Quanex Building Products CORP

​

Fiscal 2024 Changes: In line with the Company’s ongoing strategic imperatives, the fiscal 2024 AIA design maintains a focus on Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Working Capital as a Percentage of Sales. The fiscal 2024 weightings will be 20% Revenue, 35% EBITDA, 35% Adjusted EBITDA Margin, and 10% Working Capital as a Percentage of Sales.

Long-Term Incentive Compensation

Purpose: We have a long-term incentive program designed to help align the interests of executive management with shareholders and reward executives for the achievement of long-term goals. Long-term incentives are also critical to the retention of key employees and provide executives an opportunity for personal capital accumulation. For these reasons we have placed more value on the long-term incentive element of compensation than on other elements. The result is that this element of compensation generally represents at least half of the named executive officers’ total direct compensation.

Competitive Positioning: Our long-term incentive philosophy targets the 50th percentile of the market. The individual performance of each named executive officer is not considered in the value of the long-term incentive awards granted. Since the goals are set prospectively, the Company’s financial performance determines the ultimate value of the award.

Participation: Participation in the program includes the named executive officers and certain key contributors to the business and is determined based on competitive practices as well as our assessment of which positions contribute to long-term value creation.

Target Award Levels: Fiscal 2023 target long-term incentive awards were determined based on a target dollar value for our executives, which has been the practice for the executive officers since fiscal 2018. The executives had the following LTI targets for fiscal 2023:

Fiscal Year 2023 Long-Term Incentive Program Design

Vehicles and Goals

At its December 2022 meeting, the Compensation Committee maintained its ongoing long-term incentive plan design, reflecting the Company’s continued emphasis on improving returns for its shareholders. For fiscal 2023, the performance share awards were measured by reference to one performance metric — Return on Net Assets (“RONA”) — and the PRSUs were based 100% on Absolute Total Shareholder Return (“TSR”), each as measured over a three-year performance period. The LTI mix was delivered 30% in restricted stock, 30% in PRSUs, and 40% in performance shares. The allocation among the long-term incentive vehicles is determined by the Compensation Committee based on market information provided by its compensation consultant, as well as input from senior management regarding the key business drivers that will continue to promote a results-oriented culture. The Omnibus Plan does not provide for any specific subjective individual performance component in determining the ultimate value of any award.

The following chart illustrates the fiscal 2023 allocation of long-term incentives, which is 70% performance-based.

Restricted Stock

Restricted stock represents 30% of each participant’s long-term incentive value. The Compensation Committee chose 30% of the total value because it provides meaningful retentive value to key executives, helps smooth out market volatility, and is cost efficient. The restricted stock awards vest three years after the award is granted, so long as the participant remains employed through the vesting date. We believe restricted stock awards are an effective long-term compensation vehicle through which key employees can be retained, especially through volatile periods in the market.

Performance Restricted Stock Units

PRSUs represent 30% of each participant’s long-term incentive value and are payable 100% in Company stock. The PRSUs can be earned based on the Company’s Absolute TSR over the three-year performance period. In order for executives to receive a target payout, the Company must have Absolute TSR improvement of 20%. For fiscal 2023, the number of shares earned will be calculated based on Absolute TSR using the 10-day average stock price leading up to the start of the performance period (November 1, 2022) and the 10-day average stock price leading up to the end of the performance period (October 31, 2025) and includes the reinvestment of dividends. The table below illustrates the number of shares that would vest based on the Company’s Absolute TSR under the PRSU awards at various levels of performance. Performance will be interpolated for any results in between threshold and target or target and maximum.

Performance Shares

Performance shares represent 40% of each participant’s long-term incentive value. Performance shares are payable 100% in cash and are intended to motivate executives to achieve preset goals that are in line with critical business drivers.

We set target award values for each year. These target award values are used to calculate the number of performance shares granted to each executive. The final number of shares to vest is not determined until the end of a three-year performance cycle. In December 2022, the Compensation Committee maintained the design of the performance shares to be measured wholly by reference to the Company’s Return on Net Assets (“RONA”). RONA is defined as operating income over total assets (measured as a five quarter trailing average), minus cash, minus current liabilities, plus current long-term debt. The decision to utilize a single performance metric was made to help focus the executives on exceptional performance on returns. The performance shares will continue to be capped at 200% of target. The goals for RONA performance are shown below:

Fiscal 2023 Long-Term Incentive Grants

The number of long-term incentive awards granted during fiscal 2023 was determined by: (1) taking 30% of the participant’s target award value and dividing it by the 10-day average closing stock price between October 18, 2022 and October 31, 2022 to determine the number of restricted stock awards, (2) taking 30% of the participant’s target value and dividing it by the calculated Monte Carlo value of the PRSUs based on the 10-day average closing stock price between October 18, 2022 and October 31, 2022 to determine the number of PRSUs, and (3) taking 40% of the participant’s target award value and dividing it by the 10-day average closing stock price between October 18, 2022 and October 31, 2022 to determine the number of performance shares. The equity grant calculations apply an average stock price based on the last ten trading days in October 2022. For more information related to long-term incentive awards granted during fiscal 2023, please see the table entitled “Grants of Plan-Based Awards” in this Proxy Statement.

Previously Awarded Long-Term Incentive Grants

Fiscal 2021 Performance Shares

The performance shares awarded to our executives in December 2020 (the “Fiscal 2021 Performance Shares”) became payable to executives in December 2023, with a final value determined by the Company’s performance for fiscal 2021 through fiscal 2023. Performance measures for the Fiscal 2021 Performance Shares were based on RONA (as defined above). Our performance against the pre-established RONA goal determined the payout to executives within a range from threshold to maximum. The pre-established goal and the actual performance against the goal is set forth below. The Compensation Committee did not adjust any of the goals under the Company’s fiscal 2021 performance shares and determined the Company’s payouts based on actual results for the performance period.