We are seeking your approval, on a non-binding advisory basis, of the compensation of our named executive officers as described in the Compensation Discussion and Analysis section beginning on page 21. In deciding how you vote on this proposal, we encourage you to read the Compensation Discussion and Analysis for a full description of our executive compensation philosophy and programs, the decisions our Compensation Committee has made under these programs, and the factors it considers in making these decisions. As highlighted above, we believe that we have designed compensation programs that pay for performance and

align compensation with the long-term interests of our shareholders.

Accordingly, the Board recommends that shareholders vote FOR the following resolution:

“RESOLVED, that the shareholders of GATX Corporation (the “Company”) approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, and the Executive Compensation Tables, together with the narrative discussion related thereto.”

 

The Board of Directors recommends that you vote FOR adoption of the advisory resolution to approve the compensation of our named executive officers as disclosed in this Proxy Statement.

The Compensation Committee expects our executive team to create long-term shareholder value by growing capital employed while also earning an attractive return on that capital. Because GATX’s markets are cyclical in nature, our management team must strategically balance the emphasis we place on our twin objectives of growth and return at all points in the business cycle. This may involve rewarding

current financial returns over growth in capital

employed during strong markets, and conversely, rewarding growth in capital employed over current financial returns in weak markets.

The Compensation Committee believes that a substantial majority of management’s compensation should be performance-based and closely linked to our financial performance.

 

GATX delivered record financial performance in 2015:

 

•

Record net income of $205.3 million

 

•

Record EPS of $4.69 per diluted share

 

•

Return on Equity of 15.8%

 

•

Dividend increased by 15.2% to $1.52 per share as GATX completed its 96th consecutive year of uninterrupted dividends

 

•

North American Railcar Fleet Utilization averaged above 99% in a declining railcar leasing market

 

•

Committed North American Railcar lease revenues increased to $4.2 billion, up 17.4% from the end of 2014

 

•

Invested $715 million, primarily in North American and European Rail.

In addition to achieving outstanding financial results in 2015, we also continued to position GATX well for a downturn in the railcar leasing market. Over the last few years, we dramatically extended lease renewal terms at very desirable rates and optimized our fleet by selling select railcars into a robust secondary market. We utilized our railcar supply agreement to purchase new railcars at an attractive cost, limiting our spot market orders in a high-cost manufacturing environment. In addition, our strong balance sheet also offers us flexibility to pursue secondary market acquisition opportunities. We believe that the steps we took in 2015 prepared the Company to capitalize on the inherent cyclicality in our markets and left us well positioned to achieve our twin objectives of growth and return over the long term.

 

The railcar leasing business is cyclical and is heavily influenced by macro-economic conditions, as well as the supply of railcars. GATX creates value for shareholders by anticipating and managing this cyclicality. Under the leadership of our Chief Executive Officer, Mr. Kenney, we have capitalized on the strong railcar leasing market over the past few years to extend the terms of railcar leases at desirable rates, maintain high railcar fleet utilization rates,

sell railcars at attractive values into a strong secondary market, control costs, and position the Company for a downturn in the business cycle. This strategy enabled us to deliver record financial and operating performance in 2015. As illustrated in the following charts, there is a direct link between our Chief Executive Officer’s compensation and the Company’s financial performance.

 

The chart below compares the changes in shareholder return and our Chief Executive Officer’s compensation over the course of the most recent business cycle (2008 to 2015). During this time frame, our Chief Executive Officer’s compensation remained relatively flat, with year-to-year volatility in line with our annual financial performance as highlighted above. Since 2008, a year

with a similar business climate to 2015, total direct compensation for our Chief Executive Officer has increased by 19.3%, a compound annual growth rate of approximately 2.5%, while Total Shareholder Return increased 72%, a compound annual growth rate of approximately 8.0%.

 

Our compensation programs are designed to reward our executives for contributing to achievement of our annual and long-term objectives through changes in business cycles. We set robust goals in order to align such rewards with creation of long-term value for our shareholders. The following graphs show our

compensation plan goals for 2015, and our actual achievement against such goals, for each of net income, return on equity, and investment volume. All three of these measures are metrics that we use for paying out our annual and long-term performance incentives.

 

2015 actual net income performance shown in the chart above reflects certain adjustments during the year. ³ Under the terms of our annual incentive plan, our net income achievement of 104% of target resulted in a

payout to our executives at 106% of their target awards. See page 28 for more details about our annual incentive plan and how this payout was determined.

 

Return on Equity ⁴

 

 

Investment Volume

 

 

 

Under the terms of our 2013-2015 performance share program, our actual results exceeded target performance for both return on equity and investment volume, which resulted in a payout to our executives at 145.3% of their target performance shares for the 2013-2015 performance period. However, the actual value of the payouts depends upon the market price of our common stock on the vesting date, which may be higher or lower than the grant price. See page 29 for a description of our performance share program.

The return on equity and investment volume measures are weighted equally in calculating our Performance Share Plan results. The Compensation Committee

believes that these two measures strike an appropriate balance between achieving a meaningful return for our shareholders while holding to a disciplined investment strategy through business cycles. We believe that the key to generating long-term shareholder value is a combination of growth and return, and our focus and performance on these measures will vary at different points in the business cycle. For example, our cumulative investment volume target is influenced by market conditions and is more aggressive when asset prices are relatively low and less aggressive when asset prices are relatively high.

 

At our 2015 Annual Meeting of Shareholders, approximately 98.2% of shareholder votes were cast in favor of an advisory resolution approving the compensation of our named executive officers as disclosed in the 2015 proxy statement (the “say on pay” resolution). The Compensation Committee believes that the overwhelming shareholder vote in favor of

the say on pay resolution was an affirmation of shareholders’ support of our approach to executive compensation, and, therefore, our Compensation Committee did not make any specific changes to its executive compensation plans or programs as a result of the vote.

 

This Compensation Discussion and Analysis (“ CD&A ”) describes our compensation philosophy and programs, the decisions the Compensation Committee made under those programs, and the factors considered in making

those decisions. This CD&A focuses on the compensation of our named executive officers or “ NEOs ” for 2015, who were:

 

Each year, the Compensation Committee makes pay decisions by following a consistent process, taking into account the job complexity, experience, and performance of each NEO. Compensation is delivered in the form of salary, annual incentive, and long-term equity compensation, with an emphasis on performance-based compensation. Our annual incentive plan uses a net income target that focuses management on achieving short-term business objectives, while long-term equity awards drive value-enhancing performance over the longer term by focusing on growth (investment volume) and returns (return on equity). The target-setting process for the performance-based portion of our compensation program is:

 

•

Multi-faceted, combining goals related to both growth and return

 

•

Reflective of the highly cyclical nature of the railcar leasing business

 

•

Designed to incentivize management to build long-term shareholder value in both strong and weak markets.

Within this framework, our compensation program has been developed with the following key principles in mind:

 

•

A significant portion of compensation should be performance-based. Through annual and long-term

incentive awards, our executives are encouraged to focus attention on a combination of critical strategic and financial goals. The weight placed on each of these goals may vary from time to time depending on our strategies and the economic and market conditions facing GATX.

 

•

On a relative basis, long-term incentive opportunities should be emphasized more heavily than short-term incentive opportunities. We invest predominantly in long-lived assets and the outcomes of key decisions are often not realized for several years. Creating long-term economic value should outweigh focus on short-term results.

 

•

A meaningful equity stake helps ensure that executive and shareholder interests are aligned. We accomplish this by granting our executives equity incentives in GATX stock and through our mandatory stock ownership and stock retention policies, which are intended to ensure that executives acquire and retain a meaningful equity stake in GATX.

 

We have three elements of total direct compensation: Base salary, annual incentive, and long-term equity compensation. We also provide various retirement and benefit programs, which are generally available to all employees. More than 79% of total direct compensation for our Chief Executive Officer for 2015 was performance-based and not guaranteed. The following

graph provides a snapshot of the elements of our compensation program for our Chief Executive Officer and explains why each element is provided. The blue color in the chart below denotes performance-based compensation. Further details on each of these elements are discussed below.

 

Base salary constitutes approximately 20% of total targeted compensation for our Chief Executive Officer (approximately 35% for our other NEOs), which is consistent with our philosophy that a majority of executive compensation should be performance-based.

In establishing salary levels, we typically consider market pay levels, the specific responsibilities and experience of each NEO, and his or her individual performance. Base salaries may be adjusted during the Compensation Committee’s annual review for:

 

•

annual merit increases

 

•

changes in role, such as promotions or added responsibilities

 

•

market adjustments.

At his request, Mr. Kenney did not receive an increase to his base salary in 2015. Mr. Lyons, Mr. Earl, and Ms. Golden each earned a 3% base salary merit increase for 2015, which was consistent with the annual merit increases granted to other salaried employees. Mr. Ellman received a 6% base salary increase for 2015, reflecting a 3% annual merit increase and an additional 3% adjustment reflecting his increasingly critical role at the Company.

While the Company’s 2016 annual merit increases will reflect an average increase of 2%, Mr. Kenney’s base salary for 2016 will remain unchanged for the second consecutive year in line with his request.

 

Target incentive opportunities for NEOs are expressed as a percentage of base salary and are intended to be competitive with the market. Please see The Determination of Market Competitive Pay on page 32 for a description of how we determine competitive pay levels. For 2015, our NEOs’ target incentive opportunities

remained unchanged from 2014 levels. Mr. Kenney’s target incentive opportunity was 100% of his base salary. The target annual incentive opportunities for our other NEOs were 70% of base salary for Messrs. Lyons and Earl, and 60% of base salary for Ms. Golden and Mr. Ellman.

 

Our NEOs earn their annual incentive awards under our Cash Incentive Compensation Plan (the “ CICP ”) based on achievement of pre-established financial performance goals. The CICP is designed to arrive at a maximum possible incentive award, which then may be reduced by the Compensation Committee based on such other metrics as it may determine appropriate. This design is intended to meet the requirements for tax deductibility of our annual incentive, while providing the Compensation Committee the flexibility to adjust performance metrics as necessary to meet our strategic business needs.

Under the CICP a maximum bonus of 0.75% of “Total Gross Income Less Total Ownership Costs” (as such term is defined in the CICP) is earned. However, as previously mentioned, the Compensation Committee does not expect to pay the full amount. Rather, it has historically measured performance against targeted net income and determined bonuses based on achievement against a net income goal established from a financial

plan which is reviewed by the full Board. The Compensation Committee has chosen net income as the goal because it provides executives with a strong incentive to increase our profitability.

The performance metrics and payout levels are established at the beginning of each year by the Compensation Committee with input from the independent consultant and management. The level of financial performance required for the maximum payout is established based on the Compensation Committee’s assessment of the level of performance that shareholders would likely consider superior in view of general economic conditions and the economic outlook for GATX and its industry in particular. This process is essentially reversed to establish the threshold or minimum performance level, defined as the level of financial performance below which no incentive is payable.

 

2015 Annual Incentive Plan Design.  For 2015, the Compensation Committee increased the net income goal for our annual incentive plan by approximately 19% over the prior year’s net income to reflect a higher targeted

level of performance for GATX in light of our business plan and market fundamentals. The goals and payout levels under the 2015 annual incentive plan design are indicated in the following table:

 

2015 Annual Incentive Plan Payouts. Net income for 2015, was $234.9 million ⁵ , which was 104.2% of the target level of performance. Based on the targets

illustrated above, this level of performance resulted in incentive payouts of 106.3% of the target award level to the NEOs.

 

We set target long-term incentive opportunities for our NEOs to be competitive with the market. The value of the regular, annual long-term incentive awards to each NEO is divided equally between stock-settled stock appreciation rights (“ SARs ”) and performance shares. We chose this combination of grant types because it focuses executive attention on total shareholder return and on specific financial goals, both of which are essential to our long-term success. The grant date for regular long-term incentive awards is the date of the Compensation Committee’s first meeting of each

calendar year. We grant SARs to NEOs at the same time we grant them to other employees. SARs vest ratably over a three-year period and expire seven years after the grant date. We have no program, plan, or practice to time SAR grants to NEOs or any other employees in coordination with the release of material non-public information. We generally make off-cycle grants (if any) to newly hired employees on the last trading date of the month following the hire date and Compensation Committee approval of the award.

 

SARs.  SARs are granted to align the interests of our NEOs and other employees with our shareholders. SARs are granted at a price equal to fair market value (the average of the high and low trading prices of our common stock on the date of grant) as approved by the Compensation Committee. Because total shareholder return is comprised of stock price appreciation and dividends, dividend equivalents are attached to SARs. We believe that rewarding both components of shareholder return better aligns management and shareholder interests. Dividend equivalents accrue until vesting and are paid in cash thereafter until the SAR is exercised or expires. Because the value of dividend equivalents is fully factored into the determination of grant size, recipients receive no additional compensation; the number of SARs granted are correspondingly smaller than they would be if dividend equivalents were not attached because the value of each SAR is higher.

Performance Shares.  Performance shares are designed to focus attention on, and to reward the achievement of, our long-term financial and strategic objectives. The Compensation Committee establishes the goals for which the performance shares may be earned at the beginning of a three-year performance period rather than annually. At the end of the performance period, a percentage ranging from 0% to 200% of the number of shares initially awarded will be earned based on the extent to which the three-year goals are achieved. The value of each earned performance share equals the price of one share of our common stock at the end of the performance period, with payment of earned performance shares made in the form of GATX common stock.

•

Performance Metrics Design .  Performance shares are earned based on achievement of a specified level of “Total Gross Income Less Total Ownership Costs” (as defined in the GATX 2004 Equity Incentive Compensation Plan and the GATX 2012 Incentive Award Plan) at the end of the performance period. If the goal is not met, the entire performance share award is cancelled. If the goal is met, the Compensation Committee may reduce, but not increase, the number of performance shares otherwise payable based on the achievement of other long-term performance objectives established at the beginning of the performance period. This design is similar to our annual incentive plan as it is intended to meet tax deductibility requirements while also providing the Compensation Committee the flexibility to adjust performance metrics as necessary to meet our strategic business needs.

 

•

Dividends Paid only on Performance Shares Earned.  Accumulated dividend equivalents are paid on the number of performance shares, only if earned, at the end of the performance period.

 

•

Cash Election Feature.  Beginning with the 2014-2016 performance share awards, participants have the opportunity to elect to receive their performance share payout in the form of cash, if the participant meets one of two conditions: (1) the participant has exceeded 150% of his or her stock ownership goal or (2) the participant has met his or her stock ownership goal and is within five years of retirement under the Company’s pension plan. This election must be made no later than the November 30 immediately prior to the end of the performance period. The cash value will be determined based on the number of shares earned

 

multiplied by the fair market value of GATX stock on the day the award is earned. This optional cash election feature was implemented to address the accumulation of high concentrations of GATX stock beyond the required stock ownership requirements and limited opportunities to diversify due to restrictions related to the trading of GATX stock, such

as insider trading blackouts. As such, the Compensation Committee believes that there should be an appropriate balance between our compensation programs and philosophy and the participants’ needs for moderate and transparent diversification as they approach retirement.

 

Our target setting process, conducted at the beginning of each three-year performance period, combines goals related to growth and return to reflect the cyclical nature

of our business. Our targets are designed to incentivize behavior which enhances long-term shareholder value at all points in the business cycle.

 

In addition to the Total Gross Income Less Total Ownership Costs threshold goal specified in the GATX 2012 Incentive Award Plan, the number of performance shares that will be earned in 2017 will also be subject to two equally weighted measures:

 

•

Three-year average return on equity (return measure)

 

•

Three-year cumulative investment volume (growth measure)

For the 2015-2017 performance period, the NEOs can earn 100% of the shares awarded provided the Company achieves a 15.2% average return on equity and $1.93 billion in cumulative investment volume over the 3-year performance period.

 

 

As stated above, we design our growth and return objectives depending on where we are in the business cycle. When the market is strong and asset prices are high, we emphasize earning a higher return over making investments to grow capital employed. When the market is weak and asset prices are reduced, we emphasize making prudent investments at attractive prices over attempting to earn an unrealistically high short-term return. We believe that a single-minded focus on achieving growth over return, or vice versa, at the wrong points in the cycle is likely to impair shareholder value over the longer term.

The return on equity and cumulative investment targets for the 2015-2017 performance period were set in the fourth quarter of 2014 in the midst of a continued strong North American railcar leasing market. Consistent with

our objective of striking an appropriate balance between our growth and return objectives in light of market conditions, the Compensation Committee set a much higher target for average return on equity for the 2015-2017 performance period (15.2%) than for the prior three-year performance period (13.0% for 2014-2016). Due to the high asset prices prevailing in a strong market, the Compensation Committee set a somewhat lower cumulative investment volume target for the 2015-2017 performance period ($1.93 billion) than for the prior three-year performance period ($2.05 billion for 2014-2016). This decrease was consistent with our strategy to pursue a disciplined investment strategy by investing more in weak markets at attractive prices and less in strong markets when asset prices are at or near their peak.

 

In granting performance shares for the 2015-2017 performance period, we determined the number of shares awarded by dividing value of the performance share award by the average closing prices of our common stock on the four Fridays immediately preceding the

Compensation Committee meeting at which the grant was awarded. To determine the number of SARs awarded, we used the same average closing price multiplied by 35%, which represents the value of the SAR award based on the Black-Scholes valuation methodology.

 

The performance shares granted in 2013 vested at the end of 2015. Each target award was based 50% on a three-year average return on equity goal and 50% on a three-year cumulative investment volume goal. ⁶ The

goals and payout levels under the 2013-2015 Performance Share Plan are indicated in the following table:

 

As shown in the charts on page 24, the three-year average return on equity for the period was 12.7% versus a goal of 11.0%, and the cumulative investment volume for the period was $2.5 billion, which exceeded the goal of $2.3 billion. Based on these results, performance share payouts were 145.3% of target.

Performance share award values at vesting were 124% of target award values based on average fair market value of GATX stock price on January 28, 2016. For details regarding the 2013-2015 performance share payments to the NEOs, please see the Option Exercises and Stock Vested Table on page 39.

 

We sponsor a standard array of retirement, health, and welfare benefits. Our retirement programs include 401(k) and defined benefit pension programs, as well as a supplemental plan intended solely to restore pension benefits limited by law to the level specified by formula in the qualified pension plan applicable to all salaried employees. The pension and 401(k) programs are intended to supplement employees’ personal retirement savings and social security benefits. Health and welfare

benefits include medical, dental, vision, life, and disability insurance. These programs provide protection against catastrophic loss and encourage health maintenance. NEOs participate in the same programs and on the same basis as other salaried employees. No retirement, savings, medical, disability, or other insurance program or arrangement exists which provides benefits to our NEOs in excess of those provided to other salaried employees generally. No perquisites are paid to NEOs.

 

We have entered into agreements with our NEOs that provide certain benefits if employment is terminated following a change of control (“ COC ”). This protection is provided for competitive reasons and to ensure the stability, continuity, and impartiality of our executives in a COC situation. The level of protection provided is intended to be similar to that provided by similarly sized organizations.

The COC agreements are “double-trigger” agreements, meaning that benefits are payable only if a COC occurs and an executive’s employment is terminated, or

constructively terminated. For a description of the key terms of these agreements, please see Potential Payments upon Termination or Change of Control on page 40. Since 2009, we have not entered into any new COC agreements that provide excise tax gross-up benefits, and we do not intend to offer this feature in the future. We do, however, have older agreements entered into in 2009 or earlier that have excise tax gross-up benefits. In the event that we amend such agreements for any reason in the future, we will eliminate such excise tax gross-ups.

 

The vesting of equity awards upon a COC is determined under the GATX 2004 Equity Incentive Compensation Plan or the GATX 2012 Incentive Award Plan, as applicable, and related grant agreements. These terms

apply to all employees who receive long-term incentive awards. In addition, all grant agreements require both a COC event and an executive’s actual or constructive termination before vesting is accelerated.

 

The Compensation Committee, with input from the independent compensation consultant, regularly reviews:

 

•

the competitiveness of our compensation program

 

•

the competitiveness of each NEO’s compensation

 

•

recent developments and current trends in executive compensation practices.

Our human resources staff and the Chief Executive Officer also provide input to the Compensation Committee regarding base salary increases, target level

annual incentives, long-term incentive awards, and the goals applicable to earning such compensation. After reviewing these recommendations, the Compensation Committee determines and approves the compensation of each NEO, as well as the performance goals. Our Chief Executive Officer, however, does not participate in, nor is he present during, any discussions of his own compensation. Such discussions occur during the Compensation Committee’s executive sessions. The Compensation Committee also reviews its pay decisions regarding our Chief Executive Officer with the other independent directors on the Board.

 

We have structured our compensation programs to provide total direct compensation opportunities comparable to the median range of opportunities provided by companies of similar revenue size to GATX (which we refer to as “competitive” or “market” pay levels throughout this CD&A).

Because we have no direct peers in the railcar leasing business for which relevant compensation data is available, gathering information on competitive pay levels with precision for our particular industry is not possible.

Instead, the Compensation Committee, with assistance from our human resources staff and the independent compensation consultant, regularly reviews information on pay for executives as reported in national compensation surveys published by Aon Hewitt and Towers Watson for organizations of similar revenue as ours.

These surveys include general, non-company specific compensation information, on an aggregate basis, for approximately 220 public companies with annual revenues between $1-3 billion. We use these surveys to

 

better understand current compensation practices at other companies of similar revenue size and as a data point to assist us in meeting our goal of having the various elements of compensation be market-competitive.

While these surveys are a starting point for our compensation review process, actual compensation

decisions with respect to specific individuals are influenced by a variety of factors in addition to the surveys, including experience, tenure, skills, unique responsibilities, individual performance, and our specific talent requirements.

 

To underscore the importance of stock ownership, we have established mandatory stock ownership and stock retention policies for our NEOs and other members of senior management. These policies require that each executive must retain shares of GATX stock having a value equal to 50% of the after-tax profits realized from GATX equity awards until the executive owns GATX shares equal in value to a multiple of salary based on his or her position. The multiple is 5.0 times salary for the Chief Executive Officer and 2.5 times salary for other NEOs.

As of January 31, 2016, all of our NEOs had exceeded their respective stock ownership requirements, having achieved the following approximate percentages of their respective requirements: Mr. Kenney (154%), Mr. Lyons (115%), Mr. Earl (268%), Mr. Ellman (101%), and Ms. Golden (136%).

 

We have a policy which provides for the recovery of all or part of any bonus or other compensation paid to an executive officer that was based upon the achievement of financial results that were subsequently restated. In the event of a material restatement of our financial results, the Board, or a committee designated by the Board, will review the facts and circumstances that led to the restatement and will take such action as it deems necessary or appropriate. The Board will consider whether any executive officer received excess compensation because the original financial statements

were incorrectly presented. In addition, the Board will consider the accountability of any executive officer whose acts or omissions were responsible in whole or in part for the events that led to the restatement and whether such acts or omissions constituted misconduct.

Under such policy, the Board may also, depending upon the facts and circumstances, take disciplinary action, up to and including termination of employment, or decide to pursue other available remedies, including, but not limited to, canceling stock-based awards.

 

Our incentive compensation programs have been designed and administered in a manner generally intended to preserve federal income tax deductions. However, the Compensation Committee considers the

tax and accounting consequences of utilizing various forms of compensation and retains the discretion to pay compensation that is not tax deductible or could have adverse accounting consequences for GATX.

 

The independent compensation consultant, Pay Governance, has been retained by, and reports directly to, the Compensation Committee and does not have any other consulting engagements with management or GATX. The Compensation Committee has assessed the independence of Pay Governance and its employees working on GATX matters pursuant to applicable SEC rules and NYSE listing standards and determined that no conflict of interest or independence concerns exist.

With respect to Chief Executive Officer compensation, Pay Governance provides an independent recommendation to

the Compensation Committee in the form of a range of possible outcomes, for the Committee’s consideration. In developing its recommendation, Pay Governance relies on its understanding of GATX’s business and compensation programs and its own independent research and analysis. Pay Governance does not meet with our Chief Executive Officer with respect to his compensation. In addition to advising on Chief Executive Officer Compensation, Pay Governance reviews the Chief Executive Officer’s recommendations on compensation of his direct reports.