DIRECTOR COMPENSATION

The form and amount of compensation for each non-employee director is determined and reviewed at least annually by the Compensation Committee. Such compensation reflects the practices of boards of similar public companies and is comprised of cash and H.B. Fuller Common Stock (or its equivalents). Similar to our executive compensation policy, the practice of generally aligning to the market median/50^th percentile also applies to our non-employee director compensation.

2019 Review of Director Compensation

For the fiscal 2019 review, the Compensation Committee used Willis Towers Watson to provide ongoing advice and information regarding design and implementation of the Company’s director compensation programs as requested by the Compensation Committee. See further discussion regarding the Compensation Committee’s independent consultant under the heading “Independent Compensation Consultant” in the “Compensation Discussion and Analysis” section in this Proxy Statement. At its July 2019 meeting, the Compensation Committee reviewed a market analysis conducted by Willis Towers Watson relating to non-employee director compensation, including annual board retainers, committee chair retainers and annual stock-based awards. The market analysis included our peer group (see section titled “Executive Compensation – Compensation Discussion and Analysis – Use of Competitive Market Data - Peer Group Data” in this Proxy Statement). For the non-executive chair position, we also looked at a group of 21 additional industrial companies similar in revenue size to the Company. This additional analysis was performed due to the low prevalence of the non-executive chair position in the Company’s peer group.

After a review of the market comparison data, the Compensation Committee determined the non-employee directors’ compensation program was competitive with the market median of companies and no changes were made to our non-employee directors' compensation program.

Cash Fees

The fees paid to our non-employee directors are set forth in the table below. Non-employee directors may elect to defer their fees into deferred phantom stock units or other deferred investments. If the director elects to defer their cash fees into phantom stock units, the number of phantom stock units received equals the cash retainer divided by the closing price of a share of the Company common stock on the payment date, plus the Company’s 10% matching contribution as described below under Directors’ Deferred Compensation Plan. Mr. Owens, our President and Chief Executive Officer, does not receive separate compensation for serving as a director or for attendance at any meeting.

The following fees are paid to our non-employee directors:

Expense Reimbursement

We also reimburse each director for any out-of-pocket expenses related to attendance at any meeting or arising from other H.B. Fuller business.

Equity Awards

In addition to the board and chair retainers described above, the Board believes it is important that each director have an economic stake in our Common Stock. As a result, the Compensation Committee typically makes an annual grant of deferred phantom stock units to each non-employee director, which pays out in shares of Common Stock under the terms of H.B. Fuller Company Directors’ Deferred Compensation Plan (“DDCP”) and pursuant to elections made by each director. This plan is described below.

On July 16, 2019, the Compensation Committee made a discretionary award in the amount of $115,000 to each non-employee director. This amount was divided by the fair market value of the Common Stock on the date of grant to determine the number of deferred phantom stock units awarded under the DDCP.

In addition, each non-employee director typically receives a one-time grant of restricted stock units upon his or her initial election to the Board. These restricted stock unit awards are granted under our H.B. Fuller Company 2018 Master Incentive Plan, which is described below. In general, these awards vest three years from the date of grant subject to continued service during that period.

Directors’ Deferred Compensation Plan

Under this plan, directors may elect to defer all or a percentage of their board and chair retainers into several investments. Deferred amounts are credited with gains and losses based on the performance of certain mutual funds or the Common Stock as elected by the director prior to deferring any fees. Directors who elect to defer their retainers into phantom stock units will eventually be paid out in shares of Common Stock. Phantom stock units are credited with dividend equivalents equal to the amount of dividends, if any, paid on an equal number of shares of the Common Stock. The dividend equivalents are converted into additional phantom stock units based on the fair market value of Common Stock on the dividend payment date. If a participant elects to defer retainers into the Common Stock account in this plan, we make a 10% matching contribution of additional phantom stock units to the amount invested in Common Stock by the director. The phantom stock units credited to the directors’ accounts do not have voting rights. In addition, the Compensation Committee may make discretionary contributions to a participant’s H.B. Fuller Common Stock account under this plan. As described above, during fiscal year 2019, the Compensation Committee exercised this discretion and awarded each non-employee director 2,389.36 deferred phantom stock units having a grant date fair value of $115,000 under this plan.

Any amounts deferred under this plan are paid in shares of Common Stock or cash (depending on the election made by the director) at the earliest to occur of:

H.B. Fuller Company 2018 Master Incentive Plan

Under the H.B. Fuller Company 2018 Master Incentive Plan (the “2018 Incentive Plan”), we may issue to non-employee directors restricted stock, restricted stock units, options, stock appreciation rights, performance awards or other stock-based awards. In addition, shares of H.B. Fuller Common Stock are issued under this plan to satisfy any requirements under the DDCP.

Physical Examinations

Non-employee directors are reimbursed for a preventative/diagnostic annual physical examination and local travel expenses. These amounts are shown in the “All Other Compensation” column of the “Director Compensation Table” in this Proxy Statement.

Matching Gifts to Educational, Arts and Cultural Organizations Program 

Under this program, we match a non-employee director’s contributions (up to $1,000) to eligible educational, arts and cultural institutions. These amounts are shown in the “All Other Compensation” column of the “Director Compensation Table” in this Proxy Statement.

During all or a portion of their service on the Board, Mr. Florness, Mr. Handley, Ms. Hilado, Ms. Kimmelshue, Mr. Losh, Mr. Mitau, Mr. van Roden and Mr. Van Sant elected to defer some or all of their compensation into deferred phantom stock units. The aggregate number of deferred phantom stock units and restricted stock units held by each non-employee director as of November 30, 2019 were as follows:

No non-employee director held any stock options as of November 30, 2019. Only Ms. Kimmelshue and Mr. Florness held RSUs as of 2019. As of 2019, Mr. Florness held 1,325 RSUs and Ms. Kimmelshue held 1,337 RSUs.

Stock Ownership Guidelines

We have goals for stock ownership by all non-employee directors. Our goal for director stock ownership is five times the annual board retainer within five years of becoming a director. A review of director stock ownership was conducted using June 30, 2019 stock values. At the time of this review, all directors have met or exceeded this goal or are on track to meet this goal within five years of being elected as a director.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Executive Summary

This Compensation Discussion and Analysis describes our executive compensation program, including its underlying philosophy, policies and practices; significant executive compensation developments during the fiscal year; and the determinations made on material elements of compensation awarded to each of our executive officers listed in the “Summary Compensation Table” in this Proxy Statement (the “NEOs”). This discussion and analysis focuses on the information contained in the NEO compensation tables and accompanying footnotes and narrative for fiscal year 2019 which follows. We discuss compensation actions taken during fiscal years 2018 and 2020 to the extent they enhance the understanding of our executive compensation program for fiscal year 2019.

Elements of Executive Compensation. We use base salary, a short-term incentive plan with cash awards (“STIP”) and a long-term incentive plan with equity grants (“LTIP”), as well as benefits, to attract and motivate our executive officers to achieve results that increase shareholder value. We generally align with the market median for base salary, short-term incentive and long-term incentive, which comprise total direct compensation, and we review these elements each year. The emphasis on short-term and long-term incentive compensation reflects our pay-for-performance philosophy. See "Key Elements of Executive Compensation Program" on page 37.

Fiscal 2019 Business Results. Net income for the 2019 fiscal year was $131 million, or $2.52 diluted earnings per share (“EPS”), versus net income of $171 million, or $3.29 EPS, in the 2018 fiscal year. Adjusted diluted earnings per share (“AEPS”) in the 2019 fiscal year were $2.96, down 1.3% versus the prior year.

Net revenue for the 2019 fiscal year was $2,897 million, down 4.7% versus the 2018 fiscal year.

Operating income for the 2019 fiscal year was $226 million, down 5.0% from OI for fiscal 2018 of $238 million. Adjusted operating income (“AOI”) for 2019 was $271 million, down 4.6% percent versus $284 million in the 2018 fiscal year.

For the 50th consecutive year, we implemented an increase in the amount of quarterly cash dividends paid to shareholders, with a 3% increase this year.

More information on our 2019 performance can be found on pages 39 - 41. AEPS, AOI, and Adjusted Net Revenue are non-GAAP financial metrics that are reconciled with the most directly comparable GAAP financial metrics in Annex A.

STIP Performance Metrics. For our short-term incentive plan, we measure our success primarily by the Company-wide financial metrics which are aligned with our strategic plan. These metrics consist of Adjusted Net Revenue, AOI, adjusted Earnings before Interest, Taxes and Depreciation (“EBITDA”), and AEPS. For fiscal 2019 we replaced the organic revenue metric with Adjusted Net Revenue to better align with financial statements. AOI and adjusted EBITDA are measures of operational effectiveness and profitability, and AEPS is an overall measurement of profitability and the effectiveness of the growth strategies we follow:

• to grow organically by targeting our growth efforts on specific segments where we see opportunity for competitive strength;

• to manage margins by properly pricing our products and controlling expenses;

• to efficiently deploy cash generated from operations in order to repay debt balances and return additional value to shareholders; and

• to effectively integrate the Royal business and continue strong growth and profit enhancement in high value adhesive solutions.

AEPS, AOI, adjusted EBITDA and AEPS exclude unusual items, to better reflect ongoing operational results. A full reconciliation of these items is found in Annex A of this Proxy Statement.

The annual, short-term incentive plan targets for Adjusted Net Revenue, AOI and AEPS are consistent with the Company’s strategic financial targets. In addition, adjusted EBITDA and debt paydown targets are key components to the Company’s ROIC targets in its long-term strategic plan.

STIP Performance and Compensation Outcomes.

AOI, AEPS, Adjusted Net Revenue and Adjusted EBITDA are non-GAAP financial metrics that are reconciled with the most directly comparable GAAP financial metrics in Annex A.

LTIP Performance Metrics. For our LTIP, we use ROIC as the performance metric for PSUs, which account for 25% of the equity awards granted to our NEOs, including our CEO. ROIC was selected as the LTIP performance metric because it is a common metric in the market for LTIP designs and it is a key measure for assessing how much profit a company is generating for every dollar that is invested, providing a clear picture of how efficiently a company is using the capital that has been invested in it to generate income. PSUs which account for 25% of the CEO’s equity awards vest if at least a threshold level of AEPS, AOI or Adjusted Net Revenue is met. These thresholds are consistent with his short-term incentive plan thresholds, and they are key financial metrics for the long-term success of our business.

LTIP Performance and Compensation Outcomes.

ROIC is a non-GAAP financial metric that is reconciled with the most directly comparable GAAP financial metric in Annex A.

Executive Compensation Best Practices. The Company’s compensation program features best practices, such as:

Philosophy

The philosophy of our executive compensation program is to provide a competitive compensation package that rewards executive officers for sustained financial and operating performance that creates long-term value for our shareholders. We have designed and implemented our compensation programs for our executive officers to meet three principal goals:

To meet these goals, the Company has the following guidelines:

We strive to keep the target value of each individual element of compensation at or near the market median/50^th percentile, thereby maintaining target total compensation at or near the market median/50^th percentile.

Use of Competitive Market Data

The Compensation Committee uses several surveys and data points when it reviews executive compensation as described below.

General Survey Data. This year, due to recent acquisitions, we reviewed survey data for companies with a revenue range of $2-6 billion based on our fiscal 2018 revenue and expectations for fiscal 2019 revenue. The Compensation Committee used published survey data from the following sources to analyze the appropriate level of compensation for our U.S.-based NEOs:

•AON Hewitt ($2.5 – 4.99 billion revenue categories for corporate positions (CEO and CFO) and relevant revenue categories for non-corporate positions (other U.S.-based NEOs))

•Willis Towers Watson ($3-6 billion revenue category for corporate positions (CEO and CFO) and relevant revenue categories for non-corporate positions (other U.S.-based NEOs))

The Company participates in both surveys. The Aon Hewitt survey includes 525 companies and is titled "AON Hewitt U.S. Total Compensation Measurement™ (TCM™) Total Compensation Industry – Executive and Senior Management - 2018", and the Willis Towers Watson survey includes 760 companies and is titled "Willis Towers Watson 2018 CDB General Industry Executive Compensation Survey Report – U.S.”

Peer Group Data.  Our peer group consists of the following companies:

These companies represent comparable global, publicly-traded companies with revenues between $1.387 - $7.155 (for the most recent fiscal year).

Use of Market Data in Fiscal 2019. When analyzing compensation paid to our NEOs, the Compensation Committee uses specific data that matches revenue and job responsibilities from the published surveys named above, based on availability, by position. For fiscal 2019, the above-referenced survey data used by the Compensation Committee to review total compensation (base salary, short-term incentive compensation and long-term incentive compensation) for our executive officers showed that our total compensation was generally in line with the market data matched according to revenue and job responsibilities.

In addition, for the NEOs, management and the Compensation Committee used the peer group data, in conjunction with the general surveys, as a reference point for compensation design considerations. This data was derived from the most recent proxy statement available for each peer company. The primary data sources for pay level information for our executive officers are the survey sources listed under the heading “General Survey Data.” This survey data is supplemented by peer group data, which is adjusted for differences in the sizes of companies in the peer group.

The Compensation Committee uses survey data and peer group data because these sources of data are considered reliable market information. When we refer to competitive market data in the rest of this Compensation Discussion and Analysis, unless otherwise noted, we are referring to the “General Survey Data” and the “Peer Group Data” discussed above.

Compensation Process

The Compensation Committee reviews and approves all elements of compensation for our CEO, taking into account the Board of Directors’ review and assessment of the performance of the CEO as well as competitive market data and information from our human resources personnel and the Compensation Committee’s independent compensation consultant. The Compensation Committee also reviews and approves all elements of compensation for our other executive officers using the same sources noted above and taking into account the recommendations of the CEO.

In determining the particular elements of compensation that will be used to implement our overall compensation policies, the Compensation Committee takes into consideration factors related to our performance, such as our earnings and revenue growth, and business-unit-specific operational and financial performance. Other considerations include our business objectives, corporate responsibilities (including equity among executive officer positions and affordability), competitive practices and trends, and local legal requirements. In deciding on the type and amount of compensation for each executive officer, the Compensation Committee focuses on both the current pay and the opportunity for future increases in pay, and combines the compensation elements for each executive officer in a manner that optimizes the executive officer’s incentive to contribute to the Company's success.

The Compensation Committee on occasion meets with the CEO and/or certain other executive officers to obtain recommendations with respect to our compensation program, practices and packages for executive officers and directors. The Compensation Committee considers, but is not bound to and does not always accept, management’s recommendations with respect to executive compensation. The CEO typically attends the Compensation Committee’s meetings, except when his compensation package is discussed. In addition, the Compensation Committee also holds executive sessions not attended by any members of management, including the CEO.

Independent Compensation Consultant

The Compensation Committee may use outside compensation consultants to provide compensation advice, competitive survey data and other reference market information related to trends and competitive practices in executive compensation. The Compensation Committee uses Willis Towers Watson (WTW) to provide ongoing advice and information regarding design and implementation of the Company’s executive compensation programs as requested by the Compensation Committee. In addition, from time to time, management receives information from the independent compensation consultant in preparation for Compensation Committee meetings.

In fiscal 2019, the Company paid WTW for services as noted below.

WTW also provides broker services for insurance in Brazil but receives no direct payment from the Company.

All additional services performed by WTW, along with their affiliated companies, were approved by management and performed at the direction of management in the ordinary course of business. In assessing the independence of WTW, the Compensation Committee considered the factors contained in the applicable SEC and NYSE rules, including the amount and nature of the additional consulting work provided to the Company by WTW and concluded that no conflict of interest exists that would prevent WTW from independently advising the Committee.

A representative of the independent compensation consultant generally attends Compensation Committee meetings to serve as a resource for the Compensation Committee. To encourage independent review and discussion of executive compensation matters, the Compensation Committee and its chair may request meetings with the independent compensation consultant in executive session without management present.

The Role of Shareholder Say on Pay Votes. The Company provides its shareholders with the opportunity to cast an annual advisory vote on executive compensation (a “Say on Pay Proposal”). At the Company’s Annual Meeting of Shareholders held in April 2019, 96% of the votes cast on the Say on Pay Proposal were voted in favor of the proposal. The Compensation Committee believes this is an overall endorsement by the shareholders of support of the Company’s executive compensation. The Compensation Committee will continue to take into account the outcome of the Company’s Say on Pay Proposal votes.

 Fiscal 2019 Base Salaries

In General.  In January of each year, the Compensation Committee reviews and considers the annual performance of the CEO and the other NEOs. The effective date of annual merit increases is February 1^st. In April, the Compensation Committee reviews the overall compensation (base salary, short-term incentive, long-term incentive and high-level review of benefits and perquisites) of all of the executive officers (excluding the CEO) for market competitiveness.

The amount of annual base salary and year-over-year increase for each of the NEOs in fiscal year 2019 are set forth in the following table.

Analysis of Fiscal 2019 Base Salaries and Incentive Targets. Based on the competitive market data review, the Compensation Committee approved changing Mr. Owens’ short-term incentive target from 100% of base salary to 110% of base salary and the long-term incentive target from 300% of base salary to 350% of base salary. Mr. Owens received a 5.0% merit increase after a review of his performance and the competitive market data. Mr. Owens’ base salary is in the fourth quartile of the CEO salary range.

Based on a review of market data for the CFO position and Mr. Corkrean’s performance, he received a mid-year promotion in fiscal 2018. In conjunction with this promotion and market review, his long-term incentive target increased from $500,000 to $750,000 beginning in fiscal year 2019. Mr. Corkrean’s short-term incentive target was increased in fiscal 2018 with his promotion and remained at 75% of base salary for fiscal 2019. Mr. Corkrean received a merit increase of 2.94% after a review of his performance and the competitive market data. Mr. Corkrean’s base salary is in the second quartile of the salary range for his position.

The Compensation Committee approved changing Mr. Cai’s total compensation in 2019 as follows - short-term incentive target increased from 52% of base salary to 65% of base salary and the long-term incentive target increased from $375,000 in fiscal year 2018 to $500,000 in fiscal year 2019. His base salary increased 15% effective February 1, 2019, which includes a merit increase in addition to a promotional salary increase. In 2019 H.B. Fuller was restructured into three global business units. As a result, the global Engineering Adhesives business was expanded and Zhiwei Cai was promoted to Executive Vice President in recognition of the expansion. Mr. Cai received an additional increase in salary of 7.4% to $500,000 effective August 1, 2019. Mr. Cai’s base salary is in the third quartile of the salary range for his position.

Based on a competitive market data review in connection with his hiring, Mr. Tometich’s short-term incentive target was set at 65% of base salary (which was pro-rated for fiscal year 2019), and his long-term incentive target was set at $600,000. Due to Mr. Tometich’s start date of August 27, 2019, he was not eligible for a merit increase during fiscal 2019. In connection with the hiring of Mr. Tometich, he received a bonus of $150,000 and a grant of stock options and time-based RSUs with an estimated value of $1,000,000. These items are included in the “Summary Compensation Table”.

Ms. Jensen’s short-term incentive target remained at 65% of base salary, and her long-term incentive target remained at $500,000. Ms. Jensen received a merit increase of 2.13% after a review of her performance and the competitive market data. Her base salary is in the second quartile of the salary range for her position.

Ms. Campe’s short-term incentive target remained at 65% of base salary, and her long-term incentive target remained at $500,000. Ms. Campe received a merit increase of 2.33% after a review of her performance and the competitive market data. Ms. Campe's base salary is in the second quartile of the salary range for her position.

For fiscal 2019, all merit increases for the NEOs (except for Mr. Cai, who received a promotional increase and Mr. Tometich who started in August, 2019) fell within the Company’s general merit increase guidelines for our general employee population. The range of merit increases provided to NEOs was 0% to 5%.

Fiscal 2019 Short-Term Incentive Compensation

In General.  Each year, the Compensation Committee establishes the annual cash incentive target opportunities as a percentage of base salary. Under the short-term incentive plan, the Compensation Committee may also consider extraordinary circumstances that may positively or negatively impact the achievement of the total Company performance objectives.

For fiscal 2019, based on market data, the annual cash incentive target opportunity for our executive officers ranged from 65% to 110% of base salary at a target level of performance. Potential payouts range from 0% to 200% of the target award based on attainment of segment operating, key market and/or Company-wide financial goals. The threshold level for the annual cash incentive was set at 80% of each financial target, except the Adjusted Net Revenue metrics had a threshold amount of 90% of target, meaning that financial performance must meet or exceed these thresholds for executive officers to earn at least 50% of the target incentive. Higher payouts are possible if performance is above target levels. For example, at the superior level (110% of target for Adjusted Net Revenue and 120% of target for all other metrics), payout is 200% of target.

The Compensation Committee, in its discretion, has the right at any time to enhance, diminish or terminate all or any portion of any compensation plan or program, on a collective or individual basis for the NEOs. 

Analysis of Fiscal 2019 Short-Term Incentive Awards.  The financial performance metrics approved by the Compensation Committee in fiscal 2019 were selected because management believed they were the most representative measurements of our financial results and were key financial measures that linked to our long-term strategic plan. In establishing the goals for these metrics for fiscal year 2019, we considered our prior year results, economic conditions and expected business opportunities. The specific performance goals for the target level were challenging but achievable. In addition, we set a superior goal which would pay amounts for performance exceeding the target. These are noted in the table below.

For fiscal 2019, the financial performance goals for threshold, target and superior performance and the actual performance were as set forth below. These amounts are shown on a non-GAAP basis, which differs from the reported GAAP results discussed under the section entitled “Fiscal 2019 Business Results”, due to adjustments which are allowed under the short-term incentive plan as set forth in footnote 2 in the table below. All performance goals for the NEOs, and the percentage of short-term incentive compensation based on these goals as established by the Compensation Committee, are set forth in the table below:

_____________________

The following chart shows the percentage increase in fiscal year 2019 performance targets over fiscal year 2018 actual results for each measure used to determine the short-term incentive payouts:

The following table shows the actual short-term incentive award for each NEO as compared to the target payment as a percentage of base salary.

Fiscal 2019 Long-Term Incentive Compensation

In General. For all NEOs except the CEO, the fiscal 2019 long-term incentive plan design included grants with a mix of 50% NQSOs, 25% RSUs and 25% PSUs, based on the grant date fair market value of H.B. Fuller Common Stock. Instead of RSUs, the CEO received PSUs, in a mix of 50% NQSOs and 50% PSUs.

Stock Options.  The NQSOs typically vest in three equal installments on each anniversary date of the grant date, as long as the optionee continues to be employed by the Company, which enhances retention. Vested stock options provide a benefit to an executive officer only if the market value of the stock increases over the term of the option and if the executive officer remains employed with the Company. Stock options are granted for a 10-year term. Stock options are granted with an exercise price equal to the fair market value of our common stock on the date of grant.

Restricted Stock Units.  Restricted stock units provide a benefit to an employee only if the employee remains employed until the award vests. Dividends are accrued on restricted stock units during the period prior to vesting and are subject to the same vesting requirements, with payment in the form of additional shares once vesting has occurred. Restricted stock units do not have voting rights. In addition, if the market value of the stock increases over the grant date price of the award, the employee further benefits from that appreciation in value. We grant two kinds of restricted stock units.

• RSUs. For NEOs other than the CEO, 25% of their equity awards are RSUs vesting based on continued employment over time. RSUs typically vest in three equal annual installments from the grant date, which enhances retention.

• PSUs. For all NEOs including the CEO, 25% of their equity awards are PSUs vesting only if the Company achieves at least a threshold level of ROIC performance. PSUs vest ratably over three years depending on our performance against the ROIC metric for each year. Payouts range from 0% to 200% of target.

The value of an individual’s target award is established to generally correlate with the market median/50^th percentile for the applicable position and grade level. The CEO recommends to the Compensation Committee the number of stock options, RSUs and PSUs to be granted to each executive officer. The Compensation Committee retains full authority to accept, modify or reject these recommendations and to increase or decrease the value of the award. The Compensation Committee also reviews total Company performance and the CEO’s individual performance to determine the award for the CEO. The number of options is determined based on a Black-Scholes valuation, and a 30-day share price average is applied. To determine the number of restricted stock units to be awarded, a 30-day share price average is applied.

The Compensation Committee reviews and approves long-term incentives for our CEO and the other executive officers in January of each year. This long-term incentive grant date in January aligns with the annual individual performance review process and allows the grants to occur during the open trading period (after our fiscal year-end annual earnings release) for our common stock as provided under Company policy. We do not allow backdating of options, nor do we have a program, plan or practice to time stock option grants to executive officers in coordination with the release of material non-public information.

The target values for each named executive officer’s long-term incentive award are set forth in the table below. It is the general practice of the Compensation Committee to make awards to executive officers in a range of 80% to 120% of the target value below.

For all long-term incentive awards, retirement eligibility is defined as 55 years of age and 10 years of service. If an NEO is retirement eligible, stock options immediately vest upon retirement and RSUs and PSUs continue to vest pursuant to the terms of the award. For awards granted in fiscal 2019 and later, if an NEO does not remain employed for 180 days from the grant date, the award is forfeited regardless of retirement eligibility.

All grants are set forth in the “Grants of Plan-Based Awards During Fiscal 2019” table later in this Proxy Statement.

Analysis of Fiscal 2019 Long-Term Incentive Awards. Fiscal 2019 ROIC performance and related vesting of PSUs are set forth below. Beginning in 2018, the threshold, target and superior ROIC metric amounts are lower than prior year targets due to the scope of the Royal Adhesives business having a dilutive effect in the short-term calculation of ROIC.

ROIC is a non-GAAP financial metric that is reconciled with the most directly comparable GAAP financial metric in Annex A.

For all grants, if performance in a year is less than threshold (target ROIC less 2%), no shares will be earned. If the target level is achieved, the PSUs will vest at 100%. If the superior level (target ROIC plus 4%) is achieved, the PSUs will vest at 200%. Performance between threshold and target and target and superior will be calculated on a straight-line basis.

25% of the CEO’s equity awards are PSUs vesting in three equal installments only if  one or more of the performance measures in the CEO’s short-term incentive plan (AEPS, AOI or adjusted net revenue) are achieved at the threshold level for fiscal 2019 as determined by the Compensation Committee. For the January 2019 grant, this requirement was met as of January 24, 2020. Therefore, the remaining two installments of these PSUs will vest according to the three-year vesting schedule. There is no higher level of payout for these PSUs if target or superior performance is achieved for any of the measures.

Additional Fiscal 2019 RSU Award. The Compensation Committee approved RSU awards in January 2019, which vest in 12 months, for all LTIP participants, including all NEOs. In connection with our October 2017 Royal Adhesives Stock Option Grant, these additional RSU awards were provided to neutralize the impact of the timing of the Royal Adhesives acquisition on ROIC. The CEO’s awards include an additional requirement that the Company must achieve a threshold level of AEPS, AOI or Adjusted Net Revenue in the respective fiscal year for vesting of this award.

In fiscal 2016 and 2017, the Company made grants to NEOs of performance-based RSUs with ROIC as the performance metric. The metric targets for the 2016 and 2017 awards were 9.5% and 10.0% respectively. In October 2017, the Company acquired the Royal Adhesives business. Prior to the acquisition of Royal Adhesives, the Company was performing above the target level of ROIC performance for these awards.

Due to the scope of this acquisition, there was a dilutive effect in the short term calculation of ROIC. In fiscal 2018, ROIC was 8.3%. Excluding the effect of the acquisition of the Royal Adhesives business, the ROIC for fiscal 2018 would have been 11.2%.

Beginning in fiscal year 2018, ROIC targets incorporated the effects of the Royal Adhesives acquisition. The Company does not expect to make additional awards similar to the one noted above.

Fiscal year 2019 RSU awards are set forth in the “Grants of Plan-Based Awards During Fiscal Year 2019” table in this Proxy Statement.

Adjustments to Fiscal 2017 Performance-Based NQSO Award. In October 2017, the Compensation Committee approved a one-time performance-based NQSO award to NEOs to provide incentive for the successful integration of the Royal Adhesives acquisition. These performance-based NQSOs vest on January 31, 2021 contingent upon the Company achieving adjusted EBITDA at a threshold level for fiscal 2020. The target of the EBITDA metric was originally $600 million. For NEOs other than the CEO, the number of options may decrease to as low as 0% and increase to as high as 150% of target if superior levels of performance are achieved. However, the CEO’s superior level is capped at the maximum number of shares that may be granted to an individual per calendar year under the H.B. Fuller Company 2016 Master Incentive Plan.

Due to changes in accounting standards relating to classification of pension net benefit cost in the Company’s income statement, U.S. dollar devaluation, the sale of the surfactant, thickener and dispersion business during fiscal 2019 and the current global economic situation, especially in China, the Compensation Committee concluded that the performance goals in the Performance-Based NQSO Agreement (the “PBNQSO Agreement”) should be revised. Accordingly, on July 2, 2019, the Compensation Committee approved amendments to each of the PBNQSO Agreements to: (a) update the definition of “Adjusted EBITDA”; (b) exclude the effect of acquisitions and divestitures by the Company from determinations of Adjusted EBITDA; (c) take into account currency fluctuations; and (d) adjust the Adjusted EBITDA “target” goal for the fiscal year 2020 from $600 million to $547 million. All other terms of each of the PBNQSO Agreements, including the Option Exercise price of $57.70, remain unchanged.

Other Executive Benefits and Perquisites

In General.  We provide the following perquisites and benefits to our executive officers who are based in the United States or who are U.S. expatriates:

Analysis of Fiscal 2019 Executive Benefits and Perquisites. We provide perquisites to our executive officers to generally reflect competitiveness at the market median/50^th percentile.

In conjunction with the annual review of executive officer total compensation, the Compensation Committee reviews executive officer benefits and perquisites for market prevalence. In fiscal 2019, the Compensation Committee reviewed market data on the prevalence of the following benefits and perquisites provided by the Company: the Key Employee Deferred Compensation Plan, executive health programs, financial counseling, Defined Contribution Restoration Plan and executive long-term disability. The survey data used to review the market prevalence of these benefits was provided by the Aon Hewitt U.S. TCM Executive Compensation Policies and Programs: 2018 survey (436 participating companies). The data also included a review of perquisite offerings from our peer group, which was provided by our compensation consultant. The Compensation Committee reviewed the data provided and made no changes due to the general market prevalence of these programs.

All perquisites paid to our NEOs are disclosed in the “Summary Compensation Table” under the “Other Compensation” column and the footnotes thereto.

Severance, Change-in-Control and other Employment-Related Agreements

In General. H.B. Fuller does not have employment agreements with any of the NEOs that provide for a specified term of employment. The Company also has change-in-control agreements discussed under the heading “Change-in-Control Agreements” and executive severance agreements discussed under the heading “Severance.”

Severance. The executive severance agreements provide for payment of the following severance benefits if the eligible executive officer’s employment is terminated involuntarily by the Company without cause (as defined in the agreement) or voluntarily by the executive officer for good reason (as defined in the agreement):

Except as indicated above with respect to the CEO, the same form of agreement was provided to all NEOs.

Change-in-Control Agreements. All NEOs have entered into change-in-control agreements with H.B. Fuller. The agreements are a critical and effective tool to attract and retain executives. These agreements provide for payments under certain circumstances following a change-in-control of the Company. The Compensation Committee believes that one of the purposes of providing change-in-control agreements is to provide financial security to the executive officer in the event the executive officer’s employment is terminated in connection with a change-in-control. The agreement is intended to ensure the executive officer remains focused on activities related to a change-in-control that could be in the best interest of the Company and its shareholders, and that the executive officer is not distracted by compensation implications as a result of a change-in-control. The Compensation Committee also believes that change-in-control agreements assist in the retention of executive officers at a time when their departure might be detrimental to the Company and shareholders.

The change-in-control agreements contain a “double trigger” for receipt of change-in-control payments. This means that there must be a change in control of the Company and a termination of employment (or a material change to the NEO's terms of employment (such as demotion, reduction in compensation or required relocation)) during the covered period for the provisions to apply and benefits to be paid. The Compensation Committee believes that a “double trigger” is more appropriate than a “single trigger,” because a double trigger prevents the unnecessary payment of benefits to an executive officer in the event that the change in control does not result in the executive officer’s termination of employment or a material change in the terms of the executive officer’s employment.

For change-in-control agreements entered into prior to mid-fiscal 2018, the arrangements were structured to ensure that executives receive the full intended benefits of these arrangements in the event that a transaction should take place, particularly when their short tenure creates an imbalance between intended benefit and potential tax liability. Our approach was to provide our executives with arrangements that include a modified tax gross-up. These arrangements eliminated de minimis or inefficient gross-up payments, only providing tax gross-up in cases of significant imbalance. For change-in-control agreements entered into starting in mid-fiscal 2018, the Company does not include a tax gross-up provision. The Company instead references a best of net provision whereby the individual is responsible for any excise tax, or the benefit is reduced so as to not trigger an excise tax. The Company calculates both scenario estimates and the individual receives the provision with the highest after-tax benefit estimate.

An explanation of any payments to be made under the change-in-control agreements is found under the heading “Involuntary (Not for Cause) Termination or Good Reason Termination after a Change-in-Control” in the section of this Proxy Statement titled “Potential Payments Made Upon Termination or Change-In-Control.”

Stock Ownership

Goals and levels of executive stock ownership are reviewed annually by the Compensation Committee. An executive officer’s stock ownership includes common stock directly held by the executive officer and common stock held in our 401(k) Plan, restricted stock, restricted stock units (time-based and performance-based), and phantom stock units held in the Key Employee Deferred Compensation Plan.

The guideline for the CEO is ownership of at least five times his base salary in H.B. Fuller Common Stock, and the guideline for the other NEOs is ownership of at least three times their base salary. The guideline provides that an executive should strive to reach and then maintain the applicable stock ownership goal within five years of appointment to a new job grade. For the 2019 review of stock ownership, all NEOs who had been in their job grade for at least five years had met the applicable stock ownership goal. If after five years in his or her job grade, an NEO has not met his/her stock ownership goal, the NEO must retain 100% of all after-tax profit shares from any exercise, vesting or payout of equity awards until the stock ownership guideline is met, unless a hardship exception is granted. Mr. Tometich was not included in this review due to his hire date.

Tax Considerations

Section 162(m) of the U.S. Internal Revenue Code ("Section 162(m)") imposes a $1,000,000 annual deduction limit on compensation payable to certain current and former named executive officers. The Compensation Committee intends to pay competitive compensation consistent with our philosophy to attract, retain and motivate executive officers to manage our business in the best interests of the Company and our shareholders. The Compensation Committee, therefore, may choose to provide non-deductible compensation to our executive officers if it deems such compensation to be in the best interests of H.B. Fuller and our shareholders.

Prior to the Tax Cuts and Jobs Act (the “Act”), Section 162(m) permitted a deduction for compensation in excess of $1,000,000 paid to a covered executive if specified requirements related to our performance were met and shareholder approval was obtained. The Act eliminated the exception to the deduction limit for qualified performance-based compensation (and broadened the application of the deduction limit to certain current and former executive officers who previously were exempt from such limit.) However, the Act also included a transition provision which exempts from the above changes performance-based compensation payable under a written binding agreement that was in effect on November 2, 2017, if such agreement is not subsequently materially amended. As a result of the transition rule, certain performance-based awards that were outstanding as of November 2, 2017 but which may vest and pay out in future tax years may be fully deductible if they qualify for transition relief.

Various programs, including our benefit plans that provide for deferrals of compensation are subject to Section 409A of the Internal Revenue Code. We have reviewed such plans for compliance with Section 409A and believe that they are in compliance.

Actions for 2020

For fiscal 2020, the Compensation Committee of the Company approved changes to the design of the STIP applicable to the NEOs. The changes made include: (i) the Operating Income metric is replaced with Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”); (ii) Key Market metrics have been deleted for Executive Officers; (iii) the weighting of EBITDA is 35% and Adjusted Net Revenue is 35%, while Earnings Per Share (“EPS”) remains at a weighting of 30%; and (iv) there are two plan designs: one for corporate positions (e.g., Chief Executive Officer and Chief Financial Officer) and one for executive officers in Operating Segments.  The change from Operating Income to EBITDA was made to better align with our key financial metrics.  The change to weighting of 35% each for EBITDA and Net Revenue was made to ensure equal focus for delivery of results for these metrics.

Non-GAAP Financial Measures

The "Compensation Discussion and Analysis" section of this Proxy Statement contains non-GAAP financial measures, including Adjusted Net Revenue, AOI, adjusted EBITDA, AEPS and ROIC measured on a company-wide basis and certain financial measures for individual business segments. See "Reconciliation of Non-GAAP Financial Information" in Annex A to this Proxy Statement for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.