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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.     )

 

Filed by the Registrant  x
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Check the appropriate box:
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x	Definitive Proxy Statement
o	Definitive Additional Materials
o	Soliciting Material under §240.14a-12
Morningstar, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x	No fee required.
o	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
	(1)		Title of each class of securities to which transaction applies:
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	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
	(4)	Date Filed:

 

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Notice of 2020 Annual Meeting

and
Proxy Statement

 

Letter from Joe Mansueto, Chairman of the Board, and Kunal Kapoor, Chief Executive Officer

Notice of Annual Meeting

Proxy Statement

 

01	Proxy Statement Summary
03	Proposal 1: Election of Directors
06	Board of Directors and Corporate Governance
13	Security Ownership of Certain Beneficial Owners and Management
14	Compensation Discussion and Analysis
24	Compensation Committee Report
25	Executive Compensation
29	Equity Compensation Plan Information
30	Proposal 2: Advisory Vote to Approve Executive Compensation
31	Proposal 3: Ratification of the Appointment of Independent Registered Public Accounting Firm
32	Audit Committee Report
34	Principal Accounting Firm Fees
35	Certain Relationships and Related Party Transactions
35	Delinquent Section 16(a) Reports
36	Shareholder Proposals or Nominations
36	Obtaining our Financial Statements
37	Communicating With Us
37	Questions and Answers About the Annual Meeting and the Proxy Materials

 

 

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April 3, 2020

 

Dear Shareholder:

 

We will hold our 2020 Annual Shareholders’ Meeting at 9 a.m. Central time on Friday, May 15, 2020 at our corporate headquarters at 22 West Washington Street, Chicago, Illinois 60602. We look forward to your participation, either in person or by proxy.

 

At this year’s meeting, the agenda includes the following items:

 

·                  Election of directors.

 

·                  Advisory vote to approve executive compensation.

 

·                  Ratification of the appointment of our independent registered public accounting firm.

 

Please refer to the proxy statement for detailed information on each of the proposals and the meeting.

 

Each share of our stock that you own as of the record date for the meeting represents one vote. If you do not vote your shares, you will not have a say on the important issues to be voted on at the meeting.

 

If you have any questions concerning the meeting or the proposals, please contact our Investor Relations department at (312) 696-6164.

 

Sincerely,

 

Joe Mansueto	Kunal Kapoor
Chairman of the Board	Chief Executive Officer

 

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Morningstar, Inc.
Notice of Annual Shareholders’ Meeting
To be held on May 15, 2020

 

April 3, 2020

 

Dear Shareholder:

 

You are cordially invited to attend our 2020 Annual Shareholders’ Meeting, which will be held at 9 a.m. Central time on Friday, May 15, 2020 at our corporate headquarters at 22 West Washington Street, Chicago, Illinois 60602.

 

We are holding the annual meeting for the following purposes:

 

·                  To elect the ten director nominees listed in the proxy statement to hold office until the next annual shareholders’ meeting and until their respective successors have been elected and qualified.

 

·                  To hold an advisory vote to approve executive compensation.

 

·                  To ratify the appointment of KPMG LLP as our independent registered public accounting firm for 2020.

 

·                  To transact other business that may properly come before the meeting or any adjournment or postponement of the meeting.

 

The proxy statement, which follows this notice, fully describes these items. We have not received notice of other matters to be presented at the meeting.

 

You may vote at the meeting and any postponements or adjournments of the meeting if you were a shareholder of record as of the close of business on March 16, 2020, the record date for the meeting. A list of shareholders entitled to vote will be available for inspection for 10 days prior to the meeting at our corporate headquarters, 22 West Washington Street, Chicago, Illinois 60602.

 

To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the annual meeting in person. For further details, please refer to the question “How do I vote?” on page 38.

 

 

Patrick J. Maloney

General Counsel and Corporate Secretary

 

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Proxy Statement

 

Proxy Statement Summary

 

This summary highlights key elements of our proxy statement. For more complete information, you should review the entire proxy statement along with our 2019 Annual Report to Shareholders.

 

Annual Meeting Information

 

Date:		May 15, 2020
Time:		9:00 a.m. Central Time
Place:		Morningstar’s Corporate Headquarters 22 West Washington Street Chicago, Illinois 60602
Record Date:		March 16, 2020
Live Video Stream:		A link to the live video stream of the annual meeting will be available in the Investor Relations area of our corporate website at https://shareholders.morningstar.com in the Events & Presentations section.

 

Annual Meeting Proposals and Board Recommendations

 

 

2019 Financial Highlights

 

We delivered strong results in 2019, surpassing $1.17 billion of revenue and recording growth in revenue and cash flow. Although we didn’t buy back as much stock as we have done in past years, we continued sharing our success with shareholders by distributing $47.8 million in dividends, a payout ratio of approximately 31% of net income. Additionally, we allocated capital to debt repayments, reducing by $95.6 million the debt incurred in connection with our acquisition of DBRS by year end 2019. For a more detailed discussion of our financial performance, see our 2019 Annual Report to Shareholders.

 

Executive Compensation Highlights

 

Our compensation programs and practices are designed to create incentive opportunities for advancing our shareholders’ long-term interests. The compensation decisions for our executives made for 2019 were aligned with our strong financial performance and reflected a continuing emphasis on variable incentives. In 2019, the bonus payouts to our named executive officers reflected the achievement of financial goals, in addition to adjustments made for individual performance, including significant contributions made by key personnel in helping complete the acquisition of DBRS, and ranged from 100% to 175% of their targeted amounts.

 

Our Board of Directors

 

Other than Hugh Zentmyer, who is not standing for re-election in accordance with our director retirement policy, each of our current directors is standing for election to hold office until the annual meeting to be held in 2021 and until his or her successor, if any, is elected and qualified. The table below provides summary information about our 10 director nominees.

 

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Name		Age		Director Since		Primary or Former Occupation		Independent		Other Public Company Boards
Joe Mansueto		63		1984		Executive Chairman of Morningstar, Inc.
Kunal Kapoor		44		2017		Chief Executive Officer of Morningstar, Inc.
Robin Diamonte		55		2015		Vice President and Chief Investment Officer of United Technologies Corporation		✓
Cheryl Francis		66		2002		Co-Chair of Corporate Leadership Center		✓		2
Steve Joynt		68		2019		Former Chief Executive Officer of DBRS
Steve Kaplan		60		1999		Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at The University of Chicago Booth School of Business		✓		1
Gail Landis		67		2013		Founding Partner of Evercore Asset Management, LLC		✓
Bill Lyons		64		2007		Retired President and Chief Executive Officer of American Century Companies, Inc.		✓		1
Jack Noonan		72		1999		Former President and Chief Executive Officer of SPSS Inc.		✓
Caroline Tsay		38		2017		Chief Executive Officer of Compute Software, Inc.		✓		1

 

Our Board is responsible for providing oversight, counseling, and direction to our management team in the long-term interest of the company and our shareholders. The Board believes that the 2020 nominees are of an appropriate composition to effectively oversee and constructively challenge the performance of management in the execution of our strategy. Detailed information about each nominee’s background, skills, and experience can be found beginning on page 3.

 

Our nominees’ tenure and diversity are well-distributed to create a balanced Board, which contributes to a rich dialogue representing a range of perspectives.

 

 

Corporate Governance Highlights

 

We are committed to sound corporate governance. Our Nominating and Corporate Governance Committee regularly reviews our governance practices in the context of current corporate governance trends, regulatory changes, and recognized best practices. The following chart highlights our significant corporate governance policies and practices:

 

70% of directors are independent		Annual board meeting focused on company strategy
Diverse board that provides a range of viewpoints		Annual board and committee self-evaluations
Annual election of directors		Retirement age policy for directors
Majority vote standard		Proxy access rights
Regular executive sessions of independent directors		Shareholder right to call special meetings
Directors not “over-boarded”		Policy against hedging company stock

 

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Proposal 1:

Election of Directors

 

Our nominees for election as directors include seven independent directors, as defined in the applicable rules for companies traded on the Nasdaq Global Select Market (Nasdaq), two members of our senior management team, and the retired former chief executive officer of DBRS, the credit rating agency we acquired in 2019. Each director serves a one-year term, as described below, with all directors subject to annual election. All of the nominees are currently directors.

 

At the recommendation of the Nominating and Corporate Governance Committee, the Board nominated each person listed below to serve as a director for the term beginning at the annual meeting on May 15, 2020 and ending with the annual meeting to be held in 2021 and until his or her successor, if any, is elected and qualified. Unless proxy cards are otherwise marked, the persons named as proxy holders will vote all proxies received FOR the election of each nominee.

 

If any director nominee is unable or unwilling to stand for election at the time of the annual meeting, the persons named as proxy holders may vote either for a substitute nominee designated by the Board to fill the vacancy or for the balance of the nominees, leaving a vacancy. Alternatively, the Board may reduce the size of the Board. The Board believes that each nominee will be able and willing to serve if elected as a director.

 

Recommendation of the Board

 

The Board recommends that you vote FOR the election of each of the following nominees. We describe certain individual qualifications and skills that led the Board to conclude that each person should serve as a director below.

 

 

Joe Mansueto

 

Joe Mansueto founded Morningstar in 1984 and became executive chairman in 2017. He has served as chairman since our company’s inception and as chief executive officer from 1984 to 1996 and from 2000 to 2016. He formerly served as a member of the board of directors of Whole Foods Market, Inc, prior to its acquisition by Amazon.com, Inc. He holds a bachelor’s degree in business administration from The University of Chicago and a master’s degree in business administration from The University of Chicago Booth School of Business.

 

As the founder and largest shareholder of the company, Joe’s knowledge of all aspects of the business and the financial information industry position him well to serve as executive chairman of the company and chairman of the Board.

 

Kunal Kapoor

 

Kunal Kapoor is chief executive officer of Morningstar and was appointed to the Board in January 2017. Before assuming his current role in 2017, he served as president, responsible for product development and innovation, sales and marketing, and driving strategic prioritization across the firm. Before becoming president in 2015, Kunal was head of global products and client solutions. Kunal became head of our global client solutions group in 2013 and took on additional responsibility for the products

 

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group in February 2014. For part of 2013, he was president of our Data Division, and from 2010 until 2012, he was president of Equity and Market Data/Software. In 2009 and 2010, he was president of Individual Software. Kunal joined Morningstar in 1997.

 

He holds a bachelor’s degree in economics and environmental policy from Monmouth College and a master’s degree in business administration from The University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst (CFA) designation.

 

Since he joined the company, Kunal has worked in leadership roles in almost every area of the company, currently serving as chief executive officer. As a result, he is uniquely able to advise the Board on the opportunities and challenges of managing the company and its strategy for growth, as well as its day to day operations and risks.

 

Robin Diamonte

 

Robin Diamonte was appointed to the Board in December 2015. Since 2004, she has been vice president and chief investment officer of United Technologies Corporation, a diversified company providing high-technology products and services to the global aerospace and building systems industries, where she is responsible for overseeing United Technologies Corporation’s $62 billion in global retirement assets. United Technologies Corporation is merging with Raytheon Corporation and Robin has been named to serve as the chief investment officer of the combined company. Before joining United Technologies Corporation, she held several positions during her 12-year tenure at Verizon Investment Management Corporation, the asset management arm of Verizon Communications Inc., rising from research analyst to managing director. She holds a bachelor’s degree in electrical engineering and a master’s degree in business administration from the University of New Haven.

 

As the vice president and chief investment officer of United Technologies Corporation, Robin has extensive experience in the retirement industry. Her expertise is a great asset to our growing retirement business.

 

Cheryl Francis

 

Cheryl Francis was elected to the Board in July 2002. She has been co-chair of Corporate Leadership Center, a not-for-profit organization focused on developing tomorrow’s business leaders, since August 2008 and vice-chair from 2002 to August 2008. She has been an independent business and financial advisor since 2000. From 1995 to 2000, she served as executive vice president and chief financial officer of R.R. Donnelley & Sons Company, a print media company. She currently serves as a member of the board of directors of HNI Corporation and Aon plc. She holds a bachelor’s degree from Cornell University and a master’s degree in business administration from The University of Chicago Booth School of Business.

 

Cheryl is an experienced financial leader. Her experience serving as the chief financial officer of a public company makes her a valuable asset, both on our Board and as Chair of the Audit Committee. Cheryl also currently serves on the board of two other public companies and qualifies as an audit committee financial expert under the relevant SEC rules.

 

Steve Joynt

 

Steve Joynt was appointed to the Board in December 2019. He served as chief executive officer of DBRS, the global credit ratings agency acquired by Morningstar in July 2019, where he spent three years directing the global vision, mission, and strategic objectives for DBRS. Prior to that, he spent more than 20 years at the global credit ratings agency Fitch Group in a variety of roles, including as the company’s chief executive officer from 2002 to 2012. Earlier in his career, Steve spent 12 years at Standard & Poor’s in a variety of analytical roles, culminating in the role of managing director of U.S. structured finance. He holds a bachelor’s degree from the University of Arizona in business administration.

 

Steve brings to the Board deep knowledge of the credit ratings industry. With over 40 years in leadership roles within that industry, he has an excellent understanding of the needs of both investors and issuers of fixed income securities, including sovereign, corporate, asset backed and structured credits.

 

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Steve Kaplan

 

Steve Kaplan served as a member of our advisory board beginning in 1998 and was elected to the Board in August 1999. Since 1988, he has been a professor at The University of Chicago Booth School of Business where he currently is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance. He holds a bachelor’s degree in applied mathematics and economics from Harvard College and a Ph.D. in business economics from Harvard University. Steve currently serves as a member of the board of directors of Zayo Group Holdings, Inc. He formerly served on the board of trustees of the Columbia Acorn Funds and on the board of directors of Accretive Health, Inc.

 

Steve has an extensive background in academia. As a professor, his research and teaching focus on issues in private equity and entrepreneurial finance. His expertise is valuable in analyzing our business and potential acquisitions. Steve also currently serves on the board of another public company.

 

Gail Landis

 

Gail Landis was elected to the Board in May 2013. She was a founding partner of Evercore Asset Management, LLC, an institutional asset management firm, and served as managing principal from 2005 until her retirement in December 2011. From 2003 to 2005, she served as head of distribution for the Americas for Credit Suisse Asset Management, the asset management division of Credit Suisse AG. From 1981 to 2002, she served in senior roles with Sanford C. Bernstein & Co., Inc. and its successor company AllianceBernstein L.P., a global asset management firm. She holds a bachelor’s degree in East Asian studies from Boston University and a master’s degree in business administration from New York University’s Stern School of Business.

 

Gail brings to the Board deep knowledge of the asset management industry. With over 30 years of experience as an investment management executive, she has an excellent understanding of the needs of institutional clients.

 

Bill Lyons

 

Bill Lyons was appointed to the Board in September 2007. He served as president and chief executive officer of American Century Companies, Inc., an investment management company, from September 2000 until his retirement in March 2007. From 1987 to 2000, he served in other capacities at American Century Companies, Inc., including as general counsel, chief operating officer, and president. He currently serves as a member of the board of directors of NIC Inc. He holds a bachelor’s degree in history from Yale University and a juris doctor degree from Northwestern University School of Law.

 

As the former chief executive officer of a private investment management company, Bill has extensive experience in the mutual fund industry. His business acumen and knowledge of the mutual fund industry provide our Board with unique insight and a keen perspective on our customers’ priorities and challenges. Bill also currently serves on the board of another public company.

 

Jack Noonan

 

Jack Noonan served as a member of our advisory board beginning in 1998 and was elected to the Board in August 1999. He is a private investor and served as transition executive of International Business Machines Corporation, a leading manufacturer of information technologies, from October 2009 to December 2009. From January 1992 to October 2009, he served as president and chief executive officer of SPSS Inc., a software company specializing in predictive analytics. From January 2008 to October 2009, he also served as chairman of the board of directors of SPSS Inc. He formerly served as a member of the board of directors of Lionbridge Technologies, Inc. and Fleetmatics Group PLC.

 

As the former chief executive officer of a public company, Jack offers a wealth of management and business experience. Jack’s exposure to the complex issues facing a global software provider makes him a valuable member of our Board.

 

Caroline Tsay

 

Caroline Tsay was elected to the Board in May 2017. She has served as chief executive officer of Compute Software, Inc., an enterprise cloud infrastructure software company, since January 2017. From March 2013 to December 2016, she served as vice president and general manager of the online channel at Hewlett Packard Enterprise Company, an information technology

 

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company. From April 2007 to March 2013, she held several product leadership positions across the consumer search, e-commerce, and advertising businesses at Yahoo! Inc., a digital media company. Caroline currently serves on the board of directors of The Coca-Cola Company, and formerly served as a member of the board of directors of Rosetta Stone Inc. and Travelzoo Inc. She holds a bachelor’s degree in computer science and master’s degree in management science and engineering, both from Stanford University.

 

Caroline brings to the Board an extensive background in technology as well as significant leadership and management experience, including expertise in the areas of cloud infrastructure and sales. Caroline also currently serves on the board of another public company.

 

Board of Directors and Corporate Governance

 

We have adopted a set of Corporate Governance Guidelines to guide the Board in its objective of enhancing shareholder value over the long term. The shareholders elect the Board and vote on extraordinary matters. Our Board currently consists of eleven directors, which number will be reduced to ten after the annual meeting as a result of the retirement of Hugh Zentmyer from the Board. Proxies cannot be voted for a greater number of persons than the number of nominees named above.

 

Independent Directors

 

The Board believes there should be a substantial majority of independent directors on the Board. The Board also believes that it is useful and appropriate to have members of management, including the chief executive officer, as directors. Each of our director nominees, other than Joe Mansueto, Kunal Kapoor and Steve Joynt, qualifies as independent under Nasdaq requirements. Hugh Zentmyer, who is not standing for re-election in accordance with our director retirement policy, is also an independent director. Joe Mansueto and Kunal Kapoor are members of our senior management team, and Steve Joynt is not considered independent under Nasdaq requirements because he was employed from July to October 2019 by DBRS during a time it was a subsidiary of the company.

 

The Nasdaq independence rules preclude a finding of independence if the director is employed by the company or has engaged in various types of business dealings with the company. In reaching its conclusion that each of our non-employee directors (other than Steve Joynt) is independent, the Board determined that none of them had a relationship with the company that would interfere with the exercise of his or her independent judgment.

 

In making this determination, the Board reviewed and discussed information provided by the directors and management with regard to each director nominee’s business and personal activities as they relate to the company. For Robin Diamonte, the Board considered ordinary course transactions between the company and United Technologies Corporation, where she is vice president and chief investment officer. For Cheryl Francis, the Board considered ordinary course transactions between the company and Aon plc, where she is a member of the board of directors, and ordinary course transactions between the company and Corporate Leadership Center, where she is co-chair. For Steve Kaplan, the Board considered a charitable contribution of $35 million to be paid over time by Joe Mansueto to support the creation of an institute to advance urban scholarship and education at The University of Chicago, where Steve is a professor. For Caroline Tsay, the Board considered ordinary course transactions between the company and Compute Software, Inc., where she is chief executive officer, consisting of a demonstration license and follow on agreement to provide internet cloud spending optimization services that involved no payments between the company and Compute Software in 2019, and The Coca-Cola Company, where she is a member of the board of directors. Gail Landis, Bill Lyons, Jack Noonan and Hugh Zentmyer do not have any relationships involving the company other than their positions as members of the Board.

 

The Board has determined that each member of the Audit Committee qualifies as independent under special standards established by the Securities and Exchange Commission (SEC) for members of audit committees. The Board has also determined that each Audit Committee member has sufficient knowledge to read and understand the company’s financial statements and to

 

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serve on the Audit Committee. Additionally, the Board has determined that Cheryl Francis, the Chair of the Audit Committee, qualifies as an audit committee financial expert under the relevant SEC rules. This designation is related to Cheryl’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon her any duties, obligations, or liabilities that are greater than those generally imposed on her as a member of the Audit Committee and the Board. Her designation as an audit committee financial expert pursuant to this SEC requirement does not affect the duties, obligations, or liabilities of any member of the Audit Committee or the Board.

 

The Board has determined that each member of the Compensation Committee qualifies as independent under special standards established by the SEC for members of compensation committees.

 

Board Responsibilities and Structure

 

The primary responsibilities of the Board are to provide oversight, counseling, and direction to our management team in the long-term interests of the company and our shareholders. The Board’s responsibilities include:

 

·                  selecting and regularly evaluating the performance of the chief executive officer;

 

·                  planning for chief executive officer succession;

 

·                  monitoring succession planning for other senior executives;

 

·                  overseeing the conduct of our business to evaluate whether the business is being properly managed, including review of the strategic plan;

 

·                  risk oversight; and

 

·                  overseeing the processes for maintaining the integrity of our financial statements and other public disclosures and compliance with law and ethics.

 

The chief executive officer and management are responsible for seeking the advice and, in appropriate situations, the approval of the Board with respect to certain extraordinary corporate actions.

 

The Board is responsible for determining the respective roles of the chairman of the board and chief executive officer. Joe Mansueto served as chairman of the board and chief executive officer of the company until January 1, 2017. At that time, Joe stepped back from our day-to-day operations to instead focus on strategy, capital allocation, advising our senior team, and leading the Board. Joe serves as chairman of the Board and executive chairman of the company. Kunal Kapoor has served as chief executive officer and a Board member since January 1, 2017. The Board believes that the current structure, which combines Joe’s unparalleled knowledge of all aspects of the business and its history as founder and largest shareholder with Kunal’s management of the day-to-day operations, benefits the business.

 

The Board has not designated a lead director; however, the independent directors choose from among themselves a lead director with respect to specific matters when appropriate. The Board believes this practice has been working well. The Chair of the Nominating and Corporate Governance Committee works closely with the chairman to set the agenda for each Board meeting and serves as a liaison between the chairman and the independent directors.

 

The Board and its committees meet throughout the year on a set schedule. From time to time as appropriate, the Board and its committees also hold special meetings and may act by written consent. Board agendas include regularly scheduled sessions for the independent directors to meet without members of management present. The independent directors determine who among them will be responsible for chairing sessions for the independent directors. The Board has delegated various responsibilities and authority to different Board committees, as described below. These committees regularly report on their activities and actions to the full Board. Board members have access to all of our employees outside of Board meetings.

 

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Board’s Role in Risk Oversight

 

The Board’s role in the company’s risk oversight process involves both the Audit Committee and the full Board. The Audit Committee reviews and discusses with management risks relating to the company’s financial systems and data in the context of internal controls and legal exposure and the steps that management has taken to monitor and control them. The Audit Committee also reviews and discusses with management risks relating to the company’s cybersecurity and data privacy practices. Management identifies and prioritizes enterprise-wide risks. Each year, the full Board receives a presentation by management on enterprise risk, including operational, financial, legal and regulatory, strategic, and reputational risks. Management makes additional reports about enterprise risks as needed or as requested by the Board.

 

Risk Considerations in our Compensation Program

 

We believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the company. In reaching this determination, we have taken into account the following design elements of our compensation policies and practices:

 

·                the mixture of cash and equity-based compensation encourages an appropriate balance between short-term and long-term risk;

 

·                multi-year vesting of equity awards encourages employees to focus on the long-term operational and financial performance of the company; and

 

·                the use of stock ownership requirements for our executive officers not only aligns their interests with shareholders but also discourages a short-term focus.

 

Attendance at Board, Committee, and Annual Shareholders’ Meetings

 

The Board held eight meetings in 2019, three of which were special telephonic meetings relating to the acquisition of DBRS. We expect each director to attend each meeting of the Board and the committees on which he or she serves as well as the annual meeting. In 2019, each director attended at least 75% of the meetings of the Board and the committees on which he or she served. Each of the directors then serving attended our 2019 Annual Shareholders’ Meeting.

 

Board Committees and Charters

 

The Board currently has standing Audit, Compensation, and Nominating and Corporate Governance Committees and appoints the members to each of these committees. Each member of the Audit, Compensation, and Nominating and Corporate Governance Committees is an independent director under Nasdaq standards. Each Board committee has a written charter approved by the Board. A copy of each charter is available in the Investor Relations area of our corporate website at https://shareholders.morningstar.com in the Governance section. The table below shows the members of each committee as of the date of this proxy statement, and the number of meetings held by each committee during 2019.

 

Director		Audit		Compensation		Nominating and Corporate Governance
Joe Mansueto
Kunal Kapoor
Robin Diamonte		Member				Member
Cheryl Francis		Chair		Member
Steve Joynt				Chair		Member
Steve Kaplan
Gail Landis		Member				Member
Bill Lyons				Member		Chair
Jack Noonan		Member		Member
Caroline Tsay		Member				Member
Hugh Zentmyer(1)		Member		Member
2019 Meetings		9		5		4

 

(1) In accordance with the Board’s retirement policy, Hugh will not be standing for re-election as a member of the Board and such Board committees as of the annual meeting.

 

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Audit Committee

 

The Audit Committee assists the Board in its general oversight of our financial reporting, internal controls, and audit functions and is directly responsible for appointing, retaining, compensating, and overseeing the work of our independent registered public accounting firm. We describe the responsibilities and activities of the Audit Committee in greater detail in the Audit Committee Report on page 32.

 

Compensation Committee

 

The Compensation Committee reviews and determines the base salary, incentive plan awards, and other matters relating to compensation for the chief executive officer based on his individual performance and overall contribution to the company. For our other executive officers, the Compensation Committee reviews and determines base salaries, incentive plan awards, and other matters relating to compensation based on feedback from our chief executive officer about the officer’s performance and overall contribution to the company. The Compensation Committee oversees the administration of our equity-based compensation plans, including reviewing and granting equity-based awards to our non-employee directors, executive officers, and other employees. The Compensation Committee also reviews and recommends to the Board various other Morningstar compensation policies, programs, and related matters. The Compensation Committee makes recommendations to the Board concerning our compensation practices for non-employee directors.

 

The Compensation Committee may, in its discretion and only to the extent permitted by law, delegate certain of its authority to a subcommittee of the Compensation Committee. The Compensation Committee may engage its own outside advisors as it deems appropriate. In 2019, management retained an independent compensation consultant, Willis Towers Watson, to review the company’s executive compensation program. We discuss additional information about the Compensation Committee, its activity during 2019, and related matters in the Compensation Discussion and Analysis section, which begins on page 14.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee works with the Board to determine the appropriate characteristics, skills, and experience for the Board as a whole and its individual members. In evaluating the suitability of individual Board members, the Nominating and Corporate Governance Committee and the Board take into account many factors, including general understanding of technology, marketing, sales, finance, and other disciplines relevant to the success of a publicly traded company; understanding of various aspects of our business; education and professional background, including current employment and other board memberships; and reputation for integrity. Although the company does not have a formal diversity policy, the Nominating and Corporate Governance Committee and the Board believe that it is essential that the individual Board members represent diverse opinions, perspectives, personal and professional experiences, and backgrounds. The Nominating and Corporate Governance Committee reviews these factors and others it considers useful in the context of the perceived needs of the Board. The priorities and emphasis of the Nominating and Corporate Governance Committee and of the Board may change from time to time to take into account changes in business and other trends and the portfolio of skills and experience of current and prospective Board members. The Nominating and Corporate Governance Committee establishes procedures for the nomination process and recommends candidates for election to the Board.

 

Consideration of new Board nominee candidates involves a series of internal discussions, review of information concerning candidates, and interviews with selected candidates. Board members or employees typically suggest candidates for nomination to the Board. In 2019, we did not use a search firm or pay fees to other third parties in connection with seeking or evaluating Board nominee candidates. Steve Joynt who was appointed to the Board in December 2019 joined the company through its acquisition of DBRS, the fourth largest global credit ratings agency. Steve retired from his role as chief executive officer of DBRS in October 2019. With the acquisition of DBRS, the Board sought to add a member with significant experience in the credit ratings business and, as described on page 4, Steve’s experience fit this need. The Nominating and Corporate Governance Committee will consider candidates proposed by shareholders using the same criteria it uses for other candidates. A shareholder seeking to recommend a prospective nominee for the Nominating and Corporate Governance Committee’s consideration should submit the candidate’s name and qualifications to our corporate secretary at Morningstar, Inc., 22 West Washington Street, Chicago, Illinois 60602. In addition, our by-laws permit a shareholder, or group of up to 20 shareholders, owning continuously for at least three years shares of our common stock representing an aggregate of at least 3% of our outstanding shares, to nominate

 

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and include in our proxy materials director nominees constituting up to the greater of 20% of the Board or two director nominees, provided that the shareholder(s) and nominee(s) satisfy the requirements set forth in our by-laws, which can be found in the Investors Relations area of our corporate website at https://shareholders.morningstar.com in the Governance section.

 

The Nominating and Corporate Governance Committee reviews and makes recommendations to the Board regarding the appropriate size, performance, composition, duties, and responsibilities of the Board and each of its committees. The Nominating and Corporate Governance Committee also reviews and reports to the Board on a periodic basis on other corporate governance matters.

 

Limitation on Other Board Service

 

We require that our directors who serve as an executive officer of a public company serve on a total of no more than three public company boards, including ours. We require that our directors who do not serve as an executive officer of a public company serve on no more than four public company boards, including ours.

 

Communications from Shareholders to the Board

 

Shareholders may communicate with the Board by writing to our corporate secretary at Morningstar, Inc., 22 West Washington Street, Chicago, Illinois 60602 or by sending an email to board@morningstar.com. The name of any specific intended Board recipient should be noted in the communication. The Board has instructed our corporate secretary to forward correspondence only to the intended recipients; however, the Board has also instructed him to review the correspondence prior to forwarding it and, in his discretion, not to forward certain items if he deems them to be of a commercial or frivolous nature or otherwise inappropriate for the Board’s consideration. In these cases, he may forward some of the correspondence elsewhere in the company for review and possible response.

 

Corporate Governance Guidelines

 

The Board has adopted a set of Corporate Governance Guidelines. The Nominating and Corporate Governance Committee is responsible for overseeing the Corporate Governance Guidelines and reporting and making recommendations to the Board concerning corporate governance matters. We have posted the guidelines in the Investor Relations area of our corporate website at https://shareholders.morningstar.com in the Governance section.

 

Among other matters, the Corporate Governance Guidelines include the following items concerning the Board:

 

·                The Board believes that a board of directors consisting of seven to 12 members is an appropriate size based on our present circumstances. The Board periodically evaluates whether a larger or smaller slate of directors would be preferable.

 

·                The Board may fill Board vacancies. Directors appointed by the Board to fill vacancies serve until the next annual meeting at which directors are to be elected.

 

·                The Board believes that, except during periods of temporary vacancies, a substantial majority of its directors must be independent. In determining the independence of a director, the Board applies the relevant Nasdaq requirements and applicable law and regulations.

 

·                The Board does not believe it should establish term limits. While term limits could help ensure that there are fresh ideas and viewpoints available to the Board, they can also result in the loss of contribution of directors who have been able to develop, over a period of time, increasing insight into the company and its operations and, therefore, provide an increasing contribution to the Board as a whole. As an alternative to term limits, the Board believes it can continue to evolve and adopt new viewpoints through the process for the evaluation and nomination of director candidates. In that regard, the Nominating and Corporate Governance Committee and the Board consider each member’s length of service and openness to new ideas when considering the appropriate slate of candidates to recommend for nomination.

 

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·                Directors are required to retire from the Board when they reach the age of 73. A director reaching the age of 73 following his or her election to the Board may continue to serve until the next annual meeting. On the recommendation of the Nominating and Corporate Governance Committee, the Board may waive this requirement for any director if deemed in the best interests of the company.

 

·                The Board believes that any director who discontinues his or her present employment or who materially changes his or her position should promptly tender a written offer of resignation to the Board. The Nominating and Corporate Governance Committee will then evaluate whether the Board should accept the resignation based on a review of whether the director continues to satisfy the Board’s membership criteria in light of his or her changed circumstances.

 

·                All directors are required to comply with their obligations described in the Conflicts of Interest section of our Corporate Governance Guidelines. If an actual or potential conflict of interest develops for any reason, including, without limitation, because of a change in our business operations, or in a director’s circumstances, the director should immediately report that matter to our general counsel for evaluation. If a significant conflict cannot be resolved, the director may be required to resign.

 

·                If a director has a personal interest in a matter before the Board, the director must disclose the interest to the Board, must excuse himself or herself from participation in the discussion, and may not vote on the matter.

 

The Investor Relations area of our corporate website at https://shareholders.morningstar.com also includes our Code of Ethics, which has been adopted by the Board and is applicable to each director.

 

Directors’ Compensation

 

The Board establishes non-employee directors’ compensation based on the recommendation of the Compensation Committee. Directors who are also our employees do not receive any additional compensation for serving on the Board or attending Board meetings. Our non-employee directors receive cash compensation and equity-based compensation.

 

Cash Compensation

 

In 2019, each non-employee director received an annual retainer of $40,000. Non-employee directors who are members of the Audit Committee, Compensation Committee, or Nominating and Corporate Governance Committee received an additional annual retainer of $5,000, except for Gail Landis who received an additional annual retainer of $10,000 for acting as a representative of the Nominating and Corporate Governance Committee at meetings of the Regulatory Governance Board of Morningstar Credit Ratings LLC. The Audit Committee Chair, Compensation Committee Chair, and Nominating and Corporate Governance Committee Chair received an annual retainer of $25,000, $15,000, and $15,000, respectively. In addition to the retainers described above, we reimburse our non-employee directors for travel expenses for attending Board and committee meetings.

 

Equity-Based Compensation

 

In 2019, each of our non-employee directors received an annual grant of restricted stock units covering shares with a value of approximately $150,000 at grant that vest over a period of three years. In lieu of receiving the annual grant of restricted stock units, new non-employee directors receive an initial grant of restricted stock units covering shares with a value of approximately $250,000 at grant, also vesting over a period of three years.

 

2019 Directors’ Compensation

 

The following table shows compensation earned by each of our non-employee directors in 2019, other than Steve Joynt who joined our Board in December 2019 and did not receive any compensation for serving on the Board in 2019. Joe Mansueto and Kunal Kapoor are members of our Board and Morningstar employees. Neither receives any additional compensation for serving on the Board or attending Board meetings.

 

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		Fees Earned or Paid in Cash			Stock Awards			Total(1)
Robin Diamonte		$	50,000		$	149,924.81		$	199,824.81
Cheryl Francis		75,000			149,924.81			224,824.81
Steve Kaplan		65,000			149,924.81			214,824.81
Gail Landis		55,000			149,924.81			204,824.81
Bill Lyons		65,000			149,924.81			214,824.81
Jack Noonan		50,000			149,924.81			199,824.81
Caroline Tsay		50,000			149,924.81			199,824.81
Hugh Zentmyer		50,000			149,924.81			199,824.81

 

(1) As required by relevant SEC rules, the amounts represent the aggregate grant date fair value for restricted stock unit awards granted in 2019 as determined pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation (FASB ASC Topic 718). See Note 13 of the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the relevant assumptions used in calculating these amounts. As of December 31, 2019, our non-employee directors held the following number of restricted stock units: Robin Diamonte 2,594; Cheryl Francis 2,594; Steve Kaplan 2,594; Gail Landis 2,594; Bill Lyons 2,594; Jack Noonan 2,594; Caroline Tsay 3,126; and Hugh Zentmyer 2,594. Steve Joynt did not hold any restricted stock units as of December 31, 2019. Stock awards when granted are rounded down to the nearest whole share.

 

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Security Ownership of Certain Beneficial

Owners and Management

 

The following table shows information about beneficial ownership of our common stock as of March 1, 2020 by each of our directors, each of the executive officers identified in the compensation tables included in this proxy statement, each holder of more than 5% of our common stock, and all of our directors and executive officers as a group. Except as otherwise indicated in the notes to the table, each person named in the table has sole voting and investment power with respect to the shares listed.

 

The following table is based on 42,969,770 shares of our common stock outstanding as of March 1, 2020.

 

Shareholder		Number of Shares Beneficially Owned		Percentage of Common Stock
Joe Mansueto(1)		21,088,222		49.1	%
Kunal Kapoor		31,982		*
Jason Dubinsky		11,657		*
Bevin Desmond(2)		45,201		*
Danny Dunn		1,174		*
Tricia Rothschild		9,109		*
Robin Diamonte		4,651		*
Cheryl Francis(3)		29,620		*
Steve Joynt		0		*
Steve Kaplan(4)		46,524		*
Gail Landis		2,891		*
Bill Lyons(5)		23,232		*
Jack Noonan(6)		31,936		*
Caroline Tsay		2,660		*
Hugh Zentmyer(7)		19,884		*
All directors and executive officers as of March 1, 2020 as a group (14 persons)(8)		21,348,743		49.7

 

* Represents beneficial ownership of less than 1%.

 

(1) Joe Mansueto’s address is c/o Morningstar, Inc., 22 West Washington Street, Chicago, Illinois 60602. Reflects [*] shares of our common stock over which Joe has sole voting and investment power and 339,714 shares of our common stock over which Joe has shared voting and investment power. Joe has pledged 3,000,000 shares of our common stock as security under the terms of a bank credit agreement. Includes 189,714 shares of our common stock held by the Mansueto Foundation, a private charitable foundation.

 

(2) Includes 7,000 shares of common stock issuable upon exercise of stock options exercisable by April 30, 2020 and 21,107 shares of common stock held by Bevin’s spouse.

 

(3) Includes 2,316 shares of common stock issuable upon exercise of stock options exercisable by April 30, 2020.

 

(4) Includes 2,316 shares of common stock issuable upon exercise of stock options exercisable by April 30, 2020.

 

(5) Includes 2,316 shares of common stock issuable upon exercise of stock options exercisable by April 30, 2020 and 7,500 shares of common stock as to which Bill has shared voting and investment power.

 

(6) Includes 1,000 shares of common stock held by Jack’s spouse.

 

(7) Includes 2,316 shares of common stock issuable upon exercise of stock options exercisable by April 30, 2020.

 

(8) Includes 16,264 shares of common stock as to which directors and executive officers have the right to acquire beneficial ownership by April 30, 2020.

 

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Compensation Discussion and Analysis

 

In this section, we discuss the goals of our compensation program and how we compensated each of the executive officers for 2019 who are identified in the following table. We refer to this group as the named executive officers, and the group includes our chief executive officer, our chief financial officer, and our three other most highly compensated executive officers in office as of the last day of 2019.

 

Name		Title
Kunal Kapoor		Chief Executive Officer
Jason Dubinsky		Chief Financial Officer
Bevin Desmond		Head of Talent & Culture
Danny Dunn		Chief Revenue Officer
Tricia Rothschild(1)		Former Chief Product Officer

 

(1) Tricia Rothschild resigned from her position effective December 31, 2019 to pursue other opportunities.

 

Goals of Our Compensation Program

 

Our Compensation Committee’s compensation philosophy is to pay our executives competitive base salaries and provide them with the opportunity to earn meaningful annual cash incentive compensation through the Morningstar Incentive Plan (the Corporate Incentive Plan) and equity-based compensation through the Morningstar 2011 Stock Incentive Plan (the Stock Incentive Plan).

 

Our goal is to develop compensation policies and practices that:

 

·                  attract and retain talented executives;

 

·                  motivate and reward our executives for their individual and collective contributions to the company; and

 

·                  align our executives’ interests with the long-term interests of our shareholders.

 

The Compensation Committee believes that, as members of our management team take on more responsibility at Morningstar, variable incentive pay and equity awards should make up a larger portion of their total compensation. Our compensation program is designed to reward each member of our management team based on his or her overall contribution to the company and the goals and initiatives most relevant to his or her role or the particular product area that such member manages.

 

The Compensation Committee does not use rigid formulas to determine executive compensation but nevertheless aims to tie annual cash incentive compensation closely to value creation, as measured by increases in revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) or similar measures. Our equity program, combined with our stock ownership requirements for our executive officers and directors, is designed to reward long-term stock performance. The Compensation Committee bases its decisions about an executive’s compensation on its assessment of his or her performance and contribution toward enhancing the intrinsic value of our company and its product areas. The Compensation Committee relies on its judgment in determining the amounts and combination of base salary, annual bonus, and equity awards. In 2019, management retained an independent compensation consultant, Willis Towers Watson, to review the company’s executive compensation program, for a fee of approximately $76,268. Separately, Willis Towers Watson also provided, at management’s request, services relating to broader human resources-related engagements which totaled approximately $190,985.

 

The Compensation Committee compares the total compensation of our executives to what it sees in the market for companies of similar size and operating in a similar business. The Compensation Committee doesn’t target specific compensation levels based on this review but considers this information to obtain a general understanding of current compensation practices.

 

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When evaluating 2019 compensation, the Compensation Committee compared the total compensation of our executives with compensation for executives at the following companies:

 

CBOE Holdings, Inc.		Financial Engines, Inc.
Envestnet, Inc.		MSCI Inc.
FactSet Research Systems, Inc.		SEI Investments Company
Fair Isaac Corporation		SS&C Technologies Holdings, Inc.

 

The above peer group was the same peer group that was used to evaluate 2018 compensation decisions except for the removal of The Advisory Board Company due to its merger with Optum and Forrester Research, Inc. due to its size relative to Morningstar and the overall peer group.

 

The Compensation Committee also evaluated published survey data provided by McLagan and Radford compensation surveys. These surveys provide information about compensation levels and practices at financial services and technology companies. When reviewing data from published surveys, the Compensation Committee focuses on information specific to companies of Morningstar’s size. For purposes of this Compensation Discussion and Analysis, we refer to the compensation data for these companies and surveys as “market data.”

 

“Say on Pay” Vote

 

The company has historically provided its shareholders with an opportunity to cast an advisory “say on pay” vote on executive compensation once every three years. The company held its last say on pay vote at its 2017 Annual Shareholders’ Meeting, and the proposal was approved with approximately 87% of the votes cast in support of the proposal. The Compensation Committee did not make any changes to the company’s executive compensation program in response to the 2017 say on pay vote. The company is conducting a say on pay vote at its 2020 Annual Shareholders’ Meeting. For additional information on this year’s say on pay vote, see Proposal 2: Advisory Vote to Approve Executive Compensation.

 

Since the 2017 Annual Shareholders’ Meeting, the Board has reassessed its prior position regarding the frequency of future say on pay votes and now believes that an advisory vote on executive compensation every year is the best approach for the company based on a number of reasons, including the following:

 

·                  The company values the opinion of its shareholders and believes that an annual say on pay vote will best reinforce the company’s desire to communicate with its shareholders; and

 

·                  An annual say on pay vote will allow the company’s shareholders to express a view with greater frequency on the company’s compensation policies and practices.

 

Accordingly, the company expects to conduct a say on pay vote every year until the next vote on the frequency of future say on pay votes. Although we currently believe that holding say on pay votes every year is appropriate for the company, we may periodically reassess that position.

 

2019 CEO Compensation

 

Consistent with the company’s overall compensation philosophy, the Compensation Committee and Board believe that variable annual cash incentive pay and equity awards should make up a larger portion of Kunal’s compensation as chief executive officer to align his interests with the long-term interests of our shareholders. In anticipation of Kunal’s appointment as chief executive officer in January 2017, Willis Towers Watson conducted a competitive compensation analysis for the chief executive officer role using the company’s 2016 compensation peer group. The analysis also included data regarding the compensation for a number of newly appointed chief executive officers who succeeded chief executive officers who were also founders. Based on the Board’s review of the analysis prepared by Willis Towers Watson and other factors, the Board established Kunal’s target total

 

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compensation at the levels it felt appropriate for a new and first-time chief executive officer, with an emphasis on recognizing his promotion to chief executive officer with increases to his target variable incentive pay levels and equity levels.

 

For 2019, the Compensation Committee approved an increase in Kunal’s 2019 target bonus from $850,000 to $950,000. This target bonus increase was approved to reflect Kunal’s strong performance during 2019 and to improve the overall market positioning of Kunal’s cash compensation. Based on Kunal’s performance during 2018, for 2019, the Compensation Committee also approved an annual equity grant to Kunal with a target value of $1.2 million, which was allocated equally between market stock units and restricted stock units. The table below summarizes Kunal’s 2019 compensation which includes an award of market stock units approved at the time of Kunal’s appointment as chief executive officer in 2017:

 

Annual Base Salary			Target Bonus			Equity Awards
$	400,000		$	950,000		Annual equity grant with a target value of $1.2 million, allocated equally between market stock units and restricted stock units.
						Third grant of performance-based market stock units with a target value of $834,000, with a three-year performance period.

 

CEO Compensation Beyond 2019

 

During 2019, the Compensation Committee continued to monitor, evaluate, and revisit Kunal’s target total compensation. In 2019, Willis Towers Watson conducted a competitive compensation analysis for the chief executive officer role using the company’s 2019 compensation peer group. Based on the Compensation Committee’s review of the analysis prepared by Willis Towers Watson and other factors, the Compensation Committee established Kunal’s 2020 target total compensation at the levels it felt appropriate as a more experienced CEO, with an emphasis on recognizing the successes he has delivered as CEO since his promotion and the opportunities to deliver future value to the firm through his strategic direction and leadership. The Compensation Committee has set Kunal’s target total compensation beyond 2019 by replicating the target total compensation package that was established in 2017 and includes a modest increase to his base salary and more heavily weighted increases to his variable targets (i.e., bonus and equity) from which value will only be realized with continued demonstrated performance. The Compensation Committee will continue to monitor and manage the progression of Kunal’s target total compensation over time based on his performance and business conditions. The table below shows Kunal’s target total compensation beyond 2019 including his currently contemplated equity awards for the period from 2020 to 2022; the effective date of his annual base salary and target bonus will be determined at a later time based on business conditions:

 

 

Elements of our Executive Compensation Program

 

Our executive compensation program currently consists of two main elements: cash compensation (annual base salary and annual bonus) and equity-based compensation (restricted stock units and market stock units). The Compensation Committee believes that its current compensation program for executive officers strikes the correct balance between short-term and

 

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long-term incentives. This mix of equity and cash compensation is intended to align the interests of our executive officers with those of our shareholders and provide incentives for our executive officers to enhance the intrinsic value of our company.

 

Cash Compensation

 

We pay cash compensation in the form of base salary and bonuses under the Corporate Incentive Plan. We include bonuses in the compensation package because the Compensation Committee believes doing so encourages strong financial and operational performance. We describe each component of cash compensation in more detail below.

 

Base Salary: The Compensation Committee reviews and determines the base salary for Kunal based on his individual performance and overall contribution to the company. For our other executive officers, the Compensation Committee reviews and determines their base salaries based in part on Kunal’s feedback about the individual’s performance and overall contribution to the company.

 

For 2019, no salary changes were approved for our named executive officers.

 

Annual Incentives: The Corporate Incentive Plan rewards participants for meeting and exceeding annual performance goals approved by the Compensation Committee. The design of the Corporate Incentive Plan gives the Compensation Committee discretion to establish a bonus for Kunal based on his individual performance and overall contribution to the company and bonuses for our other executive officers based on an assessment of the individual’s achievements and feedback from Kunal about the individual’s performance and overall contribution to the company and, in certain cases, the performance of particular product areas.

 

2019 Bonus Target and Bonus Determinations for Named Executive Officers: In December 2018, the Compensation Committee approved the 2019 bonus targets for each of our named executive officers. The 2019 bonus targets for the named executive officers, other than Kunal’s as described above, did not increase as compared to 2018 and, accordingly, Kunal’s 2019 bonus target was set at 237.5% of his base salary and the 2019 bonus targets for the other named executive officers ranged from approximately 100% to 125% of each named executive officer’s base salary. The Compensation Committee determined these target bonus levels based on its assessment of the named executive officer’s impact on the company’s and, in some cases, particular product area’s results and a desire for a meaningful portion of total compensation to be in the form of variable incentive pay. In determining target bonus levels, the Compensation Committee also reviewed incentive compensation practices at similar companies. As noted above, while the Compensation Committee does not target compensation elements against the market data, the Compensation Committee does review the market data to understand competitive market practices with respect to executive compensation.

 

The Compensation Committee established adjusted revenue and adjusted EBITDA as the two metrics to measure company and product area performance for the annual cash incentive bonuses in 2019. The Compensation Committee determined payouts for 2019 primarily on financial performance, using a formula that measured adjusted revenue and adjusted EBITDA relative to company and product area goals established for the bonus program, rather than year-over-year comparisons. Revenue and EBITDA are adjusted to exclude the impact of certain items, such as expected incentive compensation costs, foreign currency fluctuations, capitalized software development costs, acquisitions and divestitures and associated costs, and certain investments in the business. At the beginning of 2019, the Compensation Committee established a funding formula that specifies bonus funding for adjusted revenue and adjusted EBITDA based on various performance levels, with the final funding factor being weighted 67% for adjusted revenue and 33% for adjusted EBITDA, which was shifted from 50% for adjusted revenue and

 

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50% for adjusted EBITDA to put more emphasis on top line growth in 2019. The graphics below illustrate how this formula works for company and product area performance:

 

2019 Adjusted Revenue Funding Formula

 

 

 

2019 Adjusted EBITDA Funding Formula

 

 

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The Compensation Committee determined that Kunal’s, Jason’s, Bevin’s, and Danny’s bonus should be based entirely on the company performance measures. For Tricia, who led multiple product areas, the Compensation Committee measured a portion of her bonus funding as against the performance of the areas she oversaw. The 2019 bonus funding weightings for the named executive officers were as follows:

 

Named Executive Officer		Company Funding Weighting		Product Areas Funding Weighting
Kunal Kapoor		100	%	—
Jason Dubinsky		100	%	—
Bevin Desmond		100	%	—
Danny Dunn		100	%	—
Tricia Rothschild		50	%	50	%(1)

 

(1) The product area funding weighting for Tricia reflects the aggregated funding weighting for the product areas she led.

 

Company Performance Measures: In 2019, our overall company financial performance resulted in the following calculation of the bonus funding factor and final payout factor:

 

Measure		Achievement			Goal			Goal Attainment		Unweighted Funding Factor		Weighting		Funding Factor
Adjusted Revenue (Millions)		$	1,066.5		$	1,056.5		100.9	%	104.7	%	67	%	106.1	%
Adjusted EBITDA (Millions)		$	356.4		$	344.2		103.5	%	108.9	%	33	%

 

Each executive’s bonus target was multiplied by the final funding factor to determine the funding adjusted target bonus. Adjustments to the calculated award amounts were then determined based on each executive’s individual performance.

 

The table below shows the target earned by each of the named executive officers based on the achievement of company or product area financial goals and the adjustments made for individual performance. We describe the factors affecting the individual performance adjustment for each of our named executive officers in more detail below.

 

		Corporate Incentive Plan
		2019 Target Bonus [A]			Financial Funding Factor [B]		Individual Performance Adjustment [C]		Final Bonus [A] x [B] x [C] = [D]
Kunal Kapoor		$	950,000		106.1	%	150	%	$	1,511,925	(1)
Jason Dubinsky		500,000			106.1	%	175	%	928,375
Bevin Desmond		258,904			106.1	%	175	%	480,720
Danny Dunn		300,000			106.1	%	110	%	350,130
Tricia Rothschild		300,000			98.6	%	100	%	295,800

 

(1) Kunal will receive $503,975 of the $1,511,925 in the form of restricted stock units to be granted on May 15, 2020, which will vest in full on the first anniversary of the grant date.

 

2019 Bonus Payouts: The Compensation Committee reviewed Kunal’s performance and his broader impact on the growth of the business and the Compensation Committee reviewed Kunal’s evaluation of each executive’s contributions to key company initiatives and his or her broader impact on the growth of the business. The bonus discussion below describes the key goals for each named executive officer, how the Compensation Committee evaluated performance against those goals, and the factors affecting the individual performance adjustment for each of our named executive officers.

 

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Kunal Kapoor: In 2019, Kunal’s key goals included driving our financial performance, expanding our efforts to innovate in data, research, and analytics, delivering more value to investors, and leading Morningstar’s efforts to be a leading player in the convergence of public and private markets. Kunal was also charged with delivering an exceptional employee experience, as measured through employee engagement and efforts around diversity and inclusion.

 

Kunal oversaw the achievement of strong financial results in 2019, with the company surpassing its financial goals for the year. We continued to expand the data we collect, the insights we deliver, and the range of research that we provide on investor portfolios. And as the convergence of public and private markets continues to hasten, PitchBook is fast becoming the go-to tool for investors in this growing space. Finally, Kunal led the acquisition of DBRS, our largest acquisition to date, significantly enhancing our position in the credit ratings business and positioning us for continued long-term success in this space. Based on these factors, the Compensation Committee determined that Kunal’s individual performance adjustment be 150% of his final payout factor, which resulted in a bonus of $1,511,925. Kunal received $1,007,950 in cash and the remaining $509,975 in restricted stock units to be granted on May 15, 2020. The restricted stock units vest in full on the first anniversary of the grant date.

 

Jason Dubinsky: In 2019, Jason’s key goals included delivering on Morningstar’s financial goals, the enhancement of our control environment globally, the refinement of our business continuity planning, and the implementation of process improvement across the finance organization globally.

 

Jason delivered successfully on these goals and continued to help put the organization on a path to success as it continues to scale and grow. Jason also was a pivotal player in our acquisition of DBRS, playing a key role in the diligence, execution, and integration of the opportunity, creating significant long-term value for stakeholders. Based on these factors, Kunal recommended to the Compensation Committee that Jason’s individual performance adjustment be 175% of his final payout factor.

 

Bevin Desmond: In 2019, Bevin’s key goals included enhancing employee engagement, advancing our diversity and inclusion efforts, and positioning and reinforcing Morningstar as a great place to work. Bevin was also responsible for building a world class talent and culture function, with the aim of scaling to meet our growing organization’s needs.

 

In 2019, Bevin and her team were successful in delivering the anticipated improvements as our internal surveys showed improvements in those measures. Bevin was also a key leader in our acquisition of DBRS, and took a key role in the months following the completion of the deal in helping to drive the appropriate integration activities. She made pivotal contributions in this regard, leading Kunal to recommended to the Compensation Committee that Bevin’s individual performance adjustment be 175% of his final payout factor.

 

Danny Dunn: In 2019, Danny’s key goals included delivering on our sales targets, enhancing sales enablement and training across the business development organization globally, and aligning our sales organizations in EMEA and Asia Pacific to our improved global framework.

 

In 2019, Danny successfully delivered on these goals, beginning with the organization meeting its sales targets for the year. We also continued to greatly enhance our support systems and global training efforts and rationalized our approach to selling as we added the DBRS organization to Morningstar. Danny also took on additional responsibilities in the service and marketing areas. Based on these factors, Kunal recommended to the Compensation Committee that Danny’s individual performance adjustment be 110% of his final payout factor.

 

Tricia Rothschild: In 2019, Tricia’s key goals included delivering on the financial targets set for her area, enhancing the uniqueness of our products and solutions through an increased focus on bringing research innovation to life, and delivering on product roadmap commitments, particularly through enhancing the collaboration between product managers and technologists.

 

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In 2019, Tricia largely delivered on these goals. In aggregate, the areas she oversaw delivered on their financials and we experienced a hastening of product deliveries. Additionally, we made good progress in how our teams work to deliver product enhancements, with the product, design, research, and technology teams working closely together to simultaneously execute their roadmaps. Based on these factors, Kunal recommended to the Compensation Committee that Tricia’s individual performance adjustment be 100% of her final payout factor.

 

Equity-Based Compensation

 

The Stock Incentive Plan provides for grants of options, stock appreciation rights, restricted stock, restricted stock units, performance shares, and market stock units. All of our employees are eligible for awards under the Stock Incentive Plan.

 

Equity awards that vest over time are an important part of how we reward our executive officers and other employees. We pay a meaningful portion of executive officer compensation in the form of equity awards to help align the economic interests of our executive officers with those of our shareholders. We also believe it’s important for our executives to have a long-term stake in the success of the business. The amount of equity-based compensation we provide to each executive officer in a given year generally reflects the individual’s level of responsibilities within the company.

 

The Compensation Committee reviews the value of annual equity awards for each executive officer to evaluate whether they reflect each individual’s responsibilities within the company and encourage retention and long-term alignment with the company’s success. In 2019, we granted restricted stock units and market stock units to our named executive officers. Each named executive officer’s target equity value is allocated equally between restricted stock units and market stock units. Restricted stock units were granted to our named executive officers in May. With respect to market stock units, the Compensation Committee elected to grant one-half of each named executive officer’s targeted value in May and the other half in November to minimize the effect of any stock price volatility on the awards. We describe these awards in more detail below.

 

Restricted Stock Units: In 2019, the Compensation Committee granted restricted stock units to our named executive officers that vest in four equal annual installments commencing on the first anniversary of the grant date. The table below shows the approximate value approved for each named executive officer in 2019 and 2018.

 

		Approximate Value of 2019 Restricted Stock Units			Approximate Value of 2018 Restricted Stock Units
Kunal Kapoor		$	600,000	(1)	$	500,000
Jason Dubinsky		350,000			475,000
Bevin Desmond		200,000			200,000
Danny Dunn		175,000		(2)	150,000
Tricia Rothschild		200,000			200,000

 

(1) During 2019, Kunal received a restricted stock unit grant in the amount of $230,690 as part of his 2018 bonus award. This award is not included in Kunal’s 2019 target value in the table above.

 

(2) During 2019, Danny received a restricted stock unit grant in the amount of $76,233 as part of his 2018 bonus award. This award is not included in Danny’s 2019 target value in the table above.

 

The value of Kunal’s and Danny’s restricted stock unit award in 2019 was higher than in 2018 because their equity targets were increased in 2019 to reflect their performance and contributions. The value of Jason’s 2019 restricted stock unit award was lower than in 2018 because the mix of Jason’s restricted stock units were aligned to the same mix of all other executives, thus his restricted stock units were 50% of his total equity target (which was offset with an increase in his market stock units). The value of Bevin’s and Tricia’s restricted stock units did not change in 2019 compared to 2018.

 

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Market Stock Units: In 2019, the Compensation Committee granted market stock units to our named executive officers that vest three years from the grant date depending on our total shareholder return (TSR) over that three-year period. In addition to the TSR metric, the market stock units granted to the named executive officers in 2019 had a revenue kicker, where an additional amount of market stock units would be earned for outperformance of the 2021 revenue targets. The Compensation Committee granted one-half of the 2019 targeted value on May 15, 2019 and the other half on November 15, 2019. The table below shows the targeted value for each named executive officer in 2019 and 2018.

 

		2019 Market Stock Unit Revenue Kicker			Approximate Target Value of 2019 Market Stock Units			Approximate Target Value of 2018 Market Stock Units
Kunal Kapoor		100	% Morningstar		$	600,000	(1)	$	500,000	(2)
Jason Dubinsky		100	% Morningstar		350,000			225,000
Bevin Desmond		100	% Morningstar		200,000			200,000
Danny Dunn		100	% Morningstar		175,000			150,000
Tricia Rothschild		100	% Product Areas		200,000			200,000

 

(1) As noted under 2019 CEO Compensation, during 2019, Kunal received a second grant of market stock units with a target value of $834,000, with a three-year performance period. This award was approved at the time Kunal was appointed as chief executive officer in January 2017 and is not included in Kunal’s 2019 target value in the table above.

 

(2) During 2018, Kunal received a grant of market stock units with a target value of $833,333, with a three-year performance period. This award was approved at the time Kunal was appointed as chief executive officer in January 2017 and is not included in Kunal’s 2018 target value.

 

The value of Kunal’s and Danny’s market stock unit award was higher than in 2018 because their equity targets were increased in 2019 to reflect their performance and contributions. The value of Jason’s 2019 market stock unit award was higher than in 2018 because the mix of Jason’s market stock units were aligned to the same mix of all other executives, thus his market stock units were 50% of his total equity target (which was offset with an decrease in his restricted stock units). The value of Bevin’s and Tricia’s market stock units did not change in 2019 compared to 2018.

 

The market stock units vest based on our TSR over the three-year performance period, as shown in the table below. The shares earned based on TSR performance between the performance levels described below will be based on a linear interpolation.

 

Performance Level		Shares Earned as a Percentage of Target Market Stock Units
Threshold TSR		0% vesting if TSR is a negative 23.33%
Target TSR		100% vesting if TSR is 10%
Maximum TSR		150% vesting if TSR is 35%

 

In addition to TSR performance, if there is outperformance of the 2021 revenue target, the named executive officers will receive an additional amount of shares that are earned based on TSR performance, as shown in the table below. The shares earned based on the revenue kicker between the performance levels described below will be based on a linear interpolation.

 

2021 Revenue		Revenue Kicker
Up to meeting target 2021 revenue		100% of shares earned based on TSR performance
Maximum 2021 revenue (2x target 2021 revenue CAGR)		200% of shares earned based on TSR performance

 

Beginning in 2020, the Compensation Committee expects to continue granting market stock units with a revenue kicker to our named executive officers. The design of the market stock units for 2020 is expected to be the same as the market stock units that were granted in 2019, with the exception of the Target TSR being raised to 20% to earn 100% of the target market stock units, along with corresponding adjustments to the Threshold TSR and Maximum TSR.

 

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Employment Agreements, Change in Control Arrangements, and Deferred Compensation

 

We do not have any employment agreements or change-in-control agreements with any of our executive officers. In connection with her resignation effective as of December 31, 2019, Tricia entered into a separation agreement with the company. Under the terms of this separation agreement, Tricia will be entitled to receive her 2019 annual bonus of $295,800 and her unvested restricted stock units and market stock units granted prior to December 31, 2018 will continue to vest.

 

If there is a change in control of Morningstar, the Compensation Committee can vest or make exercisable, as the case may be, unvested or not yet exercisable awards granted under the Stock Incentive Plan. The following events constitute a change in control within the meaning of the Stock Incentive Plan: the acquisition by a person or entity of more than 50% of Morningstar’s common stock, other than by Joe Mansueto, his wife, children, or any trustee or custodian on their behalf; a merger, consolidation, or statutory share exchange involving Morningstar, unless shareholders receive more than 60% of the stock of the surviving company or the parent company; a liquidation or dissolution of Morningstar; or a sale of substantially all of Morningstar’s assets. The Compensation Committee has not determined how it will exercise its discretion if there is a change in control of Morningstar.

 

If there had been a change in control of Morningstar on December 31, 2019 and the Compensation Committee exercised discretion to accelerate vesting, the market value on that date of the shares subject to unvested restricted stock units and market stock units (at target) that would have vested, for the benefit of each of our named executive officers would have been:

 

		Restricted Stock Units			Market Stock Units
Kunal Kapoor		$	4,674,571		$	5,566,241
Jason Dubinsky		1,080,505			957,792
Bevin Desmond		796,798			899,387
Danny Dunn		638,528			799,673
Tricia Rothschild		487,218			526,256

 

None of our executive officers hold any unvested stock options that would have been accelerated upon a change in control of Morningstar.

 

Other than our 401(k) plan, we do not have any plans that permit executive officers to defer salary or bonus.

 

Stock Ownership Requirements

 

The Board has adopted stock ownership requirements for our executive officers and directors. These guidelines are designed to encourage our executive officers and directors to increase their equity stakes in Morningstar and more closely link their economic interests with those of our shareholders. We require each of our executive officers and directors to hold either shares with a value of $5,000,000 or generally speaking, a number of Morningstar shares and share equivalents that is at least the sum of 12.5% of the total number of exercisable stock options and 25% of the total number of vested restricted stock units and vested market stock units that he or she has been granted. As of March 1, 2020, our executive officers and directors were in compliance with these requirements. We describe our stock ownership requirements for executive officers and directors in more detail on the Investor Relations area of our corporate website at https://shareholders.morningstar.com in the Governance section.

 

Anti-Hedging Policy

 

Our Code of Ethics prohibits directors and employees from engaging in short sales of Morningstar’s common stock and transactions in publicly traded options in Morningstar’s common stock (such as puts, calls, and other derivative securities) on an exchange or in any other organized market and from entering into derivative or hedging transactions intended to reduce their risk of owning Morningstar securities, while still maintaining ownership of such securities.

 

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Compensation Committee Report

 

The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis with management. Based on the review and discussions, the Compensation Committee recommended to the Board the inclusion of the Compensation Discussion and Analysis in Morningstar’s proxy statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

Compensation Committee

 

Steve Kaplan, Chair
Cheryl Francis
Bill Lyons
Jack Noonan
Hugh Zentmyer

 

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Executive Compensation

 

The following table shows compensation for our named executive officers. No compensation information is provided for Bevin for 2018 and for Tricia for 2017 because Bevin and Tricia were not named executive officers during those years.

 

2019 Summary Compensation Table

 

		Year		Salary			Bonus			Stock Awards(1)			Option Awards			Non-Equity Incentive Plan Compensation(2)			All Other Compensation(3)			Total
Kunal Kapoor		2019		$	400,000		$	—		$	2,033,793		$	—		$	1,511,925	(5)	$	14,964		$	3,960,682
Chief Executive Officer		2018		387,500			—			1,833,035			—			1,233,690		(6)	14,130			3,468,355
		2017		350,000			—			3,434,192			—			850,000			13,541			4,647,733
Jason Dubinsky		2019		400,000			—			699,642			—			928,375			14,313			2,042,330
Chief Financial Officer		2018		400,000			—			699,776			—			608,935			14,139			1,722,850
		2017		175,758			380,000			1,849,741			—			191,215			41			2,596,755
Bevin Desmond		2019		258,750			—			399,834			—			480,720			13,552			1,152,856
Head of Talent and Culture		2018
		2017		256,818			—			428,852			—			222,699			11,598			920,955
Danny Dunn		2019		300,000			—			349,753			—			350,130			14,448			1,014,331
Chief Revenue Officer		2018		300,000			—			299,833			—			389,400		(7)	19,977			1,009,210
		2017		300,000			—			379,831			—			210,000			13,541			903,372
Tricia Rothschild(4)		2019		300,000			—			399,834			—			295,800			13,323			1,008,957
Chief Product Officer		2018		300,000			—			399,852			—			333,218			13,229			1,046,299

 

(1) As required by relevant SEC rules, the amounts represent the aggregate grant date fair value for restricted stock unit awards and market stock units granted in 2019 as determined pursuant to FASB ASC Topic 718. The amounts included for the market stock units are calculated based on the probable satisfaction of the performance condition for these awards as of the grant date. Under FASB ASC Topic 718, the vesting condition related to the total shareholder return (TSR) market stock units is considered a market condition and not a performance condition. Accordingly, there is no grant date fair value below or in excess of the amount reflected in the table above for the named executive officers that could be calculated and disclosed based on achievement of the underlying market condition. See Note 13 of the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the relevant assumptions used in calculating these amounts. For further information on these awards, see the 2019 Grants of Plan-Based Awards table beginning on page 26 of this Proxy Statement.

 

(2) The amounts represent annual bonus payments made under the Corporate Incentive Plan. For further information on these payments, see Compensation Discussion and Analysis—Annual Incentives.

 

(3) For 2019, the amounts shown represent the following:

 

		Amounts Paid for Basic Life and Accidental Death and Dismemberment Insurance			Matching Contributions to Our 401(k) Plan			Other			Total
Kunal Kapoor		$	264		$	14,700		$	—		$	14,964
Jason Dubinsky		264			14,049			—			14,313
Bevin Desmond		178			13,374			—			13,552
Danny Dunn		198			14,250			—			14,448
Tricia Rothschild		198			13,125			—			13,323

 

(4) Tricia Rothschild resigned as Chief Product Officer effective as of December 31, 2019.

 

(5) For 2019, Kunal will receive $503,975 of the $1,511,925 in the form of restricted stock units to be granted on May 15, 2020, which will vest in full on the first anniversary of the grant date.

 

(6) For 2018, Kunal received $230,690 of the $1,233,690 in the form of restricted stock units granted on May 15, 2019 and that vest in full on the first anniversary of the grant date.

 

(7) For 2018, Danny received $76,233 of the $389,400 in the form of restricted stock units granted on May 15, 2019 and that vest in full on the first anniversary of the grant date.

 

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2019 Grants of Plan-Based Awards

 

The following table shows information concerning the grant of plan-based awards in 2019 to each of our named executive officers.

 

		Grant Date		Approval Date		Award Type		Estimated Future Payouts Under Non-Equity Incentive Plan Awards			Estimated Future Payouts Under Equity Incentive Plan Awards(2)						All Other Stock Awards: Number of Shares of Stocks or Units(3)		Grant Date Fair Value of Stock Award(4)
								Target(1)			Threshold		Target		Maximum
Kunal Kapoor		—		—		Bonus		$	950,000		—		—		—		—		$	—
		5/15/2019		2/25/2019		RSU		—			—		—		—		4,510	(4)	599,965
		5/15/2019		2/25/2019		MSU		—			0		2,689		4,033		—		299,931
		5/15/2019		9/06/16		MSU		—			0		3,738		5,607		—		416,937
		11/15/2019		9/06/16		MSU		—			0		3,083		4,624		—		416,976
		11/15/2019		10/04/2018		MSU		—			0		2,218		3,432		—		299,985
Jason Dubinsky		—		—		Bonus					500,000		—		—		—		—
		5/15/2019		2/25/2019		RSU		—			—		—		—		2,630	(4)	349,869
		5/15/2019		2/25/2019		MSU		—			0		1,568		2,352		—		174,895
		11/15/2019		10/03/2019		MSU		—			0		1,293		1,939		—		174,878
Bevin Desmond		—		—		Bonus					258,304		—		—		—		—
		5/15/2019		2/25/2019		RSU		—			—		—		—		1,503	(4)	199,944
		5/15/2019		2/25/2019		MSU		—			0		896		1,344		—		99,940
		11/15/2019		10/03/2019		MSU		—			0		739		1,018		—		99,950
Danny Dunn		—		—		Bonus					300,000		—		—		—		—
		5/15/2019		2/25/2019		RSU		—			—		—		—		1,315	(4)	174,934
		5/15/2019		2/25/2019		MSU		—			0		784		1,176		—		87,447
		11/15/2019		10/03/2019		MSU		—			0		646		969		—		87,372
Tricia Rothschild		—		—		Bonus					300,000		—		—		—		—
		5/15/2019		2/25/2019		RSU		—			—		—		—		1,503	(4)	199,944
		5/15/2019		2/25/2019		MSU		—			0		896		1,344		—		99,940
		11/15/2019		10/03/2019		MSU		—			0		739		1,018		—		99,950

 

(1) Amounts shown represent the Corporate Incentive Plan bonus target for each participating named executive officer established by the Compensation Committee. The Corporate Incentive Plan does not include specified threshold or maximum payout levels.

 

(2) Amounts shown represent the target and maximum market stock units granted under the Stock Incentive Plan. These market stock units vest on the third anniversary of the grant date depending on our total shareholder return (TSR) over that three-year period. The number of shares of our common stock to be received at vesting will range from 0% to 150% of the target amount based on the company’s TSR for the three-year performance period. At threshold performance, none of the shares vest. At target performance, the target number of shares would vest. At maximum performance, 150% of the target number of shares would vest.

 

(3) Amounts shown consist of restricted stock units granted under the Stock Incentive Plan. These restricted stock units vest in four equal annual installments beginning on the first anniversary of the grant date.

 

(4) Amounts shown represent the aggregate grant date fair value for each restricted stock unit grant and market stock unit grant made in 2019 as determined pursuant to FASB ASC Topic 718. The amounts included for the market stock units are calculated based on the probable satisfaction of the performance condition for these awards as of the grant date. See Note 13 of the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the relevant assumptions used in calculating this amount.

 

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