to vote on the Plan Proposal, the vote required to approve the Plan Proposal and the effect of abstentions.
Proposal
Voting Options
Board Recommendation
Vote Required to Adopt the Proposal
Effect of Abstentions
Effect of Broker Non-Votes*
To approve an amendment to the 2011 Incentive Award Plan
For, Against or Abstain
FOR
Majority of shares of Common Stock present in person or by proxy and entitled to vote
Treated as votes Against
No effect
* See "General Information - Voting Information" for additional information on broker non-votes.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
9


                
Proxy Statement
 


 
Proxy Solicitation Costs
We will pay for the cost of preparing, assembling, printing and mailing to our stockholders the e-proxy notice, this Proxy Statement and the accompanying Notice of Meeting, as well as the cost of our solicitation of proxies relating to the Special Meeting. We may request banks and brokers to solicit their customers who beneficially own our Common Stock listed of record in names of nominees. We will reimburse these banks and brokers for their reasonable out-of-pocket expenses regarding these solicitations. We have also retained MacKenzie Partners, Inc. ("MacKenzie") to assist in the distribution and solicitation of proxies and
 
to verify records related to the solicitation at a fee of up to $25,000 plus reimbursement for all reasonable out-of-pocket expenses incurred during the solicitation. MacKenzie and our officers, directors and employees may supplement the original solicitation by mailing of proxies, by telephone, facsimile, e-mail and personal solicitation. We have agreed to indemnify MacKenzie against liabilities and expenses arising in connection with the proxy solicitation unless caused by MacKenzie's gross negligence, willful misconduct or bad faith.
 
Delivery of Proxy Statement
Beneficial owners, but not record holders, of our Common Stock who share a single address may receive only one copy of the e-proxy notice and, as applicable, the Proxy Statement, unless their broker has received contrary instructions from any beneficial owner at that address. This practice, known as "householding," is designed to reduce printing and mailing costs. If any beneficial owner at such an address wishes to discontinue householding and receive a separate copy of the e-proxy notice and, if applicable, the Proxy Statement, they should notify their broker. Beneficial owners sharing an address to which a single copy of the e-proxy notice and, if applicable, the Proxy Statement was delivered can
 
also request prompt delivery of a separate copy of the e-proxy notice and, if applicable, the Proxy Statement by contacting Investor Relations at the following address or phone number: Attn: Investor Relations, DaVita Inc., 2000 16th Street, Denver, Colorado 80202, (888) 484-7505. Additionally, stockholders who share the same address and receive multiple copies of the e-proxy notice and, if applicable, the Proxy Statement, can request a single copy by contacting us at the address or phone number above.
 
Admission to Special Meeting
Admission to the Special Meeting will be limited to holders of the Company's Common Stock as of the Record Date or the date of the Special Meeting, family members accompanying those holders of the Company's Common Stock, persons holding executed proxies from stockholders who held the Company's Common Stock as of the close of business on the Record Date and such other persons as the chair of the Special Meeting shall determine.
If you are a holder of the Company's Common Stock, you must bring certain documents with you in order to be admitted to the Special Meeting and in order to bring family members with you. The purpose of this requirement is to help us verify that you are actually a holder of the Company's Common Stock. Please read
 
the following procedures carefully, because they specify the documents you must bring with you to be admitted to the Special Meeting. The items that you must bring with you differ depending upon whether you were a record holder of the Company's Common Stock as of the close of business on the Record Date, a holder of the Company's Common Stock in "street name" as of the close of business on the Record Date, or if you acquired the Company's Common Stock after the Record Date. For information regarding the distinction between "record holders" and holders of stock in "street name," see the information under the heading "General Information - How to Vote." If you are unsure as to whether you were a record holder of the Company's Common Stock as of the close of business on the Record Date, please call the

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Company's transfer agent, Computershare Trust Company, N.A., at (877) 889-2012.
If you were a record holder of the Company's Common Stock as of the close of business on the Record Date, then you must bring valid government-issued photo identification (such as a driver's license or passport) that matches your name on the Company's stock ledger as of the close of business on the Record Date.
At the Special Meeting, we will check your name for verification purposes against our list of record holders as of the close of business on the Record Date.
If a broker, bank or other nominee was the record holder of your shares of the Company's Common Stock as of the close of business on the Record Date, then you must bring:
valid government-issued photo identification (such as a driver's license or passport); and
proof that you owned shares of the Company's Common Stock as of the close of business on the Record Date.
Examples of proof of ownership include the following: (i) an original or a copy of the voting instruction form from your bank or broker with your name on it, (ii) a letter from your bank or broker stating that you owned the Company's Common Stock as of the close of business on the Record Date, or (iii) a brokerage account statement indicating that you owned the Company's Common Stock as of the close of business on the Record Date.
If you acquired your shares of the Company's Common Stock at any time after the close of business on the Record Date, you do not have the right to vote at the Special Meeting, but you may attend the meeting if you bring with you:
valid government-issued photo identification (such as a driver's license or passport); and
proof that you own shares of the Company's Common Stock.
Examples of proof of ownership include the following:
if a broker, bank or other nominee is the record holder of your shares of the Company's
 
Common Stock: (i) a letter from your bank or broker stating that you acquired the Company's Common Stock after the Record Date, or (ii) a brokerage account statement as of a date after the Record Date indicating that you own the Company's Common Stock; or
if you are the record holder of your shares of the Company's Common Stock, a copy of your stock certificate or a confirmation acceptable to the Company that you bought the stock after the Record Date.
If you are a proxy holder for a stockholder of the Company who owned shares of the Company's Common Stock as of the close of business on the Record Date, then you must bring:
the executed proxy naming you as the proxy holder, signed by a stockholder of the Company who owned shares of the Company's Common Stock as of the close of business on the Record Date;
valid government-issued photo identification (such as a driver's license or passport); and
proof of the stockholder's ownership of shares of the Company's Common Stock as of the close of business on the Record Date, in the form of (i) an original or a copy of the voting instruction form from the stockholder's bank or broker with the stockholder's name on it, (ii) a letter from a bank or broker indicating that the stockholder owned the Company's Common Stock as of the close of business on the Record Date, or (iii) a brokerage account statement indicating that the stockholder owned the Company's Common Stock as of the close of business on the Record Date.
No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted at the Special Meeting. The use of mobile phones during the Special Meeting is prohibited. Shares may be voted in person at the Special Meeting only by (a) the record holder as of the close of business on the Record Date or (b) a person holding a valid proxy executed by such record holder.

 
Electronic Availability of Proxy Materials for the Special Meeting
This Proxy Statement is available electronically at www.proxyvote.com.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
11



Security Ownership of Certain Beneficial Owners and Management
 


 
Security Ownership of Certain Beneficial
Owners and Management
 
The following table sets forth information regarding the ownership of our Common Stock as of November 15, 2019 by (a) all persons known by us to own beneficially more than 5% of our Common Stock, (b) each of our directors and named executive officers, and (c) all of our directors and executive officers as a group. We know of no agreements among our stockholders which relate to voting or investment power over our Common Stock or any arrangement the operation of which may at a subsequent date result in a change of control of the Company.
Name and address of beneficial owner1
 
Number of
shares
beneficially
owned

 
Percentage of    
shares    
beneficially    
owned    

 
   Warren E. Buffett2
Berkshire Hathaway Inc.
3555 Farnam St.
Omaha, NE 68131
 
 
38,565,570

 
29.86
%
 
The Vanguard Group3
100 Vanguard Blvd.
Malvern, PA 19355
 
 
13,446,856

 
10.41
%
 
BlackRock, Inc.4
55 East 52nd St.
New York, NY 10055
 
 
12,931,031

 
10.01
%
Directors and Officers:
 
 
 
 
Javier J. Rodriguez5
 
127,509

 
*

Joel Ackerman
 
5,287

 
*

Kathleen A. Waters6
 
12,972

 
*

LeAnne M. Zumwalt7
 
17,805

 
*

Kent J. Thiry8
 
762,743

 
*

Pamela M. Arway9
 
33,582

 
*

Charles G. Berg10
 
27,593

 
*

Barbara J. Desoer11
 
25,646

 
*

Pascal Desroches12
 
22,787

 
*

Paul J. Diaz13
 
28,868

 
*

Peter T. Grauer14
 
88,225

 
*

John M. Nehra15
 
109,332

 
*

Dr. William L. Roper16
 
29,080

 
*

Phyllis R. Yale17
 
20,842

 
*

All directors and executive officers as a group (17 persons)18
 
1,394,069

 
1.1
%
*
Amount represents less than 1% of our Common Stock.
1
Unless otherwise set forth below, the address of each beneficial owner is 2000 16th Street, Denver, Colorado, 80202.
2
The number of shares beneficially owned as reported for Mr. Buffet and Berkshire Hathaway, Inc. is based solely on information contained in Amendment No. 4 to Schedule 13D filed with the SEC on November 12, 2019, by Berkshire Hathaway Inc., a diversified holding company which Mr. Buffett may be deemed to control. Such filing indicated that, as of November 1, 2019, Mr. Buffett and Berkshire Hathaway Inc. share voting and dispositive power over 38,565,570 shares of the Company’s Common Stock, which include shares beneficially owned by certain subsidiaries of Berkshire Hathaway Inc. as a result of being a parent holding company or control person. The percentage of shares beneficially owned as reported for Mr. Buffett and Berkshire Hathaway, Inc. was calculated by the Company as of November 15, 2019, using the total shares outstanding as of that date.
3
The number of shares beneficially owned as reported for The Vanguard Group is based solely on information contained in Amendment No. 8 to Schedule 13G filed with the SEC on February 11, 2019, as of December 31, 2018, The Vanguard Group has sole voting power

12
 
 


with respect to 156,614 shares, shared voting power with respect to 39,657 shares, sole dispositive power with respect to 13,252,791 shares and shared dispositive power with respect to 194,065 shares. The percentage of shares beneficially owned as reported for The Vanguard Group was calculated by the Company as of November 15, 2019, using the total shares outstanding as of that date.
4
The number of shares beneficially owned as reported for BlackRock, Inc. is based solely on information contained in Amendment No. 3 to Schedule 13G filed with the SEC on February 4, 2019, as of December 31, 2018, BlackRock, Inc., an investment advisor, has sole voting power with respect to 11,684,301 shares and sole dispositive power with respect to 12,931,031 shares. The percentage of shares beneficially owned as reported for BlackRock, Inc. was calculated by the Company as of November 15, 2019, using the total shares outstanding as of that date.
5
Excludes 108,596 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
6
Excludes 28,164 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
7
Includes 12,486 RSUs issuable as of or within 60 days after November 15, 2019. Excludes 25,165 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
8
Includes 762,743 shares held in a family trust. Includes 90,090 RSUs issuable as of or within 60 days after November 15, 2019. Excludes 324,563 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
9
Includes 14,343 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 9,677 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
10
Includes 10,766 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 9,677 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
11
Includes 18,159 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 5,015 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
12
Includes 16,989 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019.
13
Includes 14,343 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 9,677 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
14
Includes 20,949 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 14,134 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
15
Includes 14,343 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 9,677 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
16
Includes 14,343 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 9,677 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
17
Includes 14,343 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Excludes 4,579 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.
18
Includes 138,578 shares issuable upon the exercise of SSARs, which are exercisable as of, or will become exercisable within 60 days after, November 15, 2019. Also includes 116,436 RSUs issuable as of or within 60 days after November 15, 2019. Excluded from this number are 643,052 SSARs which are exercisable (or will become exercisable), as of or within 60 days after November 15, 2019 as the stock price was below the base price on November 15, 2019.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
13



 
Proposal to Amend the DaVita HealthCare Partners Inc. 2011 Incentive Award Plan
 
Introduction
We are seeking your approval of an amendment to the 2011 Incentive Plan. The 2011 Incentive Plan includes a provision (the "Per Person Award Limit") that limits to 2,250,000 the number of shares of our Common Stock that may be subject to awards made to any one person during any consecutive twelve-month period. We are seeking your approval to amend the plan (the "Plan Amendment") to lift the Per Person Award Limit to allow for the one-time premium-priced stock-settled stock appreciation right (the "Premium-Priced SSAR Award", described further below) made to Javier J. Rodriguez, our Chief Executive Officer ("CEO") in order to further incentivize sustained, long-term stockholder value creation. Other than with respect to the Premium-Priced SSAR Award, the Per Person Award Limit would continue to apply. The Compensation Committee of our Board of Directors (the "Compensation Committee") and our independent directors each separately approved the Premium-Priced SSAR Award on November 4, 2019 (the "Grant Date"), subject to stockholder approval of the Plan Amendment.
The Premium-Priced SSAR Award is for 2,500,000 stock-settled appreciation rights with respect to the Company’s Common Stock at a base price of $67.80 (the "Base Price"). The Base Price is a 56% premium to the closing price ($43.42) of the Company's
 
Common Stock on the NYSE on May 31, 2019, the day before Mr. Rodriguez assumed the CEO role, and a 20% premium to the price per share ($56.50) at which the Company purchased shares in its "Dutch auction" tender offer that closed on August 22, 2019. On December __, 2019, the closing sale price of a share of Common Stock on the NYSE was $__.__.
Similar to option grants, Mr. Rodriguez will not realize any economic value from the Premium-Priced SSAR Award unless the price of the Company's Common Stock exceeds the Base Price on the date of exercise. In order to further align the interests of Mr. Rodriguez with our stockholders, the Premium-Priced SSAR includes a five-year holding period, which requires Mr. Rodriguez to hold the after-tax Gain Shares received upon exercise until at least five years from the Grant Date, subject to an earlier lapse of the holding period upon a change of control or Mr. Rodriguez’s death or termination due to disability. This holding period subjects any shares received to a full five years of potential stock price fluctuations.
Assuming stockholders approve the Plan Amendment, the Company does not intend to grant any additional equity awards to Mr. Rodriguez during the five-year life of the Premium-Priced SSAR Award.
Rationale for Premium-Priced SSAR Award
In connection with Mr. Rodriguez's transition to the CEO role in 2019, and leading up to the decision to grant the Premium-Priced SSAR Award to him, the Company and the Board received and proactively sought feedback from the Company’s largest stockholders on the structure of the executive compensation program as part of its ongoing stockholder engagement program. As discussed further below, following stockholder engagement, the independent Compensation Committee of the Board, in consultation with its independent compensation consultant, evaluated a number of alternatives to structure the compensation for Mr. Rodriguez in a way that continues to closely align him with Company and stock performance, particularly over the longer-term. The Compensation Committee concluded that the Premium-Priced SSAR Award incentivizes the creation of sustained and meaningful long-term value, as it is subject to a multi-year vesting period, a five-year
 
holding period and utilizes a Base Price that is not a performance hurdle triggering exercisability at some lower price. Rather, Mr. Rodriguez only participates in the upside above this price, and would potentially receive no value for five years’ worth of equity awards if the required stockholder returns are not sustained. This Premium-Priced SSAR Award also demonstrates the Board’s strong confidence in Mr. Rodriguez’s leadership of DaVita and the momentum of his new strategy as well as the Board’s desire to ensure Mr. Rodriguez’s continued service during this period of DaVita’s strategic transformation.
The Company is at an important inflection point as an organization:
after divesting the DaVita Medical Group ("DMG") business in June 2019 to focus primarily on the Kidney Care business,

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after effectuating the CEO transition following the announced retirement of Mr. Thiry in April 2019, and
while continuing to navigate the ongoing intricacies of a heavily regulated healthcare sector that will be a headlining topic as part of the upcoming 2020 election cycle.
We recognize that there is a lot of work to be done as we are in the early stages of this next phase of our evolution to benefit our patients, teammates, physician partners and healthcare community as a whole. The Board believes that the Premium-Priced SSAR Award provides a powerful incentive to Mr. Rodriguez to take steps that are intended to maximize the sustained, long term value of our Common Stock. Additionally, because gains from the Premium-Priced SSAR Award are settled in DaVita shares (not in cash), and those after-tax Gain Shares must be held for five years from the Grant Date, the Board believes that the Premium-Priced SSAR Award further aligns Mr. Rodriguez’s interests directly with those of the Company’s stockholders.
In connection with its continual review of the Company’s executive compensation program and the Company’s regular stockholder engagement program, the Company and Board received and proactively sought feedback from the Company’s largest stockholders on the current structure of the executive compensation program. As part of this process, the Compensation Committee, in consultation with its independent compensation consultant, considered other alternatives to incentivize Mr. Rodriguez, including continuing to utilize regular annual grants, as well as performance stock units with multiple performance targets. The Board recognized that a multi-year grant is uncommon, but at this stage in the Company’s evolution, the Board felt the Premium-Priced SSARs were the best alternative to directly link Mr. Rodriguez’s compensation with stockholder interests and give Mr. Rodriguez a strong incentive to execute successfully on the Company’s new strategies to drive meaningful and sustained long-term value for our stockholders. Among the investors who provided input on the executive compensation program was Berkshire Hathaway, the Company’s largest stockholder, who has indicated support for the Premium-Priced SSAR Award and its intention to vote in favor of the Plan Amendment.
Selected Premium
The Board felt that the Base Price (similar to an option’s exercise price) for the award should be set at a premium to the tender clearing price from our recently completed modified “Dutch auction” tender
 
offer for our stock, because this was a meaningful indicator of value based on the views of our stockholders. By setting the Base Price ($67.80) at a 20% premium to the tender clearing price of $56.50, Mr. Rodriguez will have to create and sustain significant long-term value for our stockholders before he is able to realize meaningful value from this Premium-Priced SSAR Award. In addition, the Base Price is a significant premium to the stock price when Mr. Rodriguez assumed the CEO role. Specifically, the premium represented by the Base Price, compared to those benchmarks, is as follows:
 
Date
Price
Premium
Stock price day before Mr. Rodriguez assumed CEO role
May 31, 2019
$43.42
56%
Tender clearing price
Aug. 22, 2019
$56.50
20%
On December __, 2019, the closing sale price of a share of Common Stock on the NYSE was $__.__.
Number of SSARs
Based on discussions with its independent compensation consultant, in determining the number of stock-settled appreciation rights ("SSARs") to be granted, the Compensation Committee considered, among other things, the expected value of equity awards that would otherwise have been granted to our Chief Executive Officer over a five-year period. The Compensation Committee felt that the Premium-Priced SSAR Award would provide a similar value to Mr. Rodriguez if he were successful in driving meaningful and sustained stockholder returns. Conversely, in the absence of meaningful and sustained stockholder returns, Mr. Rodriguez will realize little or no value from the Premium-Priced SSAR Award. The Board does not intend to grant any other equity awards to Mr. Rodriguez during the five-year term of the Premium-Priced SSAR Award. During the five-year term, Mr. Rodriguez will continue to receive a fixed base salary in line with competitive practices, which creates some certainty in base levels of compensation during the award’s term, and also will be eligible to receive an annual short term incentive award that is designed to align compensation with the achievement of annual objectives that are informed by and aligned with our strategy.
Holding Period
In designing the Premium-Priced SSAR Award, the Compensation Committee determined that the after-tax Gain Shares received should be subject to a

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
15



holding period to further link Mr. Rodriguez’s interests with the longer-term interests of our stockholders. Accordingly, the Premium-Priced SSAR Award includes a five-year holding period, which requires Mr. Rodriguez to hold the after-tax Gain Shares received upon exercise until at least five years from the Grant Date, subject to an earlier lapse of the holding period upon a change of control or Mr. Rodriguez’s death or termination due to disability. This holding period subjects any shares received to a full five years of potential stock price fluctuations, further aligning Mr. Rodriguez’s compensation with the interests of our stockholders.
 
The Compensation Committee will continue to review our program and practices to ensure that they appropriately reflect our evolving business, our incentive and retention needs, and alignment with the pay practices of our comparator peer group. However, the Board remains committed to closely linking pay with performance and to promoting sustainable growth in stock price over the long-term and believes that the Premium-Priced SSAR Award provides a direct and ideal form of alignment between Mr. Rodriguez and the Company’s stockholders.
Terms of the Premium-Priced SSAR Award
The following is a summary of the most significant terms of the Premium-Priced SSAR Award:
Number of Stock-Settled Appreciation Rights:
2,500,000
Base Price:
$67.80

This Base Price represents a premium of:
 
* 56% to the closing price of the Company’s Common Stock on the NYSE on May 31, 2019, the day before Mr. Rodriguez assumed the CEO role, and

* 20% to the price per share at which the Company purchased shares in its tender offer that closed on August 22, 2019.

On December __, 2019, the closing sale price of a share of Common Stock on the NYSE was $__.__.
Vesting:
* 50% of the Premium-Priced SSAR Award will vest on the date that is three years from the Grant Date.

* 50% of the Premium-Priced SSAR Award will vest on the date that is four years from the Grant Date.
Grant Date:
November 4, 20191
Settlement:
Upon exercise, Mr. Rodriguez will be entitled to receive a number of shares (the “Gain Shares”) of our Common Stock having a value equal to the difference between the value of the Common Stock on the date immediately preceding the date of exercise and the Base Price, multiplied by the number of shares with respect to which the Premium-Priced SSAR Award has been exercised. The Company will withhold shares reflecting tax withholding obligations, and Mr. Rodriguez will receive the net aftertax Gain Shares.
Expiration Date:
The Premium-Priced SSAR Award will expire on the date that is five years from the Grant Date.
Holding Period:
Mr. Rodriguez will be required to hold any Gain Shares he receives upon exercise, net of Gain Shares withheld to reflect tax withholding obligations from the date that is five years from the Grant Date—that is, for the full term of the award, subject to the lapse of the holding period upon a change in control of the Company or due to Mr. Rodriguez’s death or termination due to disability.
1 Date of approval by the Board. The Premium-Priced SSAR Award will be cancelled if stockholders do not approve the proposal to lift the Per Person Award Limit.

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Treatment upon Termination of Employment
Termination by Company without Cause or by Mr. Rodriguez for Good Reason (a "Qualifying Termination") not within two years of a Change in Control
Pro rata vesting; Mr. Rodriguez will have one year from the date of his termination of employment (the "Termination Date") to exercise the vested SSARs.
Qualifying Termination within two years of a Change in Control
Vesting in full; Mr. Rodriguez will have one year from Termination Date to exercise the vested SSARs.
Termination by Company for Cause or by Mr. Rodriguez without Good Reason
Vesting will cease as of the Termination Date; Mr. Rodriguez will have three months from the Termination Date to exercise the vested SSARs.
Termination Upon Death or Disability
Pro rata vesting; the vested SSARs will terminate one year after the Termination Date.
This summary is qualified in its entirety by reference to the Premium-Priced SSAR Award itself, which is attached to this Proxy Statement as Appendix A.
Plan Amendment
The Premium-Priced SSAR Award was granted under the 2011 Incentive Plan. The 2011 Incentive Plan currently includes the Per Person Award Limit, which, as described above, limits to 2,250,000 the number of shares of our Common Stock that may be subject to awards made to any one person during any consecutive twelve-month period. Accordingly, the full Premium-Priced SSAR Award is subject to an amendment of the 2011 Incentive Plan.
Our Board and the Compensation Committee have approved the Plan Amendment, subject to stockholder approval. The Plan Amendment would lift the Per Person Award Limit to allow for the one-time Premium-Priced SSAR Award. Other than with respect to the Premium-Priced SSAR Award, the Per Person Award Limit would continue to apply.
If the Plan Amendment is not approved by our stockholders, the Premium-Priced SSAR Award will be canceled.
Description of Terms of 2011 Incentive Plan
The following is a description of the material terms of the 2011 Incentive Plan, giving effect to the Plan Amendment.
The summary is qualified in its entirety by reference to the 2011 Incentive Plan itself, and the Plan Amendment, which are attached to this Proxy Statement as Appendix B.
Purpose
The purpose of the 2011 Incentive Plan is to promote our success and enhance our value by linking the individual interests of the members of the Board and our employees and consultants to those of our stockholders and by providing such individuals with an incentive for outstanding performance in order to generate superior returns for our stockholders. The 2011 Incentive Plan is further intended to provide us flexibility in our ability to motivate, attract, and retain the services of members of the Board, our employees and our consultants upon whose judgment, interest, and special effort of which the successful conduct of our operation is largely dependent.
Administration
The 2011 Incentive Plan is administered by the Compensation Committee. The Compensation Committee may delegate to a committee of one or more members of the Board or one or more of our officers the authority to grant or amend awards to participants other than our senior executives who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), employees who are "covered employees" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, or a member of the Board or an officer to whom authority has been delegated under the 2011 Incentive Plan to grant or amend awards.
The Board, acting by a majority of its members in office, has authority to administer the 2011 Incentive Plan with respect to awards granted to non-employee members of the Board, and the Compensation Committee has authority to administer the 2011 Incentive Plan with respect to all other eligible individuals. References to Administrator in the

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
17



Plan Proposal mean, as applicable, the full Board or the Compensation Committee as the entity to which the administration of the 2011 Incentive Plan has been delegated within the limits described in the 2011 Incentive Plan. Unless otherwise limited by the Board, the Administrator has the authority to administer the 2011 Incentive Plan with respect to grants of equity awards, including the power to determine eligibility, the types and sizes of awards, the price and timing of awards and the acceleration or waiver of any vesting restriction, as well as the authority to delegate such administrative responsibilities.
Eligibility
Employees and consultants of the Company and its affiliates and non-employee directors of the Company are eligible to participate in the 2011 Incentive Plan. As of ________, 2019, nine non-employee directors and approximately _____ employees are eligible to participate in the 2011 Incentive Plan if selected by the Administrator for participation.
Shares Available
The total number of shares authorized for issuance under the 2011 Incentive Plan is 94,356,676. The total number of shares remaining for issuance as of November 15, 2019 is 11,983,736. Shares available for issuance under the 2011 Incentive Plan are reduced (i) by 3.5 shares for each share delivered in settlement of an award, other than a stock option or a stock appreciation right ("Full Value Award"), and (ii) by one share for each stock option or stock appreciation right. Shares of our Common Stock issued under the 2011 Incentive Plan may be shares in treasury, authorized but unissued shares, or shares purchased in the open market.
If any shares subject to an award under the 2011 Incentive Plan that are not a Full Value Award are forfeited, expire, or such award is settled for cash, then any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2011 Incentive Plan. To the extent that a Full Value Award is forfeited, expires, or such award is settled for cash, the shares available under the 2011 Incentive Plan will be increased by 3.5 shares subject to such Full Value Award. However, any shares tendered or withheld to satisfy the grant, exercise price, or tax withholding obligation pursuant to any award and any shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right on its exercise may not be used again for new grants under the 2011 Incentive Plan.
The payment of dividend equivalents in cash in
 
conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2011 Incentive Plan.
Awards granted under the 2011 Incentive Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by an entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock (but not awards made in connection with the cancellation and repricing of an option or stock appreciation right) will not reduce the shares authorized for grant under the 2011 Incentive Plan. Additionally, in the event that a company acquired by us or any of our affiliates or with which we or any of our affiliates combined has shares available under a pre-existing plan approved by stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan may be used for awards under the 2011 Incentive Plan and will not reduce the shares authorized for grant under the 2011 Incentive Plan, and will be made only to individuals who were not employed by or providing services to us or any of our affiliates immediately prior to such acquisition or combination.
The maximum number of shares of our Common Stock that may be subject to one or more awards granted to any one participant pursuant to the 2011 Incentive Plan during any 12-month period is 2,250,000, and the maximum amount that may be paid in cash to any one participant during any calendar year is $10,000,000. As noted above, the Board and the Compensation Committee have approved an amendment to the 2011 Incentive Plan, subject to stockholder approval of the Plan Proposal, to lift the per person limit described in this paragraph to allow for the Premium-Priced SSAR Award.
Limitation on Full Value Award Vesting
Except as may be determined by the Administrator in the event of a consummation of a change of control, or the holder's death, disability, or retirement, a Full Value Award will not become fully vested earlier than three years from the grant date (two years in the case of an employee who is not an executive of the Company, or in the case of performance-based Full Value Awards, over a period of not less than one year), except that notwithstanding the foregoing, Full Value Awards (a) that do not exceed in the aggregate of 5% of the total number of shares available under the 2011 Incentive Plan will not be subject to the minimum vesting provisions, and (b) the Company may grant a Full Value Award to employees newly hired by the Company or any of its subsidiaries without respect to such minimum vesting provisions.

18
 
 



Awards
The 2011 Incentive Plan provides for the grant of incentive stock options, as defined under Section 422 of the Code ("ISOs"), nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock, performance-based awards, dividend equivalents, stock payments, deferred stock unit awards and deferred stock awards.
Stock options. The option exercise price of all stock options granted pursuant to the 2011 Incentive Plan may not be less than 100% of the fair market value of our Common Stock on the date of grant. In general, the fair market value will be the closing sales price for a share of our Common Stock as quoted on the principal securities market on which shares of our Common Stock are traded on the date of grant, which as of December __, 2019 was $__. Stock options may vest and become exercisable as determined by the Administrator, but in no event may a stock option have a term extending beyond the fifth anniversary of the date of grant. ISOs granted to any person who owns, as of the date of grant, stock possessing more than 10% of the total combined voting power of all classes of our stock, however, may not have an exercise price that is less than 110% of the fair market value of our Common Stock on the date of grant and may not have a term extending beyond the fifth anniversary of the date of grant. The aggregate fair market value of the shares with respect to which options intended to be ISOs are exercisable for the first time by an employee in any calendar year may not exceed $100,000, or such other amount as Section 422 of the Code provides.
Stock appreciation rights. A stock appreciation right entitles its holder, upon exercise of all or a portion of the stock appreciation right (the number of shares of which are the "base shares"), to receive from us an amount determined by multiplying the difference obtained by subtracting the exercise or base price per share of the stock appreciation right from the fair market value at the time of exercise of the stock appreciation right by the number of shares with respect to which the stock appreciation right has been exercised (in the event the stock appreciation right is settled in shares, the shares obtained are the "gain shares"), subject to any limitations imposed by the Administrator. The exercise or base price per share subject to a stock appreciation right will be set by the Administrator, but may not be less than 100% of the fair market value on the date the stock appreciation right is granted. The Administrator determines the period during which the right to exercise the stock appreciation right vests in the holder, but in no event may a stock appreciation right have a term extending
 
beyond the fifth anniversary of the date of grant. No portion of a stock appreciation right that is unexercisable at the time the holder's service with us terminates will thereafter become exercisable, except as may be otherwise provided by the Administrator. Payment pursuant to the stock appreciation right awards may be in cash, shares, or a combination of both, as determined by the Administrator.
Restricted stock units. A restricted stock unit award provides for the issuance of our Common Stock at a future date upon the satisfaction of specific conditions set forth in the applicable award agreement. The Administrator will specify the dates on which the restricted stock units will become fully vested and nonforfeitable, and the Administrator may specify such conditions to vesting as it deems appropriate, including conditions based on achieving one or more of the performance criteria, or other specific criteria, including service to us or any of our affiliates. Restricted stock units may not be sold, or otherwise hypothecated or transferred, and a holder of restricted stock units will not have voting rights or dividend rights prior to the time when the vesting conditions are satisfied and the shares of Common Stock are issued. Restricted stock units generally will be forfeited, and the underlying shares of our Common Stock will not be issued, if the applicable vesting conditions are not met. The Administrator will specify, or permit the restricted stock unit holder to elect, the conditions and dates upon which the shares underlying the vested restricted stock units will be issued (subject to compliance with the deferred compensation requirements of Section 409A of the Code). Restricted stock units may be paid in cash, shares, or both, as determined by the Administrator. On the distribution dates, we will transfer to the participant one unrestricted, fully transferable share of our Common Stock (or the fair market value of one such share in cash) for each restricted stock unit scheduled to be paid out on such date and not previously forfeited. Restricted stock units may constitute or provide for a deferral of compensation subject to Section 409A of the Code, and there may be certain tax consequences if the requirements of Section 409A of the Code are not met.
Restricted stock. A restricted stock award is the grant of shares of our Common Stock at a price determined by the Administrator, if any, to be paid by the holder to us with respect to any restricted stock award, with cash, services or any other consideration that the Administrator deems acceptable, subject to the requirements of law, and that is nontransferable and may be subject to substantial risk of forfeiture until specific conditions are met. Conditions may be based on continuing service to us or any of our affiliates or achieving one or more of the performance criteria, or

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
19



other specific criteria. During the period of restriction, participants holding shares of restricted stock have full voting and dividend rights with respect to such shares unless otherwise provided by the Administrator. In addition, with respect to a share of restricted stock with performance-based vesting, dividends which are paid prior to vesting will be paid out to the holder only to the extent that the performance-based vesting conditions are subsequently satisfied and the share of restricted stock vests. Restricted stock generally may be repurchased by us at the original purchase price, if any, or forfeited, if the vesting conditions and other restrictions are not met. The restrictions will lapse in accordance with a schedule or other conditions determined by the Administrator.
Dividend equivalents may be granted pursuant to the 2011 Incentive Plan, except that no dividend equivalents may be payable with respect to options or stock appreciation rights. A dividend equivalent is the right to receive the equivalent value of dividends paid on shares. Dividend equivalents that are granted by the Administrator are credited as of dividend payment dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the Administrator. Such dividend equivalents will be converted to cash or additional shares of our Common Stock by such formula, at such time and subject to such limitations as may be determined by the Administrator. In addition, dividend equivalents with respect to an award with performance-based vesting that are based on dividends paid prior to vesting will be paid out to the holder only to the extent that the performance-based vesting conditions are subsequently satisfied and the award vests.
Stock payments. A stock payment is a payment in the form of shares of our Common Stock or an option or other right to purchase shares, as part of a bonus, deferred compensation or other arrangement. The number or value of shares of any stock payment will be determined by the Administrator and may be based on continuing service with us or any of our affiliates or achieving one or more of the performance criteria, or other specific criteria determined by the Administrator. Except as otherwise determined by the Administrator, shares underlying a stock payment that is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Stock payments may, but are not required to, be made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards.
Deferred stock units. The number of deferred stock units will be determined by the Administrator and may
 
be based on continuing service with us or any of our affiliates or achieving one or more of the performance criteria, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Each deferred stock unit entitles its holder to receive one share of Common Stock on the date the deferred stock unit becomes vested or upon a specified settlement date thereafter. Except as otherwise determined by the Administrator, shares underlying a deferred stock unit award that is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Unless otherwise provided by the Administrator, a holder of deferred stock units will have no rights as a stockholder with respect to such deferred stock units until the award of deferred stock units has vested and any other applicable conditions and/or criteria have been satisfied and the shares of Common Stock underlying the award have been issued to the holder.
Deferred stock. Deferred stock provides for the deferred issuance to the holder of shares of our Common Stock. The number of shares of deferred stock will be determined by the Administrator and may be based on continuing service with us or any of our subsidiaries or affiliates or achieving one or more of the performance criteria, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Except as otherwise determined by the Administrator, shares underlying a deferred stock award that is subject to a vesting schedule or other conditions set by the Administrator will not be issued until those conditions have been satisfied. Deferred stock may constitute or provide for a deferral of compensation subject to Section 409A of the Code, and there may be certain tax consequences if the requirements of Section 409A of the Code are not met.
Performance awards. Performance awards may be granted in the form of cash bonus awards, stock bonus awards, performance awards or incentive awards that are paid in cash, shares, equity awards or a combination of cash, shares or equity awards. The value of performance awards may be linked to any one or more of the performance criteria, or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Performance awards may be payable upon the attainment of pre-established performance goals based on one or more of the performance criteria, or other specific criteria determined by the Administrator. The goals are established and evaluated by the Administrator and

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may relate to performance over any periods as determined by the Administrator.
Payment Methods. The Administrator will determine the methods by which payments by any award holder with respect to any awards granted under the 2011 Incentive Plan may be made, including, without limitation, by: (1) cash or check; (2) shares of our Common Stock issuable pursuant to the award or held for such period of time as may be required by the Administrator in order to avoid adverse accounting consequences and having a fair market value at the time of delivery equal to the aggregate payments required; (3) delivery of a notice that the award holder has placed a market sell order with a broker with respect to shares of our Common Stock then issuable upon exercise or vesting of an award, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to us in satisfaction of the aggregate payments required; provided that payment of such proceeds is then made to us upon settlement of such sale; or (4) other form of legal consideration acceptable to the Administrator. Only whole shares of Common Stock may be purchased or issued pursuant to an award. No fractional shares will be issued, and the Administrator will determine, in its sole discretion, whether cash will be given in lieu of fractional shares or whether such fractional shares will be eliminated by rounding down.
Vesting and Exercise of an Award. The applicable award agreement governing an award will contain the period during which the right to exercise the award in whole or in part vests, including the events or conditions upon which the vesting of an award will occur or may accelerate. No portion of an award which is not vested at the holder's termination of service with us will subsequently become vested, except as may be otherwise provided by the Administrator in the agreement relating to the award or by action following the grant of the award.
Generally, an option or stock appreciation right may be exercised only while the holder remains an employee or non-employee director of us or one of our affiliates or for a specified period of time (up to the remainder of the award term) following the holder's termination of service with us or one of our affiliates. Upon the grant of an award or following the grant of an award, the Administrator may provide that the period during which the award will vest or become exercisable will accelerate, in whole or in part, upon the occurrence of one or more specified events, including a change in control or a holder's termination of employment or service with us or otherwise.
Transferability. No award under the 2011 Incentive Plan may be transferred other than by will or the then-
 
applicable laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a domestic relations order, unless and until such award has been exercised or the shares underlying such award have been issued and all restrictions applicable to such shares have lapsed. No award will be subject to the debts or contracts of the holder or his or her successors in interest or will be subject to disposition by any legal or equitable proceedings. During the lifetime of the holder of an award granted under the 2011 Incentive Plan, only such holder may exercise such award unless it has been disposed of pursuant to a domestic relations order. After the holder's death, any exercisable portion of an award may be exercised by his or her personal representative or any person empowered to do so under such holder's will or the then-applicable laws of descent and distribution until such portion becomes unexercisable under the 2011 Incentive Plan or the applicable award agreement. Notwithstanding the foregoing, the Administrator may permit an award holder to transfer an award other than an ISO to any "family member" of the holder, as defined under the instructions for use of the Form S-8 Registration Statement under the Securities Act of 1933, subject to certain terms and conditions. Further, an award holder may, in a manner determined by the Administrator, designate a beneficiary to exercise the holder's right and to receive any distribution with respect to any award upon the holder's death, subject to certain terms and conditions.
Forfeiture, Recoupment and Clawback Provisions. Pursuant to its general authority to determine the terms and conditions applicable to awards under the 2011 Incentive Plan, the Administrator will have the right to provide, in an award agreement or otherwise, or to require a holder to agree by separate written instrument, that (a) (i) any economic benefit received by the holder upon any receipt or exercise of the award, or upon the receipt or resale of any shares of Common Stock underlying the award, must be paid to the Company, and (ii) the award will terminate and any unexercised portion of the award will be forfeited, if (x) a termination of service occurs within a specific time period following receipt or exercise, (y) the holder at any time, or during a specified time period, engages in any activity in competition with the Company, or that is contrary to the interests of the Company, or (z) the holder incurs a termination of service for "cause" (as determined in the Administrator's discretion or as set forth in a written agreement between the Company and the holder); and (b) all awards (including any economic benefit received by the holder upon any receipt or exercise of any award or upon the receipt or resale of any shares of Common Stock underlying the award) will be subject to the provisions of any recoupment or clawback policies implemented by the

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
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Company, including, without limitation, any recoupment or clawback policies adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such recoupment or clawback policies and/or in the applicable award agreement.
Adjustment Provisions
Certain transactions with our stockholders not involving our receipt of consideration, such as stock splits, spin-offs, stock dividends or certain recapitalizations may affect the shares or the share price of our Common Stock (which transactions are referred to collectively as equity restructurings). In the event that an equity restructuring occurs, the Administrator will equitably adjust the class of shares issuable and the maximum number and kind of shares of our Common Stock subject to the 2011 Incentive Plan, and will equitably adjust outstanding awards as to the class, number of shares and price per share of our Common Stock. The Administrator will also adjust the number and kind of shares for which automatic grants are subsequently to be made to new and continuing non-employee directors pursuant to the 2011 Incentive Plan. Other types of transactions may also affect our Common Stock, such as a dividend or other distribution, reorganization, merger or other changes in corporate structure. In the event that there is such a transaction that is not an equity restructuring, and the Administrator determines that an adjustment to the 2011 Incentive Plan and any outstanding awards would be appropriate to prevent any dilution or enlargement of benefits under the 2011 Incentive Plan, the Administrator will equitably adjust the 2011 Incentive Plan as to the class of shares issuable and the maximum number of shares of our Common Stock subject to the 2011 Incentive Plan, as well as the maximum number of shares that may be issued to an employee during any calendar year, and will adjust any outstanding awards as to the class, number of shares, and price per share of our Common Stock in such manner as it may deem equitable.
In addition, if there is any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or other unusual or nonrecurring transactions or events, the Administrator may, in its discretion: 
provide for the termination of any award in exchange for an amount of cash (if any) and/or other property equal to the amount that would have been attained upon the exercise of such award or realization of the participant's rights;
 
provide for the replacement of any award with other rights or property selected by the Administrator in its sole discretion having an aggregate value not exceeding the amount that could have been attained upon exercise of such award or realization or the participant's rights;
provide that any surviving corporation (or its parent or subsidiary) will assume awards outstanding under the 2011 Incentive Plan or will substitute similar awards for those outstanding under the 2011 Incentive Plan, with appropriate adjustment of the number and kind of shares and the prices of such awards;
make adjustments (i) in the number and type of shares of Common Stock (or other securities or property) subject to outstanding awards or in the number and type of shares of restricted stock or deferred stock or (ii) to the terms and conditions of (including the grant or exercise price) and the criteria included in, outstanding awards or future awards;
provide that awards may be exercisable, payable or fully vested as to shares of Common Stock covered thereby; or
provide that any outstanding award cannot vest, be exercised or become payable after such event.
Amendment and Termination
The Board may terminate, amend or modify the 2011 Incentive Plan at any time; however, except to the extent permitted by the 2011 Incentive Plan in connection with certain changes in capital structure, stockholder approval must be obtained for any amendment to (i) increase the number of shares available under the 2011 Incentive Plan, (ii) reduce the per share exercise price of the shares subject to any option or stock appreciation right below the per share
exercise price as of the date the option or stock appreciation right was granted, and (iii) cancel any option or stock appreciation right in exchange for cash
or another award when the option or stock appreciation right price per share exceeds the fair market value of the underlying shares.
Federal Income Tax Consequences
The following is a brief summary of certain United States federal income tax consequences generally arising with respect to awards under the 2011 Incentive Plan. This discussion does not address all aspects of the United States federal income tax consequences of participating in the 2011 Incentive

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Plan that may be relevant to participants in light of their personal investment or tax circumstances and does not discuss any state, local or non-United States tax consequences of participating in the 2011 Incentive Plan. Each participant is advised to consult his or her particular tax advisor concerning the application of the United States federal income tax laws to such participant's particular situation, as well as the applicability and effect of any state, local or non-United States tax laws before taking any actions with respect to any awards.
If an optionee is granted a non-qualified stock option under the 2011 Incentive Plan, the optionee should not have taxable income on the grant of the option. Generally, the optionee should recognize ordinary income at the time of exercise in an amount equal to the fair market value of a share of our Common Stock at such time, less the exercise price paid. The optionee's basis in the Common Stock for purposes of determining gain or loss on a subsequent sale or disposition of such shares generally will be the fair market value of our Common Stock at the time the optionee exercises such option. Any subsequent gain or loss will generally be taxable as a capital gain or loss. We or our affiliates generally should be entitled to a federal income tax deduction at the time and for the same amount and at the same time as the optionee recognizes ordinary income, subject to limitations under Section 162(m) of the Code with respect to covered employees.
A participant receiving ISOs will not recognize taxable income upon grant. Additionally, if applicable holding period requirements are met, the participant will not recognize taxable income at the time of exercise. However, the excess of the fair market value of our Common Stock received over the exercise or base price is an item of tax preference potentially subject to the alternative minimum tax. If stock acquired upon exercise of an ISO is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value at the time of sale and the exercise or base price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled to any deduction. If the holding period requirements are not met, the ISO will be treated as one that does not meet the requirements of the Code for ISOs and the tax consequences described for nonqualified stock options will apply.
The current federal income tax consequences of other awards authorized under the 2011 Incentive Plan
 
generally follow certain basic patterns: stock appreciation rights are taxed and deductible in substantially the same manner as nonqualified stock options; nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); restricted stock units, stock-based performance awards, dividend equivalents and other types of awards are generally subject to tax at the time of payment based on the fair market value of the award at such time. Compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, we will generally have a corresponding deduction at the time the participant recognizes ordinary income, subject to limitations under Section 162(m) of the Code with respect to covered employees.
Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain "covered employees" in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. It is possible that compensation attributable to awards under the 2011 Incentive Plan, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.
New Plan Benefits and Historical Equity Awards
The Administrator has the discretion to grant awards under the 2011 Incentive Plan and, therefore, it is not possible as of the date of this Proxy Statement to determine future awards that will be received by named executive officers or others under the 2011 Incentive Plan. Please see the section entitled "Compensation Discussion and Analysis" for grants made to each of the named executive officers under the 2011 Incentive Plan during 2018.
The following table sets forth the number of restricted stock units ("RSUs") (including performance-based RSUs at target level of performance and service-based RSUs) and stock appreciation rights (including the Premium-Priced SSAR Award) that have been granted under the 2011 Incentive Plan to named executive officers and the other individuals and groups indicated since the inception of the 2011 Incentive Plan. As noted above, the Premium-Priced SSAR Award is subject to stockholder approval of the Plan Amendment.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
23



Name and Position
  
Restricted Stock Units and Performance Stock Units1, 2
  
Stock Appreciation Rights2
Javier J. Rodriguez, Chief Executive Officer
  
366,583

 
3,390,492

Kent J. Thiry, Executive Chairman
  
661,821

 
3,070,994

Joel Ackerman, Chief Financial Officer and Treasurer
  
131,343

 
311,465

Kathleen A. Waters, Chief Legal Officer
  
94,515

 
162,877

LeAnne M. Zumwalt, Group Vice President, Public Affairs
 
39,267

 
161,867

All current executive officers (8 executive officers)
  
1,450,292

 
8,043,234

All current non-employee directors
  
117,030

 
785,669

All employees (other than current executive officers)
  
3,624,423

 
10,611,786

1
The Company has granted performance awards in the form of performance-based RSUs ("PSUs"). The amounts reported in this column with respect to unvested PSUs are based on the target award opportunity granted to the participant. Vesting levels for PSUs may range from 0% to 200% of target based on performance.
2
In addition to annual equity awards granted to the Named Executive Officers ("NEOs") in connection with the Company’s annual LTI program, this column includes for each applicable NEO: (i) incentive SSAR awards granted to Mr. Ackerman and Mses. Waters and Zumwalt and the promotional PSU equity incentive award granted to Mr. Rodriguez, in each case in connection with the June 2019 management transition and (ii) Mr. Rodriguez's Premium-Priced SSAR Award.
Vote Required for Approval
The affirmative vote of a majority of shares of Common Stock present in person or by proxy at the Special Meeting and entitled to vote on the Plan Proposal is required to approve the Plan Proposal. Abstentions will count as a vote against the Plan Proposal. Broker non-votes will not be permitted at the Special Meeting and therefore will have no effect.

The Board of Directors recommends a vote FOR the approval of the Plan Amendment.


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Compensation Discussion and Analysis
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Compensation Discussion and Analysis
 

 
Compensation Discussion and Analysis
 
The following Compensation Discussion and Analysis (the “CD&A”) is generally historical in nature and is based on the CD&A included in the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2019, with a brief update of the section titled “Highlights of 2019 Executive Compensation Program” to summarize the compensation elements awarded to each of the NEOs in 2019. Because of the historical nature of this CD&A, it does not fully reflect the feedback received by the Company or the Board, including the rationale for the Premium-Priced SSAR Award that was a byproduct of that engagement. As discussed earlier in this Proxy Statement, in connection with Mr. Rodriguez's transition to the CEO role in 2019, and leading up to the decision to grant the Premium-Priced SSAR Award to him, the Company and the Board received and proactively sought feedback from the Company’s largest stockholders on the structure of the executive compensation program as part of its ongoing stockholder engagement program. Following stockholder engagement, the independent Compensation Committee of the Board, in consultation with its independent compensation consultant, evaluated a number of alternatives to structure the compensation for Mr. Rodriguez in a way that continues to closely align him with Company and stock performance, particularly over the longer-term. The Compensation Committee concluded that the Premium-Priced SSAR Award incentivizes the creation of sustained and meaningful long-term value, as it is subject to a multi-year vesting period, a five-year holding period and utilizes a Base Price that is not a performance hurdle triggering exercisability at some lower price. Rather, Mr. Rodriguez only participates in the upside above this price, and would potentially receive no value for five years’ worth of equity awards if the required stockholder returns are not sustained. This Premium-Priced SSAR Award also demonstrates the Board’s strong confidence in Mr. Rodriguez’s leadership of DaVita and the momentum of his new strategy as well as the Board’s desire to ensure Mr. Rodriguez’s continued service during this period of DaVita’s strategic transformation. We encourage you to read the proposal to amend the 2011 Incentive Plan, beginning on page 14, for further information regarding the Premium-Priced SSAR Award.

This CD&A describes our executive compensation program for the following NEOs:
  NEO
TITLE
  Javier. J. Rodriguez
Chief Executive Officer*
  Kent. J. Thiry
Executive Chairman*
  Joel Ackerman
Chief Financial Officer and Treasurer
  Kathleen A. Waters
Chief Legal Officer
  LeAnne M. Zumwalt
Group Vice President, Public Affairs
* Effective June 1, 2019, Mr. Rodriguez assumed the position of CEO of the Company and Mr. Thiry stepped down as Chairman of the Board and CEO of the Company and DMG and assumed the position of Executive Chairman of the Board (the "2019 management transition"). Please see the “-Management Transition” section later in this CD&A for a description of the compensation arrangements entered into in connection with the 2019 management transition. References throughout this CD&A to CEO refer to Mr. Thiry, who served in such position for all of 2018.
Pay and Performance Outcomes
Our executive compensation program is designed to align the interests of our executive officers with those of our stockholders by, among other things, linking short-term and long-term compensation with financial and operating performance. We believe that this alignment was manifested in the following features of our executive compensation program in 2018:
 
Payout under the 2018 Short-Term Incentive Program ("STI Program") was above target driven by top end of guidance results for the year on adjusted operating income and strong performance on the clinical objective and the various strategic objectives. See "—Elements of Compensation—Short-Term Incentive Program (STI Program) for 2018."

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70% of the payout under the 2018 STI Program was directly tied to adjusted operating income, the primary financial metric on which the Company provides annual guidance to stockholders.
The other 30% focused on a clinical criterion and strategic criteria which varied by individual, to provide balance against the financial results and alignment with the Company's strategic and operating imperatives for 2018.
Payouts under our Long-Term Incentive Program ("LTI Program") were well below target and estimated grant date fair value based on stock price performance and a view of long-term performance. Over the past few years, total stockholder return and operating income from continuing operations had negative trends.
As compared to the original grant date fair value, our CEO vested in only 14% of the 2015 PSUs and 66% of the 2016 PSUs based on performance conditions that can be calculated as of March 31, 2019.
Our CEO realized only 6% of the grant date fair value of equity granted in prior years that vested in 2018. See "—Executive Summary—Realized LTI."
 
Changes to Executive Compensation Program in 2018
We made a number of changes to the executive compensation program in 2018 in response to feedback received from our stockholders about our executive compensation program as well as to respond to changes in our business and to better align the compensation structure for our executive officers with the long term interests of our stockholders. These changes are described in more detail later in this Proxy Statement and the highlights are summarized below:
We have provided enhanced disclosure about our executive compensation program, including providing more detail on the actual value realized by our former CEO on long-term incentives vesting in 2018 as compared to their grant date fair value.
In 2018, we amended our CEO’s employment agreement to remove a grandfathered change-in-control tax gross-up payment provision. Following this amendment, none of our employees are entitled to any change-in-control tax gross-up payments.
In order to maximize consistency in goals under our STI Program from year to year, while still retaining the compensation program’s alignment with the Company’s strategic and operating imperatives over time, we retained the same general framework for our 2018 and 2019 STI Programs. For participants in the 2018 STI Program, 70% of the annual incentive was tied to a financial metric, 15% was tied to a clinical metric and the remaining 15% was allocated to strategic objectives which varied by individual.
There were no changes made to the 2018 base salaries for our named executive officers as compared to 2017. We moved from a 'maximum-based' bonus potential to a 'target-based' annual incentive opportunity under our STI Program to be more aligned with market practices.
We moved long-term incentives for all executive officers to stock-based vehicles to provide stronger alignment with stockholders, whereas previously we used cash-based long-term incentive vehicles for executive officers other than the CEO.
After consultation with the Compensation Committee’s independent compensation consultant, Compensia, and review of market practices, we introduced a retirement policy for executive officers ("Rule of 65 Retirement

 
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Compensation Discussion and Analysis
 

Policy"), allowing for post-retirement vesting for executive officers who met certain minimum age and tenure requirements. The purpose of the Rule of 65 Retirement Policy is to align the decision-making by executive officers with the long-term interests of stockholders by providing for the ability to continue to benefit from the realization of value from equity awards that would otherwise be forfeited when the executive officer's employment with the Company ceases. Retirement benefits for long-tenured executives are common in the marketplace. Although it did not result in a cash payment or the issuance of any incremental equity, the adoption of the Rule of 65 Retirement Policy resulted in a one-time accounting modification charge for certain outstanding equity awards reflected as additional compensation in the Summary Compensation Table. See the subsection "Executive CompensationPotential Payments Upon Termination or Change of ControlRule of 65 Retirement Policy" for further information regarding the Rule of 65 Retirement Policy.
Contingent upon the closing of the DMG transaction (as defined below), we modified the PSUs granted in 2016 to reallocate the performance criteria related to 2019 DMG adjusted operating income to the other criteria used in the 2016 PSU grant, given that upon close the performance of this criterion would not be measurable. Although this did not involve a new grant of equity, this adjustment resulted in a one-time accounting modification charge reflected as additional compensation in the 2018 Summary Compensation Table.
Our Chief Financial Officer and Chief Legal Officer each received a grant of PSUs in 2018 in connection with their role in negotiating the terms of the DMG transaction. These PSUs vested 50% on the close of the DMG transaction and will vest 50% 18 months thereafter, subject to the NEO's continued employment through the applicable vesting date. If the DMG transaction had not closed, none of these PSUs would have been eligible to vest and neither Mr. Ackerman nor Ms. Waters would have realized any equity therefrom. In addition, the Compensation Committee retained the ability to reduce these PSU awards, including to zero, at its sole discretion, at any time prior to the closing of the DMG transaction.



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Executive Summary
 
Our Business
During 2018, the Company consisted of two major divisions, DaVita Kidney Care (“DKC”) and DMG. DKC is comprised of our U.S. dialysis and related lab services, our ancillary services and strategic initiatives, including our international operations, and our corporate administrative support. Our U.S. dialysis and related lab services business is our largest line of business and is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as end stage renal disease (“ESRD”). DMG was our patient- and physician-focused integrated healthcare delivery and management company with over two decades of providing coordinated, outcomes-based medical care in a cost effective manner. On December 5, 2017, we entered into an equity purchase agreement to sell DMG to Collaborative Care Holdings, LLC, a subsidiary of UnitedHealth Group Inc., subject to receipt of required regulatory approval and other customary closing conditions ("DMG transaction"). The DMG transaction closed on June 19, 2019.
As of December 31, 2018, we provided dialysis and administrative services in the U.S. through a network of 2,664 outpatient dialysis centers in 46 states and the District of Columbia, serving a total of approximately 202,700 patients. As of December 31, 2018, we also provided acute inpatient dialysis services in approximately 900 hospitals and related laboratory services throughout the U.S. In 2018, our overall network of U.S. outpatient dialysis centers increased by 154 dialysis centers primarily as a result of opening new centers and acquisitions. In addition, the overall number of patients that we served as of December 31, 2018 in the U.S. increased approximately 2.5% from December 31, 2017.
Through capitation contracts with some of the nation’s leading health plans, DMG had approximately 753,800 members under its care in southern California, central and south Florida, southern Nevada, and central New Mexico as of December 31, 2018. In addition to its managed care business, during the year ended December 31, 2018, DMG provided care in all of its markets to over 932,700 patients whose health coverage is structured on a fee-for-service basis, including patients enrolled through traditional Medicare and Medicaid programs, preferred provider organizations and other third party payors.
 
The DMG patients as well as the patients of DMG’s associated physicians, physician groups and independent practice associations benefited from an integrated approach to medical care that places the physician at the center of patient care. As of December 31, 2018, DMG delivered services to its members via a network of approximately 750 primary care physicians, over 3,200 associated group and other network primary care physicians, approximately 185 network hospitals, and several thousand associated group and network specialists. Together with hundreds of case managers, registered nurses and other care coordinators, these medical professionals utilized a comprehensive information technology system, sophisticated risk management techniques and clinical protocols to provide high-quality, cost-effective care to DMG’s members.
Our executive compensation program is best understood within the context of the business environment in which we operate. For example, we face various types of external risks in the healthcare industry, including public policy uncertainty such as prospective implementation of federal healthcare reform legislation and similar measures that may be enacted at the state level; potential changes to and increases in regulation by numerous federal, state and local government entities; reductions in reimbursements under federal and state healthcare programs, including Medicare and Medicaid; and recent decline in the rate of growth of the ESRD patient population. As a result, we believe that in certain circumstances it is appropriate to have performance measures that provide a target, or near-target, level of performance-based compensation for maintaining, rather than improving, certain results, in light of the headwinds and downward pressures referenced above.
Our Executive Compensation Structure
Our executive compensation program is designed to be aligned with our strategic, operational and financial objectives, and to align the interests of our executives with the long-term interests of our stockholders. Our executive compensation structure is comprised of both short-term and long-term incentive opportunities, which are based on challenging performance goals that we believe align with our strategic objectives, including to provide high-quality care to our patients,

 
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Compensation Discussion and Analysis
 

increase profitability, maximize growth and increase stockholder value.
The design of our 2018 short-term and long-term incentive criteria, described in further detail in the subsection titled "- Elements of Compensation," emphasizes our objectives as a Company. Our resulting compensation structure for 2018 incorporates incentives tied to clinical care, profit and growth.
 
We believe it is important to maintain consistency with our compensation philosophy and approach, described in further detail below in the subsection entitled “—Our Compensation Design and Philosophy,” to continue to incentivize management toward short-term and long-term strategic, financial and operating goals, which are intended to create long-term stockholder value.
NEO Pay Elements

Given our emphasis on variable compensation, the Compensation Committee generally limits increases to fixed compensation amounts for our executives and delivers a greater percentage of compensation increases in the form of variable compensation. After taking into account individual performance, changes to portfolio of responsibilities and comparative market
data provided by the Compensation Committee’s independent compensation consultant, Compensia, the committee did not adjust the base salary levels of the NEOs in 2018.

The following charts presented in this "NEO Pay Elements" section illustrate the allocation of the total direct compensation that the CEO and the other NEOs (on average) are eligible to earn, including annual bonus at target, and in the case of the long-term incentives, those that were granted in 2018.

 



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*These charts exclude the accounting charges associated with the modification of prior year equity awards in connection with implementation of the Rule of 65 Retirement Policy and the modification of certain 2016 PSUs to reallocate the performance criteria related to a DMG performance metric, which was contingent on completion of the DMG transaction. These charts also exclude the special PSU awards granted to Mr. Ackerman and Ms. Waters in 2018 in recognition of their respective roles in the DMG transaction. Vesting of these PSUs was contingent upon the closing of the transaction, as well as continued service through the applicable vesting date, and the Compensation Committee retained the authority to reduce these PSU awards, including to zero, at its sole discretion at any time prior to the closing of the DMG transaction.


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The following charts illustrate the allocation of performance-based versus time-based total direct compensation that the CEO and the other NEOs (on average) were eligible to earn, including annual bonus at target and in the case of the long-term incentives, those that were granted in 2018. Although RSUs represent "at risk" compensation in that their value fluctuates based on our stock price, we include salary and RSUs in time-based compensation, and target annual bonus, SSARs and PSUs in performance-based compensation. In designing the 2018 executive compensation program, the Compensation Committee provided all of the CEO’s long-term incentive grants in the form of PSUs and RSUs rather than the prior mix of SSARs and PSUs. This change was made in order to further align the CEO’s compensation mix with market data and to supplement the retentive aspect of the program with RSUs in light of the fact that the CEO’s equity grants had been delivered entirely in the form of performance-based compensation (PSUs and/or SSARs) since 2014.

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*These charts exclude the accounting charges associated with the modification of prior year equity awards in connection with implementation of the Rule of 65 Retirement Policy and the modification of certain 2016 PSUs to reallocate the performance criteria related to a DMG performance metric, which was contingent on completion of the DMG transaction. These charts also exclude the special PSU awards granted to Mr. Ackerman and Ms. Waters in 2018 in recognition of their respective roles in the DMG transaction. Vesting of these PSUs was contingent upon the closing of the transaction, as well as continued service through the applicable vesting date, and the Compensation Committee retained the authority to reduce these PSU awards, including to zero, at its sole discretion at any time prior to the closing of the DMG transaction.
The Compensation Committee believes that the above compensation structure appropriately balanced promoting long-term stockholder value creation and preventing excessive risk-taking.
Consideration of Say-on-Pay Results and Pay for Performance
At our annual meeting of stockholders held in June 2018, approximately 95% of the votes cast by stockholders at the annual meeting were voted in favor of the compensation program for our NEOs. In addition, at our meeting of stockholders held in June 2019, approximately 91% of the votes cast by stockholders at the annual meeting were voted in favor of the compensation program for our NEOs. We believe these votes reflect strong support for our executive compensation program. However, we
continue to evaluate our program to find ways we can refine it and further align management incentives with stockholder interests. Part of that evaluation involves soliciting feedback from investors as part of an ongoing dialogue with our shareholders that we maintain throughout the year. As discussed elsewhere in this Proxy Statement, we firmly believe that engaging with investors is fundamental to our commitment to good governance and essential to maintaining our strong corporate governance practices. We believe in a collaborative approach to
 
stockholder outreach and value the variety of investors’ perspectives received, which deepens our understanding of stockholder interests and fosters a mutual understanding of governance priorities.

In connection with the stockholder outreach following our 2018 annual meeting, at the direction of the Compensation Committee, management contacted stockholders representing approximately 66% of our shares outstanding, including our largest institutional stockholders, to discuss our existing compensation practices, including recent developments such as the adoption of the Rule of 65, and other corporate governance matters.
During these discussions as part of our stockholder outreach following our 2018 annual meeting of stockholders, we felt the overall sentiment from stockholders regarding our existing compensation structure, sustainability initiatives and governance matters continued to be positive. Overall, investors expressed general satisfaction with our executive compensation program and corporate governance

 
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Compensation Discussion and Analysis
 

practices and support of a continued emphasis on “pay-for-performance.” See the subsection titled "—Elements of Compensation—Highlights of 2019 Executive Compensation Program." We have and will continue our ongoing engagement with our stockholders on corporate governance, executive compensation and sustainability matters that are of interest to them.
Since 2012, we have maintained this practice of routinely engaging with stockholders to discuss our executive compensation program and have shared this stockholder feedback with the Compensation Committee. The Compensation Committee intends to continue to consider feedback we receive from our
 
stockholders, including the 2018 and 2019 say-on-pay results, and to make changes in response to such stockholder feedback when deemed appropriate to further align our executive compensation program and the individual compensation of our NEOs with our compensation and business objectives and stockholder interests. While we have made a number of changes in response to feedback received during stockholder engagement, the table below illustrates how certain feedback we have received over the past several years correlates to the design of certain aspects of our executive compensation program structure.
Board Responsiveness to Stockholder Feedback
What We Heard
What We Did
 
 
•    
The Company should generally avoid overlap in metrics for short-term and long-term incentive programs
•    
Introduced distinct metrics for short-term and long-term incentive plans (2018)
•    
The Company should have a long-term metric tied to returns on capital

•    
Introduced long-term earnings per share ("EPS") as PSU target for CEO (2016) and more broadly for executive officers (2017)
•    
The variability in metrics from year-to-year made it difficult to compare the program results over multiple years
•    
Introduced more consistency in the framework of our short-term incentive program (2017) and in our PSU structure (2018)
•    
Executive officers should not have excise tax gross-up in case of a change of control
•    
Removed excise tax gross-up provision in CEO’s employment agreement (2018)
•    
The Company should use a “target-based” annual incentive structure rather than a “maximum-based” annual incentive structure to be more in-line with peer companies
•    
Switched to “target-based” annual incentive structure (2018)
•    
Investors are generally pleased with the Company's sustainability and social responsibility programs and want to see the Company continue to focus on these initiatives
•    
The Company continues to advance sustainability and social responsibility initiatives and disclosures
•    
Average board tenure is above average with several long-serving directors
•    
Added three new directors over 2015 - 2017


Our Compensation Design and Philosophy
Our ability to recruit, engage, motivate and retain highly qualified executives is essential to our long-term success. Historically, our compensation program structure has focused on optimizing (i) incentives and metrics that we believe result in the greatest degree of alignment with stockholder interests, and (ii) effective recruitment, engagement, motivation and retention of executives.
 
Since revamping our compensation structure in 2014 in response to stockholder comments, we have been moving in the direction of simplifying and standardizing our compensation program. As a result, and given
generally favorable reception by stockholders to our compensation program and our most recent say-on-pay vote, the changes made for the 2019 annual program were incremental in nature and did not represent wholesale design changes. Greater detail on

32
 
 



the changes we made to our short- and long-term incentive programs are provided in the subsection titled "—Elements of Compensation—Highlights of 2019 Executive Compensation Program."
2018 Financial and Performance Highlights
Our overall 2018 financial and operating performance benefited from increased treatment volume from acquired and non-acquired growth in both our U.S. dialysis and related lab services and our international businesses and a corresponding increase in revenue, as well as the administration of calcimimetics (a class of drugs used to treat secondary hyperparathyroidism, a common condition in ESRD patients which can result in bone fractures). This was offset by increases in labor costs, benefits costs due to the implementation of a 401(k) matching program, pharmaceutical costs due to the administration of calcimimetics, other center related costs and advocacy costs to counter certain union-backed policy initiatives. We believe that the NEOs were instrumental in achieving our 2018 results, including the following achievements and financial and operating performance indicators for 2018 as compared to 2017:
improved key clinical outcomes in our U.S. dialysis operations, including the sixth consecutive year as a leader in Centers for Medicare and Medicaid Services' ("CMS") Quality Incentive Program and for the last five years under the CMS Five-Star Quality Rating system;
4.9% é consolidated net revenue growth;
10.4% é net revenue growth in our U.S. dialysis segment operations;
4.1% é U.S. dialysis treatment growth;
154 é net increase of U.S. dialysis centers and a net increase of 4 international dialysis centers;
 
2.5% é increase in the overall number of patients we serve in the U.S.;
repurchased 16,844,067 shares of our Common Stock for $1.2 billion;
$1.8 billion consolidated operating cash flows, or $1.5 billion from continuing operations (DKC); and
Proposition 8, a California state wide ballot initiative that sought to significantly limit the amount of revenue dialysis providers could retain from caring for patients with commercial insurance, was defeated in California.
We believe our U.S. dialysis and related lab services clinical outcomes compare favorably with other dialysis providers in the United States and generally exceed the dialysis outcome quality indicators of the National Kidney Foundation. One of the most important measures of clinical quality is the percentage of patients for whom hemodialysis access to the bloodstream is provided by a central venous catheter ("CVC") for 90 days or more (the "CVC rate"). Dialysis performed through a CVC access point is less effective than dialysis performed through a fistula or graft access point. In addition, a CVC access point is more prone to infections. As a result, the lower the CVC rate, the better. Our CVC rate in 2017 was 8.4%, as compared to 11.2% for the rest of the industry, as reported in the "Dialysis Facility Compare" dataset published by CMS.

 
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Compensation Discussion and Analysis
 

Linking 2018 NEO Compensation to Performance
Our compensation program for our NEOs emphasizes compensation based on performance and is designed to align our NEOs’ interests with those of our stockholders. To that end, our compensation program is designed to reward those individuals who have performed well in creating and protecting significant long-term value for the Company and its stockholders by permitting them to share in the value generated. As such, our compensation program heavily emphasizes variable compensation in the form of performance-based cash and equity awards.
When determining the compensation for our NEOs for 2018, the Compensation Committee evaluated the following:
clinical operating results
financial performance
advances in strategic imperatives
organizational development
Specifically in determining the amounts of the annual performance incentives for 2018, the Compensation Committee evaluated the outcome of the specific performance metrics for the short-term incentive program. See subsection "—Elements of Compensation—Short-Term Incentive Program (STI Program) for 2018" below for further discussion.
In determining the amounts of the annual long-term incentive awards for 2018, the Compensation Committee considered historical long-term incentive
 
awards, realized compensation in the context of actual performance against previously set targets, relative performance and grants as compared to other executives in the Company, and the pay practices of our peer group, all as more fully detailed in the subsection titled "—Elements of Compensation—Long-Term Incentive Program (LTI Program) for 2018—Determining LTI Program Award Amounts." The following table shows the 2018 total direct compensation elements (base salary, annual performance-based cash award paid and long-term incentive award granted) determined by the Compensation Committee for each NEO. This table is not a substitute for the information disclosed in the 2018 Summary Compensation Table and related footnotes. Specifically, the table below includes the grant date fair value of all 2018 equity awards (SSARs, RSUs and PSUs) but does not include the accounting charges associated with the modification of prior year equity awards in connection with implementation of the Rule of 65 Retirement Policy and the reallocation of DMG performance criteria under the 2016 PSUs, contingent on the completion of the DMG transaction (the "Annual LTI Award"). See subsections "—Executive Compensation—Potential Payments Upon Termination or Change of Control—Rule of 65 Retirement Policy" and "—Elements of Compensation—Long-Term Incentive Program (LTI Program) for 2018—Eligible Payouts for PSUs Granted in 2015 and 2016" below for further discussion.
  Name
 
Base
Salary1

Annual Cash
Award

 
Annual LTI  
Award4

 
Total Direct Compensation

Kent J. Thiry

$1,300,000


$3,303,371

2 

$11,916,880

 

$16,520,251

Javier J. Rodriguez

$900,000


$1,947,978

2 

$4,926,673

 

$7,774,651

Joel Ackerman

$700,000


$1,279,902

2 

$4,636,362

5 

$6,616,264

Kathleen A. Waters

$540,000


$646,045

2 

$4,074,631

5 

$5,260,676

LeAnne M. Zumwalt

$400,000


$280,000

3 

$1,105,693

 

$1,785,693

1
The amounts reported here reflect the base salary amounts actually paid during the 2018 fiscal year.
2
The amounts reported here reflect the payments made to Messrs. Thiry, Rodriguez and Ackerman and Ms. Waters under the 2018 STI Program.
3
Ms. Zumwalt did not participate in the 2018 STI Program. The amount reported reflects the bonus payment under the annual bonus program applicable to Ms. Zumwalt, as described further below.
4
The amounts reported under the Annual LTI Award column consist of the grant date fair value of all 2018 equity awards (SSARs, RSUs and PSUs). The amount for Mr. Thiry excludes the accounting charges associated with the modification of prior year equity awards in connection with the implementation of the Rule of 65 Retirement Policy and the reallocation of performance criteria related to a DMG metric under the 2016 PSUs, contingent on the completion of the DMG transaction. See subsections "—Executive Compensation—Potential Payments Upon Termination or Change of Control—Rule of 65 Retirement Policy" and "—Elements of Compensation—Long-Term Incentive Program (LTI Program) for 2018—Eligible Payouts for PSUs Granted in 2015 and 2016" below for further discussion. For additional details on the terms of the 2018 equity awards, see "—Executive Compensation—2018 Summary Compensation Table" and "—Elements of Compensation—Short-Term Incentive Program for 2018," respectively.
5
The amounts reported here include a special PSU award associated with the DMG transaction to recognize the role of Mr. Ackerman and Ms. Waters in that transaction. The transaction PSUs vested 50% upon the closing of the DMG transaction and will vest 50% 18 months thereafter, subject to the NEO's continued employment through the applicable vesting date. Vesting of the transaction PSUs was contingent on the closing of the DMG transaction, and the Compensation Committee retained the authority to reduce these PSU awards, including to zero, at its sole discretion at any time prior to the closing. The grant date fair value of these PSUs was $1,491,666 in the case of Mr. Ackerman and $2,187,768 in the case of Ms. Waters.

34
 
 



Realized LTI
To help our stockholders evaluate the alignment of our executive pay with performance and the rigor of the Company's long-term incentive criteria, the table below compares the actual value realized by Mr. Thiry upon vesting from long-term incentive awards ("Realized LTI") to the grant date fair value of those awards over the three-year period for which compensation is disclosed in this Proxy Statement (2016, 2017 and 2018). The second column presented for each year in the graph below represents the value of equity on the applicable vesting date during the year as a percentage of the estimated vesting value based on the original grant date fair value. Specifically, the value of equity at each vesting date is represented by the sum of (i) the actual intrinsic value of any SSAR vested in the indicated year, valued based on the closing stock price as of the date of vesting, (ii) the value of any RSU award vested in the indicated year, valued based on the closing stock price as of the date of vesting and (iii) the value of any PSU award vested in the indicated year, reflecting the actual shares earned for those PSUs, based on the performance metric outcome and the closing stock price as of the date of vesting. For example, Mr. Thiry was scheduled to vest in approximately $8.2M in 2018 based on the grant date fair value from previous SSAR and PSU
 
awards; however, the actual value at vest was $0.5M due to target outcomes of 7% and 14% on the 2014 and 2015 PSUs, respectively, and no value was included from relevant SSARs since the stock price on the vesting date was below the base price. As a result, Mr. Thiry vested in equity in 2018 with a value of 6% of the grant date fair value of that equity.
Some companies present "Realized Pay," rather than Realized LTI, and define Realized Pay based on actual income reported on a W-2. We believe that Realized LTI is more useful to our stockholders as it allows for an evaluation of the specific relationship between pay and performance over a longer period of time. In addition, we choose to define Realized LTI as indicated above because we feel this definition allows a better analysis of pay for performance. W-2 income is impacted by an executive officer's decision on when to exercise options or SSARs, which can be influenced by a variety of factors. In addition, because our SSARs vest 50% after three years and 50% after four years and have a five-year life, there is limited opportunity for our executive officers to realize meaningful value from SSARs after vesting given their shorter life.



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* Represents the total stockholder return based on average closing stock price for each trading day in the first quarter of the indicated year as compared to the corresponding average 3 and 4 years prior, which are the years in which the equity grants had been made that vest in the indicated years.

 
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Compensation Discussion and Analysis
 

Realizable Pay
To demonstrate further the alignment of executive pay with performance, the table below compares the realizable pay (actual cash compensation and the intrinsic value of equity-based compensation as of year-end) for Mr. Thiry over the three-year period for which compensation is disclosed in this Proxy Statement (2016, 2017 and 2018). This table provides supplemental disclosure and should not be viewed as a substitute for the information disclosed in the 2018 Summary Compensation Table and related footnotes (dollars in millions).
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The first column in each graph above represents target annual compensation. Specifically, it reflects (i) base salary earned during the year, (ii) target non-equity incentive compensation under the STI Program, and (iii) grant date fair value of equity awards granted in the applicable year. We transitioned from a "Maximum Bonus Structure" to a "Target" opportunity structure for the annual incentive program in 2018. For 2016 and 2017, the effective "Target" opportunity was 50% of the Maximum Bonus Potential, and this is what is reflected as "Target Non-Equity Incentive Comp" for 2016 and 2017 in the graphs above. The second column in each graph reflects (i) base salary earned during the year, (ii) actual non-equity incentive compensation earned under the STI Program for that year and (iii) the actual intrinsic value as of December 31, 2018 of any equity awards granted in that year. All awards granted in the respective years shown in the table above remained fully unvested as of December 31, 2018.
The intrinsic value of an SSAR award is calculated as the in-the-money value, or difference between the base price of an SSAR and the closing stock price of $51.46 as of December 31, 2018, multiplied by the
 
number of shares subject to the SSAR. Mr. Thiry's SSARs included in the tables above had no intrinsic value as of December 31, 2018 because their base price exceeded the closing stock price on December 31, 2018. The intrinsic value of PSUs reflects the payouts actually achieved for PSUs associated with performance periods that have ended as of December 31, 2018 and the estimated payouts for PSUs associated with performance conditions still outstanding as of December 31, 2018, in each case with those shares valued at the closing stock price of $51.46 as of December 31, 2018. The intrinsic value of RSUs is calculated based on the closing stock price of $51.46 as of December 31, 2018.

36
 
 



Stockholder Interest Alignment
Our executive compensation is designed to reflect our pay-for-performance philosophy and to align the interests of our executives with the long-term interests of our stockholders. In 2018, our executives received all long-term incentive compensation in the form of equity compensation comprised of SSARs, RSUs and PSUs. We believe that long-term, capital-efficient growth is aligned with the creation of stockholder value
and that using adjusted earnings per share as a performance metric focuses executives on maximizing long-term stockholder value and imposes further discipline on the type of development and acquisition-driven growth that we evaluate and in which we invest. As a result, the Compensation Committee selected adjusted earnings per share as the performance metric for 75% of the PSUs granted to NEOs in 2018.
 
Relative total shareholder return ("Relative TSR") represents the performance metric for the remaining
25% of PSUs granted to NEOs in 2018. Relative TSR is measured by comparing the return on an investment in DaVita to an investment in the S&P 500 index.
The CEO's equity mix is driven by ensuring 50% of the equity opportunity is in the form of PSUs tied to long term financial and Relative TSR performance. The other NEOs had, on average, 45% of their equity opportunity in the form of PSUs and on average 27% of their equity opportunity in the form of SSARs. As discussed further in subsection titled "—Elements of Compensation—Highlights of 2019 Executive Compensation Program" as part of changes for the 2019 annual executive compensation program, all of the NEOs received 50% of the value of their 2019 long-term incentive compensation in the form of PSUs.
The following charts illustrate the allocation of the annual equity awards among SSARs, PSUs and RSUs that the CEO and the other NEOs were granted with respect to their annual 2018 awards. In designing the 2018 executive compensation program, the Compensation Committee provided all of the CEO’s long-term incentive grants in the form of PSUs and RSUs rather than the prior mix of SSARs and PSUs. This change was made in order to further align the CEO’s compensation mix with market data and to supplement the retentive aspect of the program with RSUs in light of the fact that the CEO’s equity grants had been delivered entirely in the form of performance-based compensation (PSUs and/or SSARs) since 2014.
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*These charts exclude the accounting charges associated with the modification of prior year equity awards in connection with implementation of the Rule of 65 Retirement Policy and the modification of certain 2016 PSUs to reallocate the performance criteria related to a DMG performance metric, contingent on closing of the DMG transaction. These charts also exclude the special PSU awards granted to Mr. Ackerman and Ms. Waters in 2018 in recognition of their respective roles in the DMG transaction. Vesting of these PSUs was contingent upon the closing of the transaction, as well as continued service through the applicable vesting date, and the Compensation Committee retained the authority to reduce these PSU awards, including to zero, at its sole discretion at any time prior to the closing of the DMG transaction.


 
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37



Compensation Discussion and Analysis
 

Key Features of Our Executive Compensation Program
Our executive compensation program includes the following practices and policies, which we believe reinforce our executive compensation philosophy and objectives and are aligned with the interests of our stockholders:
What We Do
 
ü
Align compensation with stockholder interests. The compensation program for our NEOs is designed to focus on pay-for-performance and to align the interests of our executives with the long-term interests of our stockholders. 
ü
Pay-for-performance compensation. Our executive compensation program emphasizes variable compensation in the form of performance-based cash and equity awards. For 2018, approximately 52% of the target total direct compensation for our CEO and, on average, approximately 66% of the target annual total direct compensation for the other NEOs was performance-based. 
ü
Multi-year vesting and performance periods. Generally, our long-term equity incentive awards have multi-year vesting and performance periods to reinforce a culture in which the Company’s long-term success takes precedence over volatile short-term results.
ü
Annual say-on-pay vote. We conduct an annual advisory “say-on-pay” vote to approve the compensation of our NEOs. At our 2018 annual meeting of stockholders, approximately 95% of the votes cast on the say-on-pay proposal were voted in favor of the 2017 compensation of our NEOs, and since 2014 through 2018, on average approximately 93% of votes cast were voted in favor. At our 2019 annual meeting of stockholders, approximately 91% of the votes cast on the say-on-pay proposal were voted in favor of the 2018 compensation of our NEOs.
ü
Stockholder engagement. We continue to be committed to ongoing engagement with our stockholders on executive compensation, sustainability and corporate governance matters.
ü
Independent compensation consultant retained by the Compensation Committee. Our Compensation Committee uses an independent compensation consultant that reports directly to the Compensation Committee and provides no other services to the Company.
ü
Annual comparator peer group review. Our Compensation Committee, with the assistance of its independent compensation consultant, evaluates our executive compensation program against a comparator peer group, which is reviewed annually for adjustments.
ü
“Double-trigger” change in control provisions in equity award agreements. Our equity award agreements provide for double-trigger acceleration of vesting for equity awards in the event of a change in control of the Company.
ü
Limits on severance payments. Under our employment and severance arrangements with executive officers, severance payments are limited to not more than 3x base salary and bonus.
ü
Clawback policy. We have a clawback policy that permits recovery of cash incentive and equity-based compensation from executive officers in connection with certain restatements of the Company’s financial statements or significant misconduct. 
ü
Stock ownership requirements. We apply meaningful stock ownership requirements to further align the interests of our executive officers with the long-term interests of our stockholders (6x base salary for our CEO and 3x base salary for all of our other executive officers).
ü
Annual risk assessment. Based on our most recent annual risk assessment, we have concluded that our compensation program does not present any risk that is reasonably likely to have a material adverse effect on the Company.

38
 
 



What We Do Not Do
 
û
No repricing or replacing of underwater stock appreciation rights. Our equity incentive plan prohibits repricing or replacing underwater stock options or stock appreciation rights without prior stockholder approval.
û
No hedging of Company securities and restricted pledging of Company securities. Our Insider Trading Policy prohibits our directors and all employees from entering into any hedging transactions relating to our securities. The policy also prohibits our directors, executive officers and teammates that are VP level and above from pledging Company securities as collateral for a loan.
û
No change-in-control tax gross-ups in employment agreements. None of our employees is eligible for excise tax gross-up payments in connection with a change in control of the Company. While our former CEO had such a provision pursuant to a grandfathered employment agreement, in 2018 his employment agreement was amended to remove the excise tax gross-up provision.
û
No defined benefit pension benefits. We do not have a defined benefit pension plan for any employee that provides for payments or other benefits in connection with retirement.
û
No dividends on unearned or unvested stock awards. We do not pay dividends or dividend equivalents on unearned performance-based stock awards or unvested time-based stock awards.

 
Elements of Compensation
The elements of direct compensation offered under our executive compensation program include both fixed (base salaries) and variable (short-term and long-term incentives) compensation.
Base Salary
We compensate our executives with a base salary because we believe it is appropriate that some portion of compensation be provided in a form that is liquid and assured. Base salaries are initially established at levels necessary to enable us to attract and retain highly qualified executives with reference to comparative pay within the Company for executives with similar levels of responsibility, the prior experience of the executive, and expected contributions to Company performance.
We do not guarantee base salary adjustments on an annual basis. After considering input from Compensia, the Compensation Committee's independent compensation consultant, at the beginning of each year, the Compensation Committee considers adjustments to base salary as part of the overall annual compensation assessment for our executives. Our CEO typically provides the Compensation Committee with his recommendation regarding merit-based increases for each executive officer other than himself. The CEO’s base salary is recommended by the Compensation Committee for approval by the independent members of the Board, after considering input from Compensia and Compensia’s analysis of CEO compensation of our comparator peer group.
 
In March 2018, the Compensation Committee did not adjust the base salary levels for any of our NEOs. Base salaries for the NEOs as of December 31, 2018 are reflected in the following table:
 
Name
 
2017 Base Salary

 
2018 Base Salary

 
Percentage Increase in Base Salary in 2018

Kent J. Thiry
 

$1,300,000

 

$1,300,000

 
0
%
Javier J. Rodriguez
 

$900,000

 

$900,000

 
0
%
Joel Ackerman
 

$700,000

 

$700,000

 
0
%
Kathleen A. Waters
 

$540,000

 

$540,000

 
0
%
LeAnne M. Zumwalt
 

$400,000

 

$400,000

 
0
%
Short-Term Incentive Program (STI Program) for 2018
The 2018 STI Program awards were granted pursuant to the 2011 Incentive Plan, which permits the issuance of stock options, SSARs, RSUs, PSUs, equity-based and cash-based performance awards, as well as other forms of equity awards.
In 2018, the annual bonus opportunity for Messrs. Thiry, Rodriguez and Ackerman and Ms. Waters was granted under the STI Program. The annual bonus opportunity for Ms. Zumwalt was under a different performance-based "Maximum Bonus Potential" program. Specifically, this Maximum Bonus Potential program for 2018 relied less on strictly formulaic assessments of performance, and more on non-formulaic qualitative and quantitative assessments of performance as calibrated against a maximum potential annual bonus amount.

 
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39



Compensation Discussion and Analysis
 

The participants in the 2018 STI Program had a target bonus approved by the Compensation Committee, and with respect to the CEO, the independent members of the Board. Participants could earn up to 200% of their target bonus, subject to negative discretion. In addition, the 2018 STI Program included a modifier which would have allowed participants to achieve an incremental 50% payout, based on a predetermined objective involving legislation related to full capitation or regulated demonstration for ESRD, with the payout determined based on the executive's level of involvement and role played in the achievement of this objective, resulting in the potential to earn up to 300% of target bonus.
We felt it appropriate to allow for payment up to 300% of target because a successful outcome on legislation related to full capitation or regulated demonstration for ESRD would have created significant potential long-term stockholder value. That said, the conditions necessary for this modifier objective to be deemed
 
achieved were not met in 2018. The following table summarizes the target bonus and target bonus as a multiple of salary for each of the NEOs who was a participant in the 2018 STI Program:
Name
 
2018 Base
Salary

 
2018 Target Incentive Opportunity as a Percentage of Salary

 
2018 Target Incentive Opportunity

Kent J. Thiry
 

$1,300,000

 
150
%
 

$1,950,000

Javier J. Rodriguez
 

$900,000

 
125
%
 

$1,125,000

Joel Ackerman
 

$700,000

 
107
%
 

$750,000

Kathleen A. Waters
 

$540,000

 
69
%
 

$375,000


Adjusted operating income from our continuing operations and a clinical metric related to frequent interdialytic weight gain ("FEIDWG") formed the basis for 70% and 15%, respectively, of the target incentive opportunity for each participant in the 2018 STI Program.
The remaining 15% consisted of strategic objectives which varied by individual. The Compensation Committee or, in the case of the CEO, the independent members of the Board, can exercise negative discretion to reduce the annual bonus payment as otherwise formulaically determined based on changed or special circumstances, or other factors that may not have been anticipated when the criteria range for the metrics was established. In setting these 2018 STI Program performance goals, the Compensation Committee considered the uncertainty in the operating environment at the time the goals were set and set the targets at levels that it deemed to be challenging but achievable with strong and consistent performance. The following table summarizes the performance metrics, weightings, criteria ranges, performance-based eligibility ranges, actual performance and eligible payout percentages for the components of the 2018 STI Program:
2018 STI Program Performance Metrics
Performance Metrics Weightings
Criteria Range
Performance Based Eligibility Range (%)
Actual Performance
Eligible Payout Achieved (%)
Financial: Adjusted Operating Income from Continuing Operations
70.0%
$1,500 million to $1,600 million ($1,500 million target)
0%; 100% - 200%
1 
$1,595.7 million
195.7%
Clinical: Frequent Excessive Interdialytic Weight Gain
15.0%
29% - 27% (lower is better) (28% target)
0% - 200%
 
27.84%
116.0%
Strategic Objectives
15.0%
Varies by NEO
0% - 200%
 
Varies by NEO
Varies by NEO

1 For performance below $1,500 million, there is no bonus payout for this metric. For performance between $1,500 million and $1,600 million, performance-based eligibility ranges from 100% to 200%.

Adjusted Operating Income

The adjusted operating income from continuing operations metric had a range corresponding to the latest guidance range as provided to our stockholders at the time the Compensation Committee approved the 2018 STI Program performance conditions. In addition, the Compensation Committee specified that the actual results would be adjusted for certain items which could negatively impact short-term adjusted operating income results but which the Compensation Committee viewed as aligning with long-term value creation for stockholders, as well as adjustments for items that do not reflect the normal operations of the Company. All such adjustments that potentially could have been performed were specified in advance by the
 
Compensation Committee in detail at the time it approved the 2018 STI Program. For example, the significant additional spend in connection with advocacy related to the California ballot initiative targeted against dialysis providers, which would have significantly limited revenue of dialysis clinics operating in the state, negatively impacted 2018 financial results, but the success defeating the initiative as a result of the spend preserved the long-term profitability of the Company's business in California. This was a possibility contemplated at the time the 2018 STI Program performance criteria were set and as a result, the initial criteria included an adjustment for expenses above budgeted amounts related to the California ballot initiative.

40
 
 



To understand the context for the financial metric range for the 2018 STI, we believe it is also important to understand a one-time benefit the Company recognized in 2017 relating to its benefit plans. Specifically, because of a switch from profit sharing to a 401(k) match in 2018 and the accounting rules around when to recognize the expense for each, we did not accrue profit sharing expenses in 2017 and we did not begin to accrue 401(k) employer match expenses until 2018. At the time we set the financial metric range for the 2018 STI, we were expecting to recognize $100 million in 401(k) employer match expenses in 2018. As a result, the $1,550 million midpoint of the Adjusted Operating Income from Continuing Operations financial metric range for the 2018 STI represented a 2% increase from our actual adjusted operating income from continuing operations of $1,6162 million as further adjusted on a pro forma basis for the expected $100 million in 401(k) employer match expenses in 2018 to make these numbers comparable. Furthermore, in consideration of the anticipated wage rate pressure on total labor costs and pressures on commercial mix that we faced in 2018, the Company established the low end of the guidance range of $1,500 million to $1,600 million as the performance level necessary for both threshold and target payout. Below the low end of guidance, the eligible payout for this performance metric was 0%.
2 Please refer to “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 22, 2019 for the reconciliation of adjusted operating income to the most directly comparable GAAP measure.
Frequent Excessive Interdialytic Weight Gain
Our patients have to limit the intake of fluids between dialysis treatments because loss of kidney function means they are not able to eliminate excess fluids through urination. Excess fluid buildup is a common cause of hospitalization of dialysis patients. Our patient education initiatives, among other things, can have an impact on improving this fluid buildup between dialysis sessions. FEIDWG is a measure of the percentage of patients who have weight gain between treatments exceeding a specified percentage of target weight, which in dialysis patients is mostly driven by fluid buildup. The criteria range for FEIDWG was set such that year-over-year improvement would be required to achieve target level payouts.
 
Strategic Objectives
Strategic objectives vary by participant in the 2018 STI Program, with each objective being evaluated qualitatively to result in a single performance outcome for the strategic objectives for each participant measured on a scale of 0% to 200%, with 100% representing target. The Compensation Committee designed the individual strategic objectives to be challenging, but achievable with strong and consistent performance. More than one executive officer may have the same strategic objective given its importance and/or the role played by the individual executive officer. The following summarizes the strategic objectives for the 2018 STI Program by individual:
Kent J. Thiry
Goals focused on driving successful progress on our key strategic imperatives, advancing the Company’s public policy objectives and effectively aligning our teammates and organization around strategic imperatives for both the short and long-term.
Javier J. Rodriguez
Objectives centered on positioning the U.S. kidney care business to deliver against 2018 operating goals, driving progress on the Company’s key long-term strategic imperatives and advancing the Company’s public policy objectives.
Joel Ackerman
Goals focused on driving successful progress on the Company’s key strategic imperatives, successfully managing our finance organization and capital allocation strategy, and positioning our international operations to deliver against 2018 operating goals.
Kathleen A. Waters
Objectives centered around successful management of our legal department and litigation/government investigation priorities, supporting the Company’s key strategic imperatives and supporting our enterprise risk management program.




 
DaVita Inc. Notice of Special Meeting and Proxy Statement
41



Compensation Discussion and Analysis
 

The table below summarizes the performance metrics and their relative weights and the eligible payout achieved, target incentive opportunity, and total eligible and actual STI Program award by NEO. Additional description of each of the metrics is provided above.
 
 
Eligible Payout Achieved
2018 STI Program Performance Metrics
Performance Metrics Weightings
Kent J. Thiry
Javier J. Rodriguez
Joel Ackerman
Kathleen A. Waters
Financial: Adjusted Operating Income from Continuing Operations
70.0%
195.7%
195.7%
195.7%
195.7%
Clinical: Frequent Excessive Interdialytic Weight Gain
15.0%
116.0%
116.0%
116.0%
116.0%
Strategic Objectives
15.0%
100.0%
125.0%
108.3%
119.2%
 
 
 
 
 
 
Total Weighted Eligible Payout Achieved
 
169.4%
173.2%
170.7%
172.3%
Target Incentive Opportunity
 
$1,950,000
$1,125,000
$750,000
$375,000
Total Eligible and Actual STI Program Award
 
$3,303,371
$1,947,978
$1,279,902
$646,045
Ms. Zumwalt's bonus was based on a qualitative evaluation of her performance in 2018, including her successes in advancing the Company's public policy objectives at the Federal and state levels and her contributions to the negotiation of supply and vendor contracts on attractive terms.
Ms. Zumwalt's Maximum Bonus Potential, percentage
 
of Maximum Bonus Potential and Annual Bonus are indicated in the table below:
 
2018 Bonus
 
LeAnne M. Zumwalt
Maximum Bonus Potential
$400,000
Percentage of Maximum Bonus Potential Achieved
70.0%
Annual Bonus
$280,000

Long-Term Incentive Program (LTI Program) for 2018

LTI Program awards are granted pursuant to the 2011 Incentive Plan. Our LTI Program is designed to provide a link to long-term stockholder value through equity awards for executives. From 2012 through 2017, we also offered cash-based performance awards targeting internal operating performance metrics specific to the line of business for which certain executives were responsible. With the completed divestitures of DMG and our Paladina business and the sale and transition of our pharmacy business, we intend to use cash-based performance awards for specific lines of business on a more limited basis. Accordingly, none of our NEOs received a cash-based long-term incentive award in 2018.
Equity Awards
While we emphasize stock-based compensation, we have not designated a target percentage of total compensation as stock-based. We instead maintain discretion to respond to changes in executive and Company performance and related objectives, changes in the different constituents of our business, and changes in remaining relative values that have yet to be vested. We believe that our emphasis on stock-based compensation creates an alignment of interests between our executives and our stockholders. Grants of equity awards also serve as an important tool for
 
attracting and retaining executives. To fully vest in equity awards, executives generally must remain employed for a multi-year vesting period, typically four
years, which further aligns the interests of our executives with the Company's long term success.
Stock-settled Stock Appreciation Rights
SSARs only derive value if the market value of our Common Stock increases from the date of grant. The economic value and tax and accounting treatment of SSARs are comparable to those of stock options, but SSARs are less dilutive to our stockholders because only shares with a total value equal to the grantee’s gain (the difference between the fair market value of the base shares and their base price) are ultimately issued. SSARs are granted with a base price not less than the closing price of our Common Stock on the date of grant and vest based on the passage of time. SSARs granted to our NEOs in 2018 vest 50% each on May 15, 2021 and May 15, 2022.
Restricted Stock Units
Historically, we have not typically awarded RSUs to our NEOs as part of our compensation program because of the challenges of maintaining tax deductibility under the "performance based" exception of Section 162(m) of the Code. However, with the

42
 
 



passage of tax reform at the end of 2017, the "performance based" exception was removed from the Code and any non-grandfathered compensation above $1 million is not tax-deductible with respect to NEOs, whether or not it is performance-based. Therefore, commencing in 2018, we included RSUs as a component of the long-term incentive for NEOs. RSUs typically fully vest with the passage of time over a period of four years (with partial vesting occurring in years 3 and 4), but the Compensation Committee may approve alternative vesting schedules based on performance, timing of vesting of individual outstanding grants and other retention related factors.
Performance Stock Units
As an additional incentive component of our compensation program and to further align pay and performance, we typically award annual grants of PSUs to select executive officers. PSUs are granted under the 2011 Incentive Plan and typically fully vest based on a combination of accomplishment of performance metrics and passage of time over a period of four years. However, the Compensation Committee may approve alternative vesting schedules based on performance, timing of vesting of individual outstanding grants, time of grant during the year and other retention related factors.
 
As described in more detail in the table below, the PSUs granted in 2018 have two metrics: adjusted earnings per share representing 75% of the opportunity and relative TSR representing 25% of the opportunity.
We believe that long-term, capital-efficient growth is aligned with the creation of stockholder value and that adjusted earnings per share as a performance metric focuses executives on maximizing long-term stockholder value and imposes further discipline on the type of development and acquisition-driven growth that we evaluate and in which we invest. As a result, the Compensation Committee selected adjusted earnings per share as the performance metric for 75% of the PSUs granted to NEOs in 2018. In prior years, adjusted earnings per share was measured as of a single period, but beginning in 2018, we split the PSUs dependent on adjusted earnings per share between two performance years to further incentivize year after year improvement in adjusted earnings per share. Relative TSR is measured by comparing the return on an investment in DaVita to an investment in the S&P 500 index. We used a similar metric in the PSU program for 2017, and in 2018 modified it such that if the Company's TSR is negative, the most that can be earned is the target number of PSUs,
The table below summarizes the criteria range and percent range of target PSUs for each of the 2018 PSU performance metrics. We are not able to present performance against the following metrics because the performance periods have not yet ended. Given the market and operating conditions at the time the targets were set, the target payout levels were designed to be achievable with strong management performance, while maximum payout levels were designed to be difficult to achieve.
2018 PSU Performance Metrics
Performance Metrics Weightings
Criteria Range
Percent of Target PSUs 
Vesting
2020 Adjusted Earnings per Share
37.5%
$4.28 - $5.20
50% - 200% 
100% May 15, 2021
2021 Adjusted Earnings per Share
37.5%
$4.50 - $5.82
50% - 200% 
100% May 15, 2022
Relative TSR*
25.0%
See below**
0% - 200% 
50% May 15, 2021, 50% May 15, 2022
*For three-month periods ending March 31, 2021 and March 31, 2022, respectively, as compared to the three-month period ended March 31, 2018.
**PSUs earned under the Relative TSR metric are calculated based on two times the difference between the return on an investment in DaVita stock and an investment in the S&P 500 index (assuming dividend reinvestment). For example, if the return on an investment in DaVita is 50% and the return on an investment in the S&P 500 index is 40%, then 120% (100% + 2*(50% - 40%)) of the target number of PSUs is earned. The maximum that can be earned is 200% of the target number of PSUs, and if the Company TSR is negative, the maximum that can be earned is 100% of the target number of PSUs.
We have used EPS as a criterion for our CEO since 2016 and for all participants in the LTI Program since 2017. TSR has been a component of the LTI Program since 2014, and the structure utilized in 2018 was also utilized in 2017. In addition, the same structure used in 2018 also was used in the 2019 grants.
We believe consistent use of the same performance metrics year-over-year in the LTI Program enhances
 
the long-term focus and incentivizes continuous improvement in Company performance, as each
performance period's results build upon prior periods' performance results.
In setting the Adjusted Earnings per Share target, we applied a 5% to 12% compound annual growth rate to adjusted earnings per share from the base year, which was the most recent completed fiscal year prior to the

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
43



Compensation Discussion and Analysis
 

grant. These adjusted earnings per share were adjusted for non-recurring items and further adjusted to reduce pro forma debt expense for the expected DMG sale closing by applying 50% of the expected proceeds from the sale to reduce after tax interest expense in the base year. This earnings per share compound annual growth rate range of 5% to 12% is what we articulated to our stockholders as our forecasted multi-year earnings per share growth rate range in our then most recent capital markets day in 2017 prior to the development of the Adjusted Earnings per Share target.
Cash-Based Performance Awards

In the past, cash-based long-term performance awards were used to align pay with the performance of significant business units. Because of the completed divestitures of DMG and our Paladina business and the sale and transition of our pharmacy business, the Company expects to grant long-term performance awards primarily in the form of equity. Accordingly, none of the NEOs received long-term cash-based performance awards in 2018.
Of the NEOs, only Mr. Rodriguez and Ms. Waters had a previously granted cash-based performance award eligible to vest in early 2019 based on adjusted operating income achieved for the U.S. dialysis and related lab services operating segment in 2018. However, the Company's actual performance on this metric was below the threshold for minimum payment, and consequently neither Mr. Rodriguez nor Ms. Waters received any payment thereunder.
Determining LTI Program Award Amounts
The Compensation Committee considers the annual LTI Program awards for our NEOs and other executives in advance of the grant date with the input of management and the Compensation Committee’s independent outside compensation consultant, Compensia. Each year, management considers the following in recommending equity awards to the Compensation Committee: (i) recent performance and trajectory of historical performance; (ii) level of responsibilities and expected changes to responsibilities; (iii) market levels of total compensation and long-term incentives for similar positions; (iv) the historical amounts granted and expected vesting levels for PSUs; (v) the in-the-money value of unvested equity currently held by participants; and (vi) the amount of previously granted cash-based long-term incentive awards held by participants and the expected payout.
The Compensation Committee evaluates management's recommendations and also considers
 
the CEO's assessment of the performance of each executive officer, other than himself, the CEO's self-assessment and the market competitiveness of the Company’s executive compensation program as compared to the Company's comparator peer group based on peer group data provided by Compensia, the Compensation Committee’s independent compensation consultant.
After taking into account the factors set forth above, the Compensation Committee approved LTI Program award grants to our NEOs in 2018, with the exception of Mr. Thiry, whose LTI Program award grant was approved by the independent members of the Board, as required by the Compensation Committee’s charter.
The table below shows the aggregate number of shares subject to SSARs, RSUs and target PSUs granted to each of our NEOs in 2018.
 
  2018 Long-term
  Incentive Awards
 
Shares Subject to SSARs (#)
 
Shares Subject to PSUs (#)
 
Shares Subject to RSUs (#)
Kent J. Thiry
 

 
90,090

 
90,090

Javier J. Rodriguez
 
88,213

 
35,285

 
17,643

Joel Ackerman
 
56,306

 
45,124

1 
11,261

Kathleen A. Waters
 
33,784

 
46,662

1 
6,757

LeAnne M. Zumwalt
 
37,538

 

 
7,508

1
Mr. Ackerman's and Ms. Waters' amounts include PSU awards granted during 2018 contingent on the closing of the DMG transaction as follows: Mr. Ackerman — 22,601 and Ms. Waters — 33,148.
The annual SSAR, PSU and RSU awards above vest 50% each on May 15, 2021 and May 15, 2022, except for the PSU awards related to the DMG transaction for Mr. Ackerman and Ms. Waters, which vested 50% on the closing of the DMG transaction and will vest 50% 18 months thereafter, in each case subject to their continued employment through the applicable vesting date. These PSU awards were granted to Mr. Ackerman and Ms. Waters in recognition of the role they played in that transaction.
In designing the 2018 executive compensation program, the Compensation Committee provided all of the CEO’s long-term incentive grants in the form of PSUs and RSUs rather than the prior mix of SSARs and PSUs. This change was made in order to further align the CEO’s compensation mix with market data and to supplement the retentive aspect of the program with RSUs in light of the fact that the CEO’s equity grants had been delivered entirely in the form of performance-based compensation (PSUs and/or SSARs) since 2014.

44
 
 



Eligible Payouts for PSUs Granted in 2015 and 2016
We granted PSUs to executive officers beginning in 2014. The performance metrics associated with the PSUs granted in 2015 and 2016 have been measured through the end of the relevant performance periods, with the exception of (i) the PSUs granted in 2016 for which the performance metric was Adjusted Earnings Per Share with a performance year of 2019, (ii) the PSUs granted in 2016 for which the performance metric was Kidney Care Star Rating with a performance year of 2018 (with data not being available from CMS until late 2019), and (iii) the PSUs granted in 2016 for which the performance metric was Relative TSR measured through March 31, 2020.
The tables below summarize the criteria range and percentage range of target PSUs and detail the relative weightings of each performance metric for the 2015 and 2016 PSUs granted to Messrs. Thiry and Rodriguez, who are the only NEOs as of December 31, 2018 who were granted PSUs in 2015 and 2016. In addition to the performance metrics identified below, when initially granted, the PSUs with performance metrics that can be measured by the third anniversary of the grant date were also subject to time-based vesting: 50% vest on the June 2 occurring three years after the grant date, and 50% vest on the June 2
 
occurring four years after the grant date for PSUs granted in 2015 and 50% vest on the May 15 occurring three years after the grant date, and 50% vest on the May 15 occurring four years after the grant date for PSUs granted in 2016.
The PSUs granted in 2016 to Mr. Thiry included a component for which the performance metric was 2019 DMG adjusted operating income. The PSUs allocated to this metric represented 12.5% of the PSUs granted to Mr. Thiry in 2016. In 2018, the Compensation Committee recommended, and the independent members of the Board approved, the reallocation of the PSUs associated with the DMG performance metric proportionately to the other performance metrics, contingent on the completion of the DMG transaction. This modification was made since the performance metric would not be measurable if the DMG transaction closed prior to the end of the performance period. If the DMG transaction did not close prior to the end of the performance period, the modification and reallocation would not have been effective. The tables below reflect this reallocation since the DMG transaction did close in 2019.
Kent J. Thiry 
 
 
 
Performance Based
Eligibility Range
 
Eligible
    Payout Achieved    
2015 PSU Performance Metrics
Weight
Criteria Range
(%)
(Shares)
Actual
Performance
(%)
(Shares)
Kidney Care Quality Incentive Program (2018 vesting)
5.0%
10% to 40% better than rest of industry
50% - 100%
1,208 - 2,416
Above high end of range
100.0
%
2,416

Kidney Care Quality Incentive Program (2019 vesting)
5.0%
10% to 40% better than rest of industry
50% - 100%
1,208 - 2,416
Below low end of range
0.0
%

Kidney Care Non Acquired Growth
10.0%
3.95% to 4.70%
50% - 150%
2,416 - 7,248
Below low end of range
0.0
%

DMG New Market Success
7.5%
2 to 6 markets that meet threshold
50% - 200%
1,812 - 7,248
Below low end of range
0.0
%

DMG New Market Adjusted Operating Income
7.5%
50% to 200% of internal goal
50% - 200%
1,812 - 7,248
Below low end of range
0.0
%

DaVita Rx Specialty Drugs Contracts
5.0%
50% to 200% of internal goal
50% - 200%
1,208 - 4,832
Below low end of range
0.0
%

Paladina Members
5.0%
180% to 541% growth over 3 years
50% - 200%
1,208 - 4,832
Below low end of range
0.0
%

Village Health Hospital Admission Rate
5.0%
Range tied to internal goal
50% - 200%
1,209 - 4,834
Toward high end of range
182.9
%
4,420

Relative TSR (2018 vesting)
25.0%
40th percentile to 90th percentile
50% - 200%
6,041 - 24,162
Below low end of range
0.0
%

Relative TSR (2019 vesting)
25.0%
40th percentile to 90th percentile
50% - 200%
6,041 - 24,162
Below low end of range
0.0
%

Total Eligible PSUs 
14.1
%
6,836

Total Actual PSUs 
14.1
%
6,836



 
DaVita Inc. Notice of Special Meeting and Proxy Statement
45



Compensation Discussion and Analysis
 

 
 
 
Performance Based
Eligibility Range
 
Eligible
    Payout Achieved    
2016 PSU Performance Metrics
Weight
Criteria Range
(%)
(Shares)
Actual
Performance2
(%)
(Shares)
2019 Adjusted Earnings per Share
28.6%
$4.66 – $6.03 
50% - 200%
10,405 – 41,620  
NA
NA

NA

International Adjusted Operating Income1
14.3%
($10) million - $20 million
50% - 200%
5,203 – 20,810 
($3.8) million
81.0
%
8,428

2017 Kidney Care Star Metric
7.1%
5% to 15% better than rest of industry
50% - 100%
2,583 – 5,166
Below low end of range
0.0
%

2018 Kidney Care Star Metric
7.1%
5% to 15% better than rest of industry

50% - 100%
2,583 – 5,165    
NA
NA

NA

Village Health Hospital Admission Rate
14.3%
Range tied to internal goal
50% - 200%
5,203 - 20,810
Between target and high end of range
150.8
%
15,691

Relative TSR (2019 vesting)
14.3%
25th – 90th percentile
50% - 200%
5,203 – 20,810 
Below low end of range
0.0
%

Relative TSR (2020 vesting)
14.3%
25th – 90th percentile
50% - 200%
5,203 – 20,810
NA
NA

NA

Total Eligible PSUs3
66.3
%
24,119

Total Actual PSUs 3
66.3
%
24,119

1
Excludes non-dialysis operations, long-term incentive compensation expense, impairment charges, and operations in all countries in which the Company did not have operations as of January 1, 2016.
2
"NA" indicates that the performance period was still in progress as of March 31, 2019.
3
Total eligible and actual PSUs were measured based on metrics for which performance periods ended on or before March 31, 2019. If the DMG transaction did not close prior to May 15, 2020, the measurable eligible and actual PSUs would be 21,082, or 66.2% of target.
Javier J. Rodriguez 
 
 
 
Performance Based
Eligibility Range
 
Eligible
    Payout Achieved    
2015 PSU Performance Metrics
Weight
Criteria Range
(%)
(Shares)
Actual Performance
(%)
(Shares)
Kidney Care Quality Incentive Program (2018 vesting)
10.0%
10% to 40% better than rest of industry
50% - 100%
628 - 1,256
Above high end of range
100.0
%
1,256

Kidney Care Quality Incentive Program (2019 vesting)
10.0%
10% to 40% better than rest of industry
50% - 100%
627 - 1,256
Below low end of range
0.0
%

Kidney Care Non Acquired Growth
20.0%
3.95% to 4.70%
50% - 150%
1,257 - 3,770
Below low end of range
0.0
%

Village Health Hospital Admission Rate
10.0%
Range tied to internal goal
50% - 200%
628 - 2,512
Toward high end of range
182.9
%
2,299

Relative TSR (2018 vesting)
25.0%
40th percentile to 90th percentile
50% - 200%
1,571 - 6282
Below low end of range
0.0
%

Relative TSR (2019 vesting)
25.0%
40th percentile to 90th percentile
50% - 200%
1,571 - 6282
Below low end of range
0.0
%

Total Eligible PSUs 
28.3
%
3,555

Total Actual PSUs 
28.3
%
3,555

 
 
 
Performance Based
Eligibility Range
 
Eligible
    Payout Achieved    
2016 PSU Performance Metrics
Weight
Criteria Range
(%)
(Shares)
Actual
Performance1
(%)
(Shares)
2017 Kidney Care Star Metric
12.50%
5% to 15% better than rest of industry
50% - 100%
955 – 1,910
Below low end of range
0.0
%

2018 Kidney Care Star Metric
12.50%
5% to 15% better than rest of industry

50% - 100%
955 – 1,910  
NA
NA

NA

Village Health Hospital Admission Rate
25.0%
Range tied to internal goal
50% - 200%
1,910 - 7,640
Between target and high end of range
150.8
%
5,761

Relative TSR (2019 vesting)
25.0%
25th – 90th percentile
50% - 200%
1,910 – 7,640
Below low end of range
0.0
%

Relative TSR (2020 vesting)
25.0%
425h – 90th percentile
50% - 200%
1,910 – 7,640
NA
NA

NA

Total Eligible PSUs2
60.3
%
5,761

Total Actual PSUs 2
60.3
%
5,761

1
"NA" indicates that the performance period was still in progress as of March 31, 2019.
2
Total eligible and actual PSUs were measured based on metrics for which performance periods ended on or before March 31, 2019.

46
 
 



Highlights of 2019 Executive Compensation Program
The Compensation Committee regularly considers stockholder feedback and reviews our executive compensation program to assess whether to update the program design, with input from management and Compensia, to further support our business objectives and further align our executive compensation program with the interests of our stockholders. After thoughtful review and deliberation, and having considered the 2018 level of say-on-pay support of approximately 95% and the program designs of our peer group, the Compensation Committee elected to retain the same general structure for the short- and long-term incentive programs in 2019 as in 2018, but did make some refinements to each.
The following summarizes the general structure of our 2019 annual executive compensation program:
Participants: All executive officers other than Mr. Thiry (who stepped down as CEO and assumed the role of executive chairman of the Board on June 1, 2019) and Mr. Hilger (who is expected to retire from the Company in 2020) participate in the Company’s standard short- and long-term incentive programs. Mr. Thiry's participation in the 2019 short- and long-term incentive programs is governed by the terms of an Executive Chairman Agreement, as described further below in the "—Management Transition" section.
The criteria range for the financial metric of the 2019 short-term incentive program ("2019 STI Program") will result in 50% payout at the low end of our most recent guidance range to stockholders at the time that the metric was approved by the Compensation Committee (vs. 100% payout at the low end of guidance in the 2018 STI Program) and 200% at the high end of guidance.
The 2019 annual long-term incentive awards for our NEOs were comprised of 50% PSUs and 50% RSUs.
Target payouts (100%) under the 2019 STI Program and 2019 long-term incentive program (the "2019 LTI Program") are designed to be achievable only with strong and consistent performance by our executives under anticipated market conditions.
In particular:
STI Program (annual incentive)—The table below summarizes the general structure of the 2019 STI Program:
2019 STI Program Performance Metrics
Performance Metrics Weightings
Performance Based Eligibility Range (%)1
Financial: Adjusted Operating Income from Continuing Operations
70.0%
50% - 200%
Clinical: Home Modalities Outperformance vs. Non-Acute NAG
15.0%
50% - 200%
Strategic Objectives
15.0%
0% - 200%
1
Target tied to percentage of salary, with the opportunity to earn up to 200% of target, with the potential for a modifier identified in advance (which in the 2018 and 2019 programs is tied to a specific objective involving the legislation related to full capitation or regulated demonstration for ESRD).
As indicated above, the criteria range for the financial metric was our most recent guidance range to our stockholders for 2019 at the time that the metric was approved by the Compensation Committee. Our clinical metrics are generally tied to important clinical initiatives, and for 2019, we selected a clinical metric consistent with our long-term strategy to further enable the appropriate modality for our patients, as determined by the patient's physician. Our strategic objectives metric is customized for each executive officer and aligned with short- and long-term strategic and operating initiatives.
LTI Program—The table below summarizes the structure of the 2019 LTI Program:
2019 LTI Program Awards
Weighting of Grants
Vesting
Restricted Stock Units (RSUs)
50.0%
50% May 15, 2022, 50% May 15, 2023
Performance Stock Units (PSUs)
50.0%
50% May 15, 2022, 50% May 15, 2023


 
DaVita Inc. Notice of Special Meeting and Proxy Statement
47



Compensation Discussion and Analysis
 

PSUs—The table below summarizes the structure of the PSUs granted in May 2019:
2019 PSU Performance Metrics
Performance Metrics Weightings
Percent of Target PSUs 
Vesting
2021 Adjusted Earnings per Share
37.5%
50% - 200% 
100% May 15, 2022
2022 Adjusted Earnings per Share
37.5%
50% - 200% 
100% May 15, 2023
Relative TSR*
25.0%
0% - 200% 
50% May 15, 2022, 50% May 15, 2023
*
For the three-month periods ending March 31, 2022 and March 31, 2023, respectively, as compared to the three-month period ended March 31, 2019. PSUs earned under the Relative TSR metric are calculated based on two times the difference between the return on an investment in DaVita stock and an investment in the S&P 500 index (assuming dividend reinvestment). For example, if the return on an investment in DaVita is 50% and the return on an investment in the S&P 500 index is 40%, then 120% (100% + 2*(50% - 40%)) of the target number of PSUs is earned. The maximum that can be earned is 200% of the target number of PSUs, and if the Company TSR is negative, the maximum that can be earned is 100% of the target number of PSUs.
Consistent with its approach for 2018 compensation decisions, in determining 2019 compensation levels, the Compensation Committee considered historical compensation granted to the NEOs, realized compensation in the context of actual performance against previously set targets, relative performance and compensation as compared to other executives in the Company, and the pay practices of our peer group. In addition, during 2019, the Compensation Committee considered the unique circumstances of the Company in light of the June 2019 management transition, particularly the stepping down of Mr. Thiry as CEO after nearly 20 years of service in that role. In order to incentivize the successful execution of the new management team’s goals, as led by Mr. Rodriguez, the Compensation Committee approved SSAR grants in June 2019 subject to multi-year vesting periods to certain key members of management other than Mr. Rodriguez, including Mr. Ackerman and Mses. Waters and Zumwalt. In addition, in connection with his promotion to CEO, the Compensation Committee approved a promotional PSU grant to Mr. Rodriguez, with performance goals related to the management transition and the Company's long-term strategy. 
 The following table shows the 2019 base salary, annual performance-based cash award at target, and long-term incentive awards determined by the Compensation Committee for each NEO other than Mr. Thiry. Mr. Thiry's participation in the 2019 STI and LTI programs is governed by the terms of an Executive Chairman Agreement, as described further below in the "-Management Transition" section.

  Name  
 
Base Salary1 
 
  Annual Cash Award2
 
Annual LTI Awards3
 
LTI Awards Related to Management Transition4
 
Total Target Direct Compensation
Kent J. Thiry
 
$
1,000,000

 
$
1,393,014

 
$
3,485,347

 
$

 
$
5,878,361

Javier J. Rodriguez5
 
$
1,200,000

 
$
1,620,575

 
$
6,970,745

 
$
1,777,788

 
$
11,569,108

Joel Ackerman
 
$
700,000

 
$
750,000

 
$
2,987,447

 
$
1,565,971

 
$
6,003,418

Kathleen A. Waters
 
$
580,000

 
$
500,000

 
$
1,493,750

 
$
1,138,888

 
$
3,712,638

LeAnne M. Zumwalt
 
$
440,000

 
$
268,000

 
$
995,799

 
$
560,568

 
$
2,264,367


1
The amounts reported here reflect the annualized base salary amounts as of the date of this Proxy Statement.
2
The amounts reported here reflect the target award opportunities granted under the 2019 STI Program for each NEO.
3
Consists of the grant date fair value of 2019 equity awards granted to the NEOs in connection with the Company’s annual LTI program (RSUs and PSUs).
4
Consists of the grant date fair value of incentive SSAR awards granted to Mr. Ackerman and Mses. Waters and Zumwalt and the promotional PSU equity incentive award granted to Mr. Rodriguez, in each case, in connection with the June 2019 management transition.
5
Mr. Rodriguez's Total Target Direct Compensation total excludes the Premium-Priced SSAR Award as the grant date fair value for such award is not fixed and ascertainable until stockholder approval of the 2011 Incentive Plan proposal is obtained. Please see "Proposal to Amend the DaVita HealthCare Partners Inc. 2011 Incentive Award Plan Terms of the Premium-Priced SSAR Award" for a summary of the terms of this award.
Management Transition
In connection with the 2019 management transition, the Company and Mr. Rodriguez entered into a new employment agreement, dated as of April 29, 2019
 
(the “Employment Agreement”) reflecting his new position, effective as of June 1, 2019, and which superseded his existing employment agreement with the Company. The Employment Agreement has an

48
 
 



initial three-year term and, beginning on the third anniversary of its effective date, is subject to automatic renewal for additional one-year periods, unless terminated earlier by the Company or Mr. Rodriguez in accordance with the terms of the Employment Agreement. The payments and benefits to which Mr. Rodriguez is entitled under the Employment Agreement include: (i) an annual base salary of $1,200,000; (ii) participation in the Company’s annual incentive plan, with a target incentive bonus opportunity equal to 150% of base salary; (iii) participation in the Company’s employee benefit plans that are generally available to Company executives; (iv) participation in any long-term cash or equity incentive plans in which other Company senior executives generally participate; and (v) a one-time, promotional equity incentive award with a target grant date fair value of $2,000,000, which will vest over three years (subject to satisfaction of performance goals to be determined), in addition to the grant that was made to Mr. Rodriguez under the Company's 2019 LTI Program.
Pursuant to the Employment Agreement, if the Company terminates Mr. Rodriguez’s employment for reasons other than death, disability or cause (or if the Employment Agreement is not renewed upon the completion of the term), or if Mr. Rodriguez voluntarily terminates his employment for good reason, Mr. Rodriguez will in each case be entitled to the following severance benefits (in addition to certain accrued but unpaid amounts): (i) a prorated annual incentive bonus for the fiscal year in which the termination of employment occurs; (ii) an amount equal to the product of (a) two (or, if the termination of employment occurs within two years following a change in control, three) (such number, the “Severance Multiple”), multiplied by (b) the sum of (I) Mr. Rodriguez’s then-current annual base salary and (II) the average of his annual incentive bonus earned for the last two full fiscal years prior to the year of termination; (iii) the use of an office and an administrative assistant for a number of years equal to the applicable Severance Multiple (or until Mr. Rodriguez obtains other full-time employment, if earlier); and (iv) a payment equal to the employer-paid portion of the monthly health insurance premium for Mr. Rodriguez and his dependents as of the date of termination for a number of years equal to the Severance Multiple (or until comparable coverage is available from another employer, if earlier). Such severance benefits are subject to Mr. Rodriguez’s execution and non-revocation of a release of claims. The Employment Agreement also contains non-competition and non-solicitation provisions, each of which continue in effect for two years following any termination of Mr. Rodriguez’s employment, as well as
 
perpetual non-disparagement, confidentiality and work product covenants.
The Company and Mr. Thiry entered into an Executive Chairman Agreement as of April 29, 2019 (the “Executive Chairman Agreement”). The Executive Chairman Agreement provided that, as of June 1, 2019, Mr. Thiry assumed the position of Executive Chairman and ceased his service as CEO. Under the Executive Chairman Agreement, Mr. Thiry’s employment as Executive Chairman will continue until June 1, 2020 (the “Expiration Date,” and such period, the “Employment Period”). Effective as of the Expiration Date, Mr. Thiry’s employment with the Company and its affiliates will terminate, unless terminated earlier by the Company or Mr. Thiry in accordance with the terms of the Executive Chairman Agreement.
The Executive Chairman Agreement provides that, during the Employment Period, Mr. Thiry will receive an annual base salary of $1,000,000 and will be eligible to receive certain annual bonuses for 2019 and 2020, with target bonus opportunities determined as follows:
For 2019, Mr. Thiry will be eligible for an annual bonus with a target opportunity determined as follows: (a) for the period from January 1, 2019 through May 31, 2019, Mr. Thiry’s target annual bonus opportunity was equal to 150% of his base salary earned during such period (which is consistent with his target annual incentive opportunity as CEO) and (b) for the period from June 1, 2019 through December 31, 2019, Mr. Thiry’s target annual bonus opportunity will be equal to 100% of his base salary earned during such period.
For 2020, Mr. Thiry will be eligible for an annual bonus with a target opportunity equal to 100% of his annual base salary, which amount will be prorated based on the portion of 2020 during which he is employed by the Company.
Additionally the Company granted Mr. Thiry equity awards in May 2019 with a target grant date fair value of $3,500,000, which were granted 50% in the form of RSUs that vest upon the Expiration Date (the “2019 RSUs”) and 50% in the form of PSUs that vest on terms substantially consistent with those applicable to similar awards granted to other senior executives of the Company in May 2019 (the “2019 PSUs”), subject in each case to Mr. Thiry’s continued employment through the Expiration Date. Notwithstanding the foregoing, if Mr. Thiry’s employment with the Company

 
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49



Compensation Discussion and Analysis
 

is terminated involuntarily without cause or due to his death, disability or resignation for good reason prior to the Expiration Date, the 2019 RSUs will vest in full, and the 2019 PSUs will remain eligible to vest as if Mr. Thiry had remained employed through the applicable vesting date (subject in each case to the execution and non-revocation of a release of claims by Mr. Thiry or, if applicable, his estate). Mr. Thiry will not receive an equity grant with respect to the 2020 calendar year. During the Employment Period, Mr. Thiry will be entitled to continued participation in the Company’s employee benefit plans and to receive certain expense reimbursements.
The Executive Chairman Agreement provides that Mr. Thiry’s employment as Executive Chairman may be terminated prior to the Expiration Date due to his death or disability, by the Company with or without cause, or by Mr. Thiry’s resignation with good reason. Any such termination generally will be governed by the applicable provisions of Mr. Thiry's existing employment agreement, including provisions under his existing employment agreement entitling him to certain severance or termination-related payments and benefits, as discussed in the "—Potential Payments Upon Termination or Change of Control" section. Upon Mr. Thiry’s termination of employment, the Executive Chairman Agreement provides that he will receive severance benefits consistent with an involuntary termination without cause under his existing employment agreement except that, in the case of resignation without good reason prior to the Expiration Date, the 2019 RSUs and 2019 PSUs will be forfeited and Mr. Thiry will not be entitled to any bonus for the period following the commencement of his service as Executive Chairman. Any severance or termination-related payments to which Mr. Thiry may be entitled under the Executive Chairman Agreement (through its incorporation of the termination provisions in his existing employment agreement) are subject to his execution and non-revocation of a release of claims.
In addition, the Executive Chairman Agreement incorporates by reference certain continuing restrictive covenant obligations under his existing employment agreement, including non-competition, non-solicitation and confidentiality obligations. The Executive Chairman Agreement also requires both Mr. Thiry and the Company to abide by a perpetual non-disparagement obligation.
Personal Benefits and Perquisites
As described above, our compensation program for NEOs is designed to emphasize compensation based on performance and compensation which serves to further align our NEOs’ interests with those of our stockholders. As a result, the Compensation
 
Committee has determined that the Company should provide a limited number of perquisites to NEOs. We believe that the limited perquisites and personal benefits that we provide support important attraction and retention objectives. We also consider the extent to which the perquisite or personal benefit provided serves to enhance the performance of our NEOs in light of the demands on these individuals’ time. The perquisites and personal benefits available to our NEOs are reviewed annually by the Compensation Committee.
The Compensation Committee has authorized limited personal use of fractionally-owned or chartered corporate aircraft by some of our NEOs. The Compensation Committee believes that access to an aircraft for personal travel enables our NEOs to maximize their work hours, particularly in light of their demanding business travel schedules. One of the Compensation Committee’s objectives is to ensure that our NEOs are afforded adequate flexibility to allow for sufficient personal time in light of the significant demands of the Company. The Compensation Committee and our CEO use their discretion when determining the number of allocated hours, which displace other forms of compensation that otherwise would have been awarded to the NEO.
Our CEO is authorized by the Compensation Committee to use a fractionally owned or chartered corporate aircraft for business purposes and for a fixed number of hours per year for personal use instead of additional forms of compensation that would have otherwise been paid. Other executives of the Company are authorized on a limited basis to use a fractionally owned or chartered corporate aircraft for a fixed number of hours for business purposes and to a much lesser extent for a fixed number of hours per year for personal use. As part of our CEO’s aggregate compensation package, the Compensation Committee approves a fixed number of hours for personal use each year and unused hours from the prior year are available for use the following year. When determining the number of hours of personal use of aircraft to award, the Compensation Committee takes into consideration our CEO’s overall compensation package. While our CEO has historically not exceeded the authorized number of hours for personal use, if he were to exceed the fixed number of hours for personal use that is unrelated to business in a given year, the excess hours of personal use would offset the number of hours approved by the Compensation Committee the following year for personal use, or our CEO would be required to compensate us directly. The Compensation Committee provides oversight of corporate aircraft use including approving annual allocations to executives and reviewing all business and personal use by each executive.

50
 
 



Deferred Compensation Program
Our deferred compensation program permits certain employees, including our NEOs, to defer compensation at the election of the participant. We do not utilize deferred compensation as a significant component of compensation, and there are no Company contributions thereto or above-market returns available thereunder.
Severance and Change of Control Arrangements
We have entered into employment or severance arrangements with each of our NEOs other than Ms. Zumwalt. Any severance benefits paid to Ms. Zumwalt would be paid under the terms of the Company's severance policy applicable to her. These arrangements, among other things, provide for severance benefits in the event of a termination of employment in certain circumstances, including, with respect to certain NEOs, the departure of the NEO following a change of control of our Company. Each arrangement is individually negotiated and the terms vary. When entering into employment or severance arrangements with our NEOs, we attempt to provide severance and change of control benefits which strike a balance between providing sufficient protections for the NEO while still providing post-termination compensation that we consider reasonable and in the interests of the Company and our stockholders.
The terms of individual agreements vary, but under our current stock-based award agreements, accelerated vesting of stock-based awards is generally triggered when a change of control event occurs and either the acquiring entity fails to assume, convert or replace the stock-based award or if the executive resigns for “good reason” or is terminated by the Company without “cause” as provided in his or her applicable employment agreement, all within a certain period of time after the effective date of the change of control event. The additional acceleration provisions in our stock-based award agreements further serve to secure the continued employment and commitment of our NEOs prior to or following a change of control. See subsection titled “Executive Compensation—Potential Payments Upon Termination or Change of Control” for a description of the severance and change in control arrangements for our NEOs, and for more information regarding accelerated vesting under our stock-based award agreements.
 

Mr. Thiry's employment agreement previously contained a tax gross-up provision for tax obligations possibly imposed by Section 280G or 4999 of the Code when a change of control event occurs. Effective August 20, 2018, his agreement was amended to remove such provision.
As described above in the "—Management Transition" section, in 2019, the Company entered into a new employment agreement with Mr. Rodriguez and an Executive Chairman Agreement with Mr. Thiry in connection with the announced 2019 management transition.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
51



Compensation Discussion and Analysis
 

 
Process for Determining NEO Compensation
Role of Independent Compensation Committee
Our executive compensation and benefits programs are designed and administered under the direction and control of the Compensation Committee. Our Compensation Committee, composed solely of independent directors, reviews and approves our overall executive compensation program, strategy and policies and sets the compensation of our executive officers.
When recruiting new executives, the Compensation Committee and our CEO evaluate the comparative compensation of executives within the Company with similar levels of responsibility, the prior experience of the executive, market data and expected contributions to Company performance. Thereafter, each executive officer’s compensation is reviewed annually by the Compensation Committee and CEO, and considered for adjustment based on individual performance and other relevant factors.
When evaluating performance, we base compensation decisions on an assessment of Company and individual performance over the year, taking individual accomplishments into consideration in light of the totality of circumstances together with individual potential to contribute to the Company’s future growth. We believe that all of our NEOs have the ability to influence overall Company policies and performance and, accordingly, should be accountable for Company-wide performance as well as the areas over which they have direct influence. The differences in total annual compensation levels among the NEOs are based on their individual roles and responsibilities within the Company and their relative individual performance. The Compensation Committee uses its judgment in awarding compensation to our NEOs in accordance with the overall objectives of the Company’s compensation program.
The Compensation Committee takes into consideration a number of factors when determining the elements and amounts of compensation awarded to our NEOs, including individual performance and contributions, overall financial and non-financial performance of the Company for the year, individual skill sets and experience relative to industry peers, readiness for promotion, past and expected future performance, the importance and difficulty of achieving
 
future Company and individual objectives, the value of each executive’s outstanding equity and long-term cash-based awards, aggregate historical compensation, levels of responsibility and performance relative to other executives within the Company, importance to the Company and difficulty of replacement. The Compensation Committee also gives significant weight to our clinical performance and quality of patient care. Accordingly, Company-wide patient clinical outcomes and improvements in quality of patient care, and each NEO’s contributions in those areas, can have a significant impact on NEO compensation.
The Company-wide factors taken into consideration by the Compensation Committee to assess the NEO’s related contributions include, but are not limited to:

overall revenue growth, market share increases, and improvements in controlling treatment costs;
capital efficiency of growth and long-term impact of capital allocation decisions;
legal and regulatory compliance, including healthcare regulatory compliance;
improved positioning of the Company for continued growth and appropriate diversification;
improved organizational capabilities;
patient growth and geographic expansion;
relationships with private payers;
improved clinical outcomes and other measures of quality of care;
appropriate management and mitigation of enterprise risk;
relationships with physicians involved in our patient care;
selection and implementation of improved financial, operating and clinical information systems;
management performance in attracting and retaining high-performing employees throughout our organization and succession planning;
implementation of successful public policy efforts;
good corporate citizenship;
leadership and teammate engagement; and
advancement of strategic business initiatives supporting our mission to be the provider, partner and employer of choice.

52
 
 



There is no formal weighting of the individual elements considered and no particular elements are required to be considered with respect to a given individual or in any particular year.
When determining annual compensation for our NEOs (other than for our CEO), the Compensation Committee works closely with our CEO to review each individual’s performance for the year and determine such NEO’s compensation. Shortly following the end of each year, our CEO provides his assessment of each NEO’s performance during the year. The Compensation Committee also considers performance discussions that have taken place at the Board and Compensation Committee level regarding the NEOs throughout the year, as well as input from the Company's Chief Compliance Officer. Our CEO makes recommendations to the Compensation Committee regarding the compensation elements for each NEO. The Compensation Committee considers the recommendations made by the CEO regarding the other NEOs but can deviate from those recommendations.
The Compensation Committee evaluates our CEO’s performance at the same time it sets the compensation of the other NEOs. When evaluating the performance of our CEO and making decisions about his compensation, the Compensation Committee also considers input from the Company's Chief Compliance Officer as well as a self-assessment prepared by our CEO. As part of this self-assessment, our CEO reviews with the Compensation Committee the overall annual management objectives of the Company and his participation in the attainment, or shortfall, with respect to such objectives. Approximately every other year, the Compensation Committee engages an outside independent consultant to conduct an in-depth analysis of our CEO’s performance as a manager during the year. The most recent assessment of this sort took place in early 2018. This evaluation involves a rigorous assessment of our CEO’s performance by members of the senior management team. This assessment is reviewed by the Board and the Compensation Committee, and is one of the many factors considered when making compensation decisions. As further described below, the Compensation Committee’s independent compensation consultant provides the Compensation Committee with an analysis of comparative market data on the cash-based, stock-based and total compensation for senior executives, including the CEO, at a group of comparable companies within our industry. The Compensation Committee recommends a compensation package for our CEO to the independent members of the Board for approval, but
 
the independent members of the Board can deviate from those recommendations.
Role of Independent Compensation Consultant
The Compensation Committee has selected and directly retains the services of Compensia, a national compensation consulting firm. The Compensation Committee has the sole authority to retain or replace Compensia in its discretion. Compensia does not provide consulting services to the Company and may not provide such services without prior approval of the Compensation Committee chair. Accordingly, Compensia only provides compensation consulting services to the Compensation Committee, and works with the Company’s management only on matters for which the Compensation Committee provides direction and is responsible. The Compensation Committee has assessed the independence of Compensia pursuant to the rules of the SEC and NYSE, and concluded that Compensia’s work for the Compensation Committee does not raise any conflicts of interest. The Compensation Committee periodically seeks input from Compensia on a range of external market factors, including evolving compensation trends, appropriate peer companies and market survey data. Compensia also provides general observations on the Company’s compensation program, but it does not determine or recommend the amount or form of compensation for the NEOs.
Market Competitiveness
We evaluate the overall competitiveness of our executives’ total direct compensation each year in order to assist in executive retention. For 2018, the Compensation Committee retained Compensia to perform a comprehensive market analysis of our executive compensation programs and pay levels and based upon the recommendation of Compensia made no changes to the comparator peer group, which was used to evaluate 2018 and 2019 compensation decisions.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
53



Compensation Discussion and Analysis
 

Compensia provided the Compensation Committee with an analysis of comparative market data on the cash-based, stock-based and total compensation for senior executives at the companies within our comparator peer group. The Compensation Committee reviewed the compensation practices of our comparator peer group for purposes of evaluating the competitive environment and understanding the general compensation practices of our peers. Our 2018 comparator peer group consisted of the following companies, which are all in the healthcare services, diagnostics, managed care and solutions markets:
  Company1
 
1-Year
TSR2
 
3-Year
Compound
Annual
TSR2
Market
Capitalization
(in millions)3
 
Net Income
for Last 4
Quarters
(in millions)3
Revenue for
Last 4
Quarters
(in millions) 3
Abbott Laboratories
40.0
%
25.0
%

$122,209


$926


$29,575

Aetna
29.0
 %
24.1
 %

$66,457


$3,503


$60,421

Anthem
46.1
 %
27.1
 %

$70,639


$4,343


$90,588

Baxter International
24.1
 %
34.3
 %

$40,417


$912


$11,000

Centene Corp.
49.6
 %
38.7
 %

$29,462


$1,075


$52,079

Community Health Systems, Inc.
(54.9
)%
(53.5
)%

$371


($2,259
)

$13,975

Encompass Health
71.0
 %
29.3
 %

$7,724


$302


$4,107

Envision Healthcare
1.7
 %
(16.2
)%

$5,532


($1,763
)

$8,144

HCA Healthcare, Inc.
76.5
 %
22
 %

$46,838


$2,864


$45,210

Laboratory Corporation of America Holdings
15.0
 %
17.0
 %

$17,428


$1,294


$11,166

LifePoint Health
11.2
 %
(3.2
)%

$2,494


$44


$6,239

MEDNAX
8.2
 %
(15.3
)%

$4,366


$345


$3,598

Molina Healthcare, Inc.
116.3
 %
29.3
 %

$9,004


($50
)

$19,509

Quest Diagnostics Incorporated
17.4
 %
23.0
 %

$14,513


$811


$7,670

Tenet Healthcare, Inc.
73.2
 %
(8.3
)%

$2,925


($471
)

$18,769

Thermo Fisher Scientific
29.4
 %
26.4
 %

$96,662


$2,393


$23,094

Universal Health Services, Inc.
15.6
 %
1.1
 %

$11,761


$811


$10,552

WellCare Health Plans
86.6
 %
54.9
 %

$13,819


$486


$18,033

Summary Statistics:
 


 
 
  75th Percentile
60.3
 %
28.2
 %

$43,627


$1,185


$26,334

  50th Percentile
29
 %
23
 %

$13,819


$811


$13,975

  25th Percentile
13.1
 %
(1
)%

$4,949


$122


$7,907

DaVita
20.6
 %
(0.3
)%

$12,031


$535


$11,282

DaVita Percentage Rank
38
 %
27
 %
42
%
42
%
41
%
1
The Company’s peer group was compiled by Compensia and approved by the Compensation Committee.
2
Data as of September 28, 2018.
3
Financial data generally publicly available as of October 12, 2018.

Our 2018 comparator peer group includes a diverse representation of various companies in the healthcare services, diagnostics, managed care, and solutions markets because we compete in these broad industry groups for executive talent. The Compensation Committee, in conjunction with Compensia, reviews the composition of this group annually and makes adjustments to the composition of the group as it deems appropriate in order to provide a fairly consistent measure for comparing executive compensation. We believe that our comparator peer companies are comparable to us in their size, as measured by market capitalization, net income and revenues. We believe compensation paid by this comparator peer group is representative of the
 
compensation required to attract, retain and motivate our executive talent.
The Compensation Committee considered the 2018 comparator peer group together with market data and analysis from Compensia and other factors, in determining 2018 base salary amounts and long-term incentive program awards granted in 2018. The 2018 comparator peer group together with market data and analysis from Compensia and other factors were considered by the Compensation Committee in determining 2019 base salary amounts, 2018 performance bonuses, and 2019 STI and LTI program awards granted in 2019.

54
 
 



The Compensation Committee considered Compensia’s analysis of the compensation of executives serving in similar positions at comparable companies to obtain a general understanding of current compensation practices in our industry. The analysis provided by Compensia was used to provide context for the compensation decisions made by the Compensation Committee, but the Compensation Committee’s decisions were not directly related to or otherwise based upon the comparative data. Instead, the Compensation Committee used this comparative data as one of many factors considered to set the compensation for our NEOs. The Compensation Committee also used the analysis as a tool to assess how well the Company is implementing its core compensation objective of awarding compensation weighted heavily in favor of variable compensation tied to performance.
 
In approving executive compensation, the Compensation Committee considered the Company’s market capitalization, which was at the 42nd percentile of our comparator peer group, and the Company’s size, in terms of net income and revenue (on a continuing operations basis as described in footnote four of the above table), which was at the 42nd and 41st percentiles, respectively, of our comparator peer group at the time of this analysis. The Compensation Committee also considered each NEO’s role and responsibilities within the Company, individual performance, Company performance and internal pay equity in addition to the results of the competitive pay analysis.
 
Compensation Policies and Practices
We are committed to strong governance standards with respect to our compensation program, policies and practices. We believe that the following aspects of our compensation program are indicative of this commitment.
 
Equity Grant Policy
For 2018, we standardized our timetable for granting equity awards. Specifically, annual equity awards were granted to our executives on May 15. Interim awards to our executives may be made during the year to address special circumstances, such as retention concerns, promotions, special performance recognition awards and new hire awards. Our annual equity awards are generally awarded following the completion of performance reviews and are considered in connection with the Compensation Committee’s decision and review process regarding other forms of direct compensation. The timing of the interim grants is contingent upon individual circumstances. Under the terms of the 2011 Incentive Plan, stock option awards or stock appreciation rights awards are granted with an exercise or base price not less than the closing price of our Common Stock on the date of grant. Furthermore, the 2011 Incentive Plan prohibits repricing or replacing underwater stock options or stock appreciation rights without prior stockholder approval.
Management Share Ownership Policy
Prior to 2019, our share ownership policy applied to certain members of our management team at the executive level. Effective April 24, 2019, we adjusted our share ownership policy to, among other things, apply to all executive officers other than Mr. Hilger (in
 
light of his anticipated retirement) and increase the applicable ownership thresholds for certain executives, including the CEO position. The management share ownership policy is similar to our share ownership policy that applies to all non-employee members of the Board. The purpose of the policy is to ensure that executive officers accumulate a meaningful ownership stake in the Company over time by retaining a specified financial interest in our Common Stock. Both shares owned directly and in-the-money value of shares underlying vested but unexercised equity are included in the determination of whether the share ownership guidelines are met. The total net realizable share value retained (the "Ownership Threshold") must have a market value (as defined in the policy) of not less than the lower of 25% of the total pretax equity award value in excess of $100,000 realized by the executive from the time such executive becomes subject to the policy to date; or a specific multiple of the executive’s base salary. The salary multiple requirement is 6x for the CEO and 3x base salary for other executive officers. Prior to 2019, Mr. Thiry's salary multiple requirement was set at 5x base salary. Executive officers subject to the policy must retain subsequently acquired shares until their applicable threshold is met, subject to certain limited exceptions. As of December 31, 2018, all of our executive officers who were subject to the policy were in compliance with our then effective share ownership policy.

 
DaVita Inc. Notice of Special Meeting and Proxy Statement
55



Compensation Discussion and Analysis
 

Policy Regarding Clawback of Bonuses and Incentive Compensation
In 2010, the Board adopted a clawback policy that permits the Board to recover annual bonuses and long-term incentive and equity-based compensation from executive officers and non-employee members of the Board whose fraud or intentional misconduct was a significant contributing factor to the Company having to restate all or a portion of its financial statements. In December 2014, the policy was further amended to add significant misconduct as another possible clawback triggering event, in accordance with the executive financial compensation recoupment requirements under our Corporate Integrity Agreement.
This provision applies to all senior vice presidents and above of the Company’s domestic dialysis business, in addition to the executive officers and non-employee members of the Board. The clawback policy allows for the recovery of any bonus or incentive compensation paid to those executive officers or directors, the cancellation of restricted or deferred stock awards and outstanding stock awards granted to those executive


 
officers or directors, and the reimbursement of any gains realized that are attributable to such awards to the fullest extent permitted by law. The policy allows for the foregoing actions to the extent that the a