COGNEX CORP

Our executive compensation program is designed to be largely performance-based with base salary providing a steady income and the annual company bonus, RSU awards and stock option awards based upon individual, company and stock price performance. In its deliberations of compensation for our named executive officers, the Compensation/Stock Option Committee considers the following:

The Compensation/Stock Option Committee also considers ways to maximize the deductibility of executive compensation under U.S. tax laws, while retaining the discretion of the Compensation/Stock Option Committee as is appropriate to compensate executive officers at levels commensurate with their responsibilities and achievements. Beginning in 2018, U.S. tax legislation has impacted the company’s ability to deduct annual compensation in excess of $1 million for anyone who served as a named executive officer in any year after 2016. The Compensation/Stock Option Committee believes that shareholder interests are best served if its discretion and flexibility in awarding compensation is not restricted, even though some compensation awards may result innon-deductible compensation expenses.

The Compensation/Stock Option Committee uses the Competitive Analysis to assess our executives’ compensation against the compensation paid to executives in similar positions in our peer group to help ensure that the compensation we pay is competitive and fair to our executives and to our shareholders. To supplement market benchmarking information sourced from the public filings of the peer group summarized below, our Compensation/Stock Option Committee also reviews competitive compensation data representative of our peer group and other similarly-situated high-tech companies provided within Radford’s Global Technology survey suite. We generally target overall compensation opportunities for our executives at the median of the market as an initial benchmark. While we use the Competitive Analysis as a starting point, we also consider the qualitative, unique dimensions of an executive’s role and tenure in the position when setting our executives’ compensation as we do not believe an external benchmark should be the only determinant of compensation.

Compensation Consultant

The Compensation/Stock Option Committee engaged Pay Governance as its independent consultant to assist it in evaluating our executive compensation programs and practices. Pay Governance is a specialist in compensation practices and provides an additional objective perspective as to the reasonableness of our executive compensation programs and practices and their effectiveness in supporting our business and compensation objectives. During 2023, Pay Governance performed the following tasks for the committee:

Annually, the Compensation/Stock Option Committee evaluates Pay Governance’s independence by considering the following six factors: (i) the provision of other services to the company by Pay Governance; (ii) the amount of fees received by Pay Governance from the company as a percentage of Pay Governance’s total revenue; (iii) Pay Governance’s policies and procedures that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the Pay Governance consultant with members of the Compensation/Stock Option Committee; (v) any company stock owned by the Pay Governance consultant managing the relationship with the company; and (vi) any business or personal relationship of the Pay Governance consultant or Pay Governance, as applicable, with any executive officer of the company. After considering these factors, the Compensation/Stock Option Committee determined that Pay Governance was independent and that its work with the committee for 2023 has not raised any conflicts of interest.

Competitive Analysis

The peer group used for the Competitive Analysis consists of 13 publicly-traded U.S. companies, most of which are in the software and services or technology hardware and equipment industries, that have revenues and market capitalizations in a range we believe is appropriate. We believe this group represents the competition for executive talent in our industry. We plan to review the peer group annually to ensure that the companies in the peer group remain relevant and provide meaningful compensation comparisons.

2023 Peer Group

Base Salary

In determining the base salaries paid to our named executive officers for fiscal year 2023, the Compensation/Stock Option Committee considered, in particular, their levels of responsibility, salary increases awarded in the past, the Competitive Analysis, and the executive’s experience and potential. The base salary approved for each of our named executive officers for fiscal year 2023 was determined based on the following criteria:

Following its investigation and consideration of the above criteria, the Compensation/Stock Option Committee kept Mr. Willett’s annual base salary at $676,000 and increased Mr. Todgham’s annual base salary from $415,000 to $427,000, Ms. DiPalma’s annual base salary from $312,000 to $325,000, Mr. Gerst’s annual base salary from $340,000 to $355,000, and Mr. Kuechen’s annual base salary from $300,000 to $312,000.

Annual Company Bonuses

The Compensation/Stock Option Committee views annual company bonuses as a way to reward employees for meeting individual and company performance objectives. Cognex employees, including our named executive officers, are eligible to participate in the performance-based annual company bonus program except for those employees on a sales commission plan. The Compensation/Stock Option Committee approves the annual company bonus plan in conjunction with our Board of Directors’ approval of Cognex’s annual budget, which typically takes place at the end of the prior fiscal year.

The annual company bonus plan is designed to be variable. In order for any employee to be eligible for an annual company bonus, Cognex must first achieve financial goals set forth in the annual budget related to budgeted consolidated operating income as a percentage of revenue (we refer to this metric as “operating margin”). Once the operating margin criterion is met, the amount each employee at director level and above, which includes our named executive officers, receives depends upon the achievement of individual performance goals, which are established annually.

The Compensation/Stock Option Committee determined that operating margin is an appropriate metric for our bonus program because the committee believes employee performance is integral in achieving desired levels of company profitability.

In 2023, the Board of Directors approved aone-time variance to the calculation of operating margin for bonus purposes to remove the impact of acquisition costs that exceeded the amount budgeted for the year, and Moritex’s revenue and operating expenses in the fourth quarter of 2023. The Board determined that thisone-time variance is appropriate because the Moritex acquisition was not contemplated at the time the Board set the operating margin target for bonus purposes.

In order for any annual cash bonus to be paid to an employee, a minimum level of operating margin for the company must be achieved. Once the minimum level has been achieved, each employee’s eligible bonus is calculated as follows:

The Compensation/Stock Option Committee approves the target bonus for each employee at the vice president level and above, which includes our named executive officers, and the amount by which each individual can participate in any increase due to company performance in excess of the operating margin target. The target bonus amount is based upon a percentage of base salary with the percentage based upon the individual’s level of responsibility. Individual performance goals are established annually and generally relate to near-term strategic, financial and operational performance that supports the company’s business objectives. A weighting is assigned to each individual performance goal. In 2023:

The Compensation/Stock Option Committee believes that the payment of an annual company bonus based upon the achievement of company and individual performance goals is an appropriate way to reward our named executive officers for meeting performance objectives while also achieving desired levels of company profitability.

For 2023, the operating margin target, as calculated for bonus purposes, was consistent with our long-term financial objectives. The actual operating margin achieved for 2023 bonus purposes for our named executive officers was 16.6%, which was below the target of 24.5%, but above the minimum level of 15.9%. As a result, each employee at director level and above (which includes our named executive officers) was eligible to receive up to 8% of thepro-rata portion of his or her bonus target depending on the achievement of his or her individual performance goals. The annual bonuses for 2023 for our named executive officers are listed under the heading “Executive Compensation—Summary Compensation Table” and were paid in the first quarter of 2024. All other bonus-eligible employees were eligible to receive up to 25% of thepro-rata portion of his or her bonus target.

Equity-Based Awards

Cognex’s equity award program is intended to reward a significant portion of our eligible employees, which includes our named executive officers, for their efforts in building shareholder value and improving corporate performance over the long term. The Compensation/Stock Option Committee believes that granting stock options and RSUs is instrumental in our ability to recruit, retain and motivate our high caliber employees.

The Compensation/Stock Option Committee approves the equity awards granted to our named executive officers on an individual basis. Our Chief Executive Officer has been delegated the authority to approve stock options and other equity-based awards to ournon-executive employees not to exceed 80,000 shares to any one individual, in the aggregate, per calendar year.

Each year, Cognex determines the equity-based awards to be granted to current employees in the form of annual grants by considering, among other factors, the impact of the awards on shareholder dilution. We have always been, and will continue to be, sensitive to shareholders’ concerns about the increase in the number of outstanding shares caused by new grants. In that regard, we have kept the number of underlying shares granted each year relatively flat between 2011 and 2019 (disregarding the impact of stock splits effected through the issuance of stock dividends), with decreases commencing in 2020 due primarily to the introduction of RSUs into our equity award program. In 2023, our equity-based awards consisted of only 1.39% of our average outstanding shares. We have also reduced share dilution by repurchasing Cognex stock on the open market during that period.

As a result, the number of outstanding shares has decreased by about 2.38% from 2020 to 2023 (disregarding the impact of stock splits effected through the issuance of stock dividends). We intend to continue to actively manage our use of shares each year.

Each of our named executive officers participated in our annual equity award grants, which were completed in the first quarter of 2023. Grant amounts are determined based on, among other factors, levels of responsibility and the desire to retain our most valuable employees. The annual grants were consistent with the vesting schedules and expiration dates of the majority of grants made to our other employees.

Our policy is to grant equity-based awards on certain fixed dates. If any such date falls within a designated quiet period, then the grants will instead be made on the first Monday following the completion of the quiet period. If Nasdaq is closed on the appropriate Monday as described above, then the grants will instead be made on the next day that Nasdaq is open for trading. The Compensation/Stock Option Committee retains the discretion to grant equity-based awards at such other times as it may otherwise deem appropriate. The exercise price for all stock options granted equals the closing price of our common stock on Nasdaq on the date of grant.

The Compensation/Stock Option Committee believes that the primary purpose of equity-based awards is to align employee interests with the interests of our shareholders, and to provide our employees, including our named executive officers, with incentives to increase shareholder value over time. Each of our named executive officers is eligible to receive an annual grant of (i) stock options that generally vest annually over a period of five years of continuous employment, and (ii) RSUs that vest annually over a period of three years of continuous employment. We believe that this equity compensation model has allowed us to recruit, retain and motivate our senior employees, while reducing dilution and administrative costs to the company as compared to our prior program of granting only options to executive officers.

We also introduced performance-based RSUs (“PRSUs”) for Mr. Willett in 2022. One third of Mr. Willett’s 2023 annual equity grant (based on grant date fair value) was in the form of PRSUs. The vesting of Mr. Willett’s PRSUs is based on the percentile rank of the company’s total shareholder return (“TSR”) against the TSR of the companies within the S&P Composite 1500 Electronic Equipment, Instruments & Components index (or a comparable index if such index is materially changed or discontinued) (“PRSU Index TSR”) over a three-year measurement period. The number of PRSUs earned is calculated by multiplying (i) the Performance Multiplier for the measurement period based on the company’s TSR percentile, as set forth in the table below, by (ii) the target PRSU shares.

If the company’s TSR ranks between a designated performance percentile, the performance multiplier will be determined using linear interpolation. If the company’s TSR is a negative percentage, regardless of the percentile achieved, the performance multiplier will be a maximum of 100%. The vesting of the PRSUs in all cases is subject to Mr. Willett’s continued service with the company. We believe that PRSUs further align the interests of Mr. Willett with building shareholder value and improving corporate performance over the long term.

Change of Control Arrangements

Change of control transactions typically represent events where our shareholders are realizing the value of their equity interests in our company. We believe it is appropriate for our named executive officers to share in this realization of shareholder value. All equity award agreements covering the unvested equity awards held by Mr. Todgham and the February 2019 and February 2020 option agreements covering option awards held by Ms. DiPalma provide for such equity awards to vest immediately upon a “change of control” of Cognex, which is defined as a corporate transaction in which the holders of Cognex common stock before the transaction control less than 51% of the stock of Cognex or any successor corporation after the transaction. In providing for the immediate vesting of these equity awards, the Compensation/Stock Option Committee noted that, given their roles with Cognex at the time of the grants, it was unlikely that Mr. Todgham’s or Ms. DiPalma’s employment with Cognex would be continued following a change of control transaction. Further, Mr. Willett’s February 2022 PRSU and 2023 PRSU agreements provide that the PRSUs will vest immediately upon a “change of control” of Cognex, with such number of vested PRSUs to be calculated based on the applicable performance multiplier determined by the percentile rank of the company’s TSR against the PRSU Index TSR over a measurement period concluding on the date immediately prior to such change of control.

All stock option and RSU agreements covering unvested time-based RSU and option awards held by Mr. Willett, as well as the October 2020, February 2022 and February 2023 option agreements covering option awards held by Ms. DiPalma and Mr. Gerst, the February 2022 and February 2023 RSU agreements covering RSUs held by Ms. DiPalma and Mr. Gerst, the August 2022 and February 2023 option agreements covering option awards held by Mr. Kuechen, and the February 2023 RSU agreement covering RSUs held by Mr. Kuechen are subject to immediate vesting if there is both a “change of control” of Cognex and the respective executive officer’s employment is involuntarily terminated within twelve months following such transaction.