FORMFACTOR INC

In 2024 through the standard annual review process, the Compensation Committee highlighted an opportunity to adjust pay mix for our named executive officers. The goal being to maintain total direct compensation levels in alignment to market by rebalancing base salaries, short-term cash incentive targets of time-based and performance-based long-term incentive target values while not materially increasing costs. These changes resulted in changes to both Dr. Slessor’s and Mr. Shahar’s total direct compensation as summarized in the table and described in further detail throughout this section.

Target Total Cash.

Target total cash, which consists of fixed base salary and a target variable cash bonus, is designed to provide market-competitive cash pay, allowing us to attract and retain the highly skilled executives required to drive business results and stockholder value.

Base salary and any required adjustments are determined by the Compensation Committee based on various factors, including an individual’s level of responsibility, expertise and experience, internal equity, individual and Company performance, and competitive conditions in the industry. The Compensation Committee also considers recommendations made by our CEO regarding salary rate adjustments for his direct reports. There is no specific formula applied between the factors in making the specific pay decisions, but rather the Compensation Committee considers the totality of available information in setting compensation levels.

With reference to these and other factors, the Compensation Committee members apply their business judgment to determine the level of target total cash for our named executive officers. In fiscal year 2024, the Compensation Committee determined it was appropriate to rebalance Dr. Slessor’s pay mix by increasing his base salary and reducing his target cash bonus amount for a net overall 7.4% increase to target cash, aligning to our pay philosophy and strengthening retention. Additionally, in fiscal year 2024, the Compensation Committee increased Mr. Shahar’s total target cash by 24% to address his overall low target cash market position to align more closely to the targeted 50 th percentile of FormFactor’s compensation peer group. The change was also intended to address the criticality of the role and ongoing retention concerns. These pay mix changes are further described in the table below.

Summary of Total Target Cash Changes in 2024:

Variable Cash Incentive Plan.

We provide a variable cash incentive opportunity through our Employee Incentive Plan, which awards cash bonuses to our named executive officers and other employees based upon the achievement of pre-determined, quantifiable, and objective performance metrics that are determined by the Compensation Committee and approved by the Board as needed. The performance metrics are set based upon the Company’s annual operating plan, including financial operating targets, identified key drivers of performance, and strategic objectives reflected therein, with the objective to set targets that we believe are challenging but reasonably achievable. The Board considers the annual planning process and its outcome as a critical element to creating a united and focused management team and a workforce well connected to the Company’s strategic plans. The Board reviews the annual plan as it is being developed and approves the annual plan only after the Board is satisfied that the plan is in the best interest of the Company and its stockholders. The direct link between performance under the annual operating plan and the level of cash payouts under the Employee Incentive Plan helps drive achievement of the Company’s near and long-term objectives with quarterly payouts being aligned to the short operating cycles. The following is an illustration of the calculation of individual cash incentive payments under our Employee Incentive Plan for our executive officers.

In fiscal year 2024, the Compensation Committee determined that alignment on the adjusted operating income, a single measure of performance for the variable cash incentive compensation of our named executive officers, combined an important measure of business performance with the clarity of having simple and objective goals. There was also a minimum level of 40% achievement of the target required for any payout to be made, as well as a cap of 200% on all payouts to minimize excessive risk taking, as described in more detail below.

For fiscal year 2025, the Compensation Committee has decided to introduce additional performance metrics for our senior leaders including our named executive officers. To better align variable cash incentives with value creation for our shareholders.

In 2025, bonuses for the named executive officers will have two components:

As was the case in fiscal year 2024, a minimum achievement of 40% is required for any payout on the bonus, with a cap set at 200% to minimize excessive risk-taking.

The following table shows the target bonus of each named executive officer as a percentage of salary for 2023 and 2024. As noted above, the decrease in target incentive as a percentage of base pay was part of the overall rebalancing of total direct compensation and total target cash to address competitive pressures relative to our peer group and market trends.

Fiscal 2024 Performance and Impact on Executive Compensation.

We generated sales of $763.6 million and $663.1 million in fiscal years 2024 and 2023, respectively, reflecting a growth rate of 15.2%. Adjusted operating income increased $56 million, or 80%, in 2024, primarily as a result of an increase in revenues. The performance-based cash incentives for our named executive officers under our Employee Incentive Plan are based on adjusted operating income results. Adjusted operating income, a non-GAAP measure, is defined as GAAP operating income adjusted for amortization of intangible assets, inventory and fixed asset fair value adjustments due to acquisitions; stock-based compensation; restructuring charges; gain on sale of business, net of related costs; acquisition related expenses; bonus expense; and other non-ordinary course events determined by the Compensation Committee that are not within our annual operating plan. The adjusted operating income result was $126.0 million in 2024, an increase of 80% compared to $70.0 million in 2023, primarily as a result of an increase in revenue as noted above. For fiscal year 2024, based on annual adjusted operating income that was significantly higher than target, the 2024 full-year achievement under the Employee Incentive Plan was also above the target level by 28% (or 128% of target), which aligns with the Company’s pay-for-performance philosophy.

The following table shows the level of achievement in relation to the applicable performance metrics for each quarter in fiscal year 2024:

The following table shows the annual total actual 2024 bonus received in relation to the annual total target for each named executive officer.

Equity Compensation.

Our 2012 Equity Incentive Plan authorizes the award of different types of equity awards, including stock options, RSUs and performance-based RSUs. Equity awards are granted to our named executive officers under our 2012 Equity Incentive Plan.

The Compensation Committee believes that equity compensation is a very important component of our pay-for-performance compensation philosophy and is an effective way to reward performance and contributions to our Company, and align compensation for named executive officers over a multi-year period directly with the interests of the Company’s stockholders by motivating and rewarding creation and preservation of stockholder value. Also, due to its long-term nature, equity compensation is also useful for retention purposes.

Fiscal 2024 Equity Awards.

In fiscal year 2024, the Compensation Committee chose to continue issuing annual equity awards in the form of a combination of performance-based RSUs, representing 50% of the grant value, and time-vested RSUs, representing 50% of the grant value, to our named executive officers. RSUs were awarded because their value is directly impacted by all stock price changes and therefore tied directly to stockholder value. Awards of performance-based RSUs were given to our named executive officers in fiscal year 2024 and are tied to a multi-year TSR goal. These performance-based RSU awards are based on the Company’s TSR on a relative basis against the S&P Semiconductors Select Industry Index.

The time-based RSU awards will vest quarterly in equal installments over a period of three years from the date of grant. The performance-based RSU awards will vest following the end of a three-year performance period, depending on how many of the units are earned (between 0% and 200% of the target amount), as certified by the Compensation Committee, based on the Company’s TSR for the period from July 1, 2024 through June 30, 2027 relative to the TSR of the companies identified as being part of the S&P Semiconductors Select Industry Index as of July 1, 2024.

The table below reflects selected details relating to the TSR awards granted to Dr. Slessor and Mr. Shahar in fiscal year 2024(1).

The individual award amounts for the fiscal year 2024 annual equity awards to our named executive officers are set forth in the table below. No special or one-time equity awards were granted in 2024.

As discussed above, during 2024, the Compensation Committee rebalanced pay mix across base salaries, target cash incentives and target value of long-term equity incentives to align total direct compensation levels to market benchmarks for both cash and equity. As a result, the Compensation Committee granted Dr. Slessor long-term equity awards with a target grant value of $4.9 million (compared to $5 million in 2023), a reduction of $100,000. The Compensation Committee granted Mr. Shahar long-term equity awards with a total target grant value of $1.5 million, slightly higher than his total target 2023 grant value.

See the table entitled “Grants of Plan-Based Awards in Fiscal Year 2024” under “Executive Compensation and Related Information” in this Proxy Statement for additional information regarding these equity awards to our named executive officers in fiscal year 2024. Note the actual number of shares granted is determined by dividing the target grant value by the 20-day average stock price prior to the grant date. The 20-day average price used to determine the number of shares granted was $56.04 and the actual price at grant was $41.25, resulting in a 26% reduction in value between the target grant value and the fair market value at the time of grant.

Achievement of TSR Awards for Performance Periods Ending in 2024.

Our performance-based RSUs granted in fiscal year 2021 had a three-year performance period that ended June 30, 2024. The grant performance was determined based on the TSR percentile rank among the S&P Semiconductor Index of Total Shareholder Return (TSR) at the end of the performance period. Performance is determined on a straight line ratio along the following points: 200% of target (maximum) at 75% or greater percentile rank, 100% of target at 50% TSR percentile rank, 50% of target at 25% TSR percentile rank, and 0% payout below 25% TSR percentile rank.

Our TSR for the three-year measurement period was 65% and ranked 11 th out of 38, or in the 73 rd percentile of the S&P Semiconductors Select Industry Index, resulting in a payout at 146%. During this 3-year performance period, our stock price increased 65% from $34.54 to $56.92 per share.

Our performance-based RSUs granted in fiscal years 2022, 2023 and 2024 have a three-year performance period that ends June 30, 2025, June 30, 2026 and June 30, 2027, respectively, based on TSR.