Definitive Proxy Statement


SCHEDULE 14A INFORMATION
 
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NIC INC.
 
(Name of Registrant as Specified In Its Charter)
 

 
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NIC INC.
25501 West Valley Parkway, Suite 300
Olathe, Kansas 66061
_________________
 
Notice of 2014 Annual Meeting of Stockholders
 
Time and Date:
 
10:00 a.m., Central Daylight Time, on Tuesday, May 6, 2014
 
Place:
 
The Oread,
   
1200 Oread Avenue, Lawrence, Kansas 66044
 
Items of Business:
   
 
 
To elect the director nominees of NIC Inc. (the "Company") as directors;
 
 
To consider and vote upon the approval of the 2014 Amended and Restated Stock Compensation Plan (an amendment and restatement of the 2006 Amended and Restated Stock Option and Incentive Plan);
 
 
To consider and cast an advisory vote in favor of the compensation paid to the Company's named executive officers as disclosed in these materials;
 
 
To consider and vote upon the ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent registered public accounting firm for the year ending December 31, 2014; and
 
 
To transact such other business as may properly come before the Annual Meeting or any adjournments or postponements of the Annual Meeting.
 
Record Date:
 
You can vote if you were a stockholder of record at the close of business on March 7, 2014.
 
Materials to Review:
 
We are distributing our proxy materials to our stockholders primarily via the Internet under the "Notice and Access" rules of the Securities and Exchange Commission ("SEC"). This approach saves printing and mailing costs and reduces the environmental impact of our Annual Meeting, while providing a convenient way to access the materials and vote. On March 21, 2014, we mailed a Notice of Internet Availability of Proxy Materials to stockholders of record at the close of business on March 7, 2014, containing instructions about how to access our proxy materials and vote online or vote by telephone.
 
Proxy Voting:
 
Important. Please review the instructions on each of your voting options described in this Proxy Statement and in the notice you received by mail. Whether or not you plan to attend the Annual Meeting, please vote your shares at your earliest convenience.
 
 
By Order of the Board of Directors
   
 
William F. Bradley, Jr.
 
Secretary
 
March 21, 2014

 
i

 
 
CONTENTS
 
 
Page
   
NOTICE OF 2014 ANNUAL MEETING OF STOCKHOLDERS
i
   
GENERAL INFORMATION
1
   
STRUCTURE AND PRACTICES OF THE BOARD OF DIRECTORS
8
   
DIRECTOR COMPENSATION
15
   
REPORT OF THE AUDIT COMMITTEE
20
   
ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)
22
   
APPROVAL OF 2014 AMENDED AND RESTATED STOCK COMPENSATION PLAN
 
(AN AMENDMENT AND RESTATEMENT OF THE 2006 AMENDED AND RESTATED STOCK
 
OPTION AND INCENTIVE PLAN) (ITEM 2 ON PROXY CARD)
27
   
EXECUTIVE COMPENSATION
35
   
REPORT OF THE COMPENSATION COMMITTEE
35
   
COMPENSATION DISCUSSION AND ANALYSIS
36
   
COMPENSATION TABLES
53
   
SUMMARY COMPENSATION TABLE
53
   
GRANTS OF PLAN-BASED AWARDS IN FISCAL 2013
59
   
OUTSTANDING EQUITY AWARDS AT 2013 FISCAL YEAR-END
61
   
OPTION EXERCISES AND STOCK VESTED IN FISCAL 2013
64
   
EXECUTIVE OFFICERS
65
   
EMPLOYMENT AGREEMENTS AND SEVERANCE PAYMENTS
66
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
74
   
ADVISORY VOTE ON EXECUTIVE COMPENSATION (ITEM 3 ON PROXY CARD)
77
   
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (ITEM 4 ON PROXY CARD)
78
   
SUBMISSION OF STOCKHOLDER PROPOSALS
79
   
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
79
   
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
80
   
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
80
   
OTHER BUSINESS
83

 
 

 
 
NIC INC.
25501 West Valley Parkway, Suite 300
Olathe, Kansas 66061
_________________
 
PROXY STATEMENT
FOR
2014 ANNUAL MEETING OF STOCKHOLDERS

GENERAL INFORMATION
 
Why am I receiving these materials?
 
NIC Inc. (“NIC” or the “Company” or “we”) has made these materials available to you on the Internet or, upon your request, has delivered printed versions of these materials to you by mail, in connection with the Company’s solicitation of proxies for use at the 2014 annual meeting of stockholders (the “Annual Meeting”) to be held on Tuesday, May 6, 2014 at 10:00 a.m., local time, and at any adjournment or postponement thereof.  These materials were first sent or made available to stockholders on March 21, 2014.  You are invited to attend the Annual Meeting and are requested to vote on the proposals described in this proxy statement (the “Proxy Statement”).  The Annual Meeting will be held at The Oread, 1200 Oread Avenue, Lawrence, Kansas 66044.
 
What is included in these materials?
 
These materials include:
 
This Proxy Statement for the Annual Meeting; and

The Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 27, 2014.

If you requested printed versions by mail, these materials also include the proxy card or vote instruction form for the Annual Meeting.
 
 What are the Board’s recommendations?
 
The Board recommends that you vote your shares:
 
  1.  “FOR” each of the nominees named herein for director (Proposal No. 1);
     
  2.  “FOR” the approval of the 2014 Amended and Restated Stock Compensation Plan (an amendment and restatement of the 2006 Amended and Restated Stock Option and Incentive Plan) (Proposal No. 2);
     
  3. “FOR” the approval on an advisory basis of the compensation paid to the Company’s named executive officers, as disclosed in these proxy materials (Proposal No. 3); and
     
  4.  “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2014 (Proposal No. 4).
 
 
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Where are the Company's principal executive offices located, and what is the Company’s main telephone number?
 
The Company’s principal executive offices are located at 25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061.  The Company’s main telephone number is (877) 234-3468.
 
Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?
 
Pursuant to rules adopted by the SEC, the Company uses the Internet as the primary means of furnishing proxy materials to stockholders.  Accordingly, the Company is sending the Notice of Internet Availability of Proxy Materials (the “Notice”) to the Company’s stockholders.  All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or request a printed set of the proxy materials.  Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice.  In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.  The Company encourages stockholders to take advantage of the availability of the proxy materials on the Internet to help reduce the environmental impact of its annual meetings.
 
I share an address with another stockholder, and we received only one paper copy of the proxy materials.  How may I obtain an additional copy of the proxy materials?
 
The Company has adopted a procedure called “householding,” which the SEC has approved.  Under this procedure, the Company is delivering a single copy of the Notice and, if applicable, this Proxy Statement and the Annual Report, to multiple stockholders who share the same address unless the Company has received contrary instructions from one or more of the stockholders.  This procedure reduces the Company’s printing and mailing costs, and the environmental impact of the Company’s annual meetings.  Stockholders who participate in householding will continue to be able to access and receive separate proxy cards.  Upon written or oral request, the Company will deliver promptly a separate copy of the Notice and, if applicable, this Proxy Statement and the Annual Report to any stockholder at a shared address to which the Company delivered a single copy of any of these documents.
 
To receive a separate copy of the Notice and, if applicable, this Proxy Statement and the Annual Report, stockholders may write or call the Company at the following address and telephone number:
 
NIC Corporate Secretary
25501 West Valley Parkway, Suite 300
Olathe, Kansas 66061
(877) 234-3468
 
Stockholders who hold shares in “street name” (as described below) may contact their brokerage firm, bank, broker-dealer or other similar organization to request information about householding.
 
If you and other residents at your address have been receiving multiple copies of the Notice and, if applicable, our Annual Report to Stockholders and Proxy Statement, and desire to receive only a single copy of these materials, you may contact your broker, bank or other nominee or contact us at the above address or telephone number.
 
 
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How can I get electronic access to the proxy materials?
 
The Notice will provide you with instructions regarding how to:
 
View on the Internet the Company’s proxy materials for the Annual Meeting; and
 
Instruct the Company to send future proxy materials to you by email.
 
The Company’s proxy materials are also available on the Company’s website at      www.egov.com/investors.
 
Choosing to receive future proxy materials by email will save us the cost of printing and mailing documents to you and will reduce the impact of our annual meetings on the environment.  If you choose to receive future proxy materials by email, you will receive an email message next year with instructions containing a link to those materials and a link to the proxy voting website.  Your election to receive proxy materials by email will remain in effect until you terminate it.
 
Your vote is very important.
 
You can vote your shares at the Annual Meeting if you are present in person or represented by proxy.
 
Who can vote?
 
Stockholders of record as of the close of business on March 7, 2014 (also referred to as the Record Date) are entitled to vote. On that date, approximately 65,149,187 shares of Common Stock were outstanding and eligible to vote.
 
How many votes do I have?
 
On each matter presented at the Annual Meeting, you are entitled to one vote for each share of Common Stock owned by you at the close of business on the Record Date.
 
What is the difference between a stockholder of record and a beneficial owner?
 
Most NIC stockholders hold their shares through a broker, bank, or other nominee rather than directly in their own names.  As summarized below, there are some distinctions between shares held of record and those owned beneficially.
 
Stockholder of Record .  If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the stockholder of record with respect to those shares, and the Notice was sent directly to you by NIC.  If you request printed copies of the proxy materials by mail, you will receive a proxy card.
 
Beneficial Owner of Shares Held in Street Name .  If your shares are held in a brokerage account at a brokerage firm, bank, broker-dealer or similar organization, then you are the “beneficial owner” of shares held in “street name,” and a Notice was forwarded to you by that organization.  The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting.  As a beneficial owner, you have the right to instruct that organization on how to vote your shares.  Those instructions are contained in a “voting instruction form.”  If you request printed copies of the proxy materials by mail, you will receive a voting instruction form.  As a beneficial owner, you are also invited to attend the Annual Meeting.  However, because you are not the stockholder of record, you may not vote your shares in person at the Annual Meeting, unless you obtain a legal proxy from your broker, bank, or other nominee and present it to the inspectors of election at the Annual Meeting with your ballot.
 
 
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If I am a stockholder of record of the Company’s shares, how do I vote?
 
If you are a stockholder of record, there are four ways to vote:
 
Internet Voting .  You may vote by proxy via the Internet by following the instructions provided in the Notice.
 
Telephone Voting .  If you requested printed copies of the proxy materials by mail, you may vote by proxy by calling the toll free number found on the proxy card.
 
Voting By Mail .  If you requested printed copies of the proxy materials by mail, you may vote by proxy by filling out the proxy card and returning it in the envelope provided.
 
Voting in Person .  You may vote in person at the Annual Meeting.  The Company will give you a ballot when you arrive.
 
If I am a beneficial owner of the Company’s shares held in street name, how do I vote?
 
If you are a beneficial owner of shares held in street name, there are four ways to vote:
 
Internet Voting .  You may vote by proxy via the Internet by visiting www.proxyvote.com and entering the control number found in your Notice.
 
Telephone Voting .  If you requested printed copies of the proxy materials by mail, you may vote by proxy by calling the toll free number found on the voting instruction form.
 
Voting By Mail .  If you requested printed copies of the proxy materials by mail, you may vote by proxy by filling out the voting instruction form and returning it in the envelope provided.
 
Voting in Person .  If you wish to vote in person at the Annual Meeting, you must obtain a legal proxy from your broker, bank, or other nominee.  Please contact your broker, bank, or other nominee for instructions regarding obtaining a legal proxy.
 
What is the quorum requirement for the Annual Meeting?
 
A majority of the shares entitled to vote at the Annual Meeting must be present at the Annual Meeting in person or by proxy for the transaction of business.  This is called a quorum.  Your shares will be counted for purposes of determining whether there is a quorum if you:
 
Are entitled to vote and you are present in person at the Annual Meeting; or
 
Have properly voted on the Internet, by telephone or by submitting a proxy card or vote instruction form by mail.
 
If a quorum is not present, the Annual Meeting will be adjourned until a quorum is obtained.
 
 
4

 
 
How are proxies voted?
 
All shares represented by valid proxies received prior to the Annual Meeting will be voted and, where a stockholder specifies by means of the proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the stockholder’s instructions.
 
What happens if I do not give specific voting instructions?
 
Stockholders of Record . If you are a stockholder of record and you:
 
Indicate when voting on the Internet or by telephone that you wish to vote as recommended by the Board; or
 
Sign and return a proxy card without giving specific voting instructions, then the persons named as proxy holders will vote your shares in the manner recommended by the Board on all matters presented in this Proxy Statement and as the proxy holders may determine in their discretion with respect to any other matters properly presented for a vote at the Annual Meeting.
 
Beneficial Owners of Shares Held in Street Name. If you are a beneficial owner of shares held in street name and do not provide the organization that holds your shares with specific voting instructions then, under applicable rules, the organization that holds your shares may generally vote on “routine” matters but cannot vote on “non-routine” matters.  If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-routine matter, that organization will inform the inspectors of election that it does not have the authority to vote on this matter with respect to your shares.  This is generally referred to as a “broker non-vote.”
 
What ballot measures are considered “routine” or “non-routine”?
 
The ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2014 (Proposal No. 4) is a matter considered routine under applicable rules.  A broker or other nominee may generally vote on routine matters, and therefore no broker non-votes are expected to exist in connection with Proposal No. 4.
 
The election of directors (Proposal No. 1), the approval of the 2014 Amended and Restated Stock Compensation Plan (an amendment to the 2006 Amended and Restated Stock Option and Incentive Plan) (Proposal No. 2) and the non-binding advisory resolution approving the Company’s executive compensation (Proposal No. 3) are matters considered non-routine under applicable rules.  A broker or other nominee cannot vote without instructions on non-routine matters, and therefore broker non-votes may exist in connection with Proposals No. 1, No. 2 and No. 3.
 
What vote is required to approve each of the proposals?
 
With respect to the election of directors (Proposal No. 1), directors are elected by a plurality of the votes cast for the election of directors at the Annual Meeting and the director nominees who receive the most votes will be elected.
 
Approval of Proposals No. 2 (amendment to the 2006 Amended and Restated Stock Option and Incentive Plan), No. 3 (advisory vote on executive compensation) and No. 4 (ratification of independent registered public accounting firm) require the affirmative vote of the holders of a majority of all of the outstanding shares of Common Stock present or represented at the Annual Meeting and entitled to vote thereon.
 
 
5

 
 
How are abstentions and broker non-votes counted?
 
Abstentions and broker non-votes are counted for purposes of determining whether a quorum is present.  Only “FOR” and “AGAINST” votes are counted for purposes of determining the votes received in connection with each proposal.
 
Directors are elected by a plurality of the votes cast for the election of directors at the Annual Meeting, with the nominees obtaining the most votes being elected.  Because there is no minimum vote required for the election of directors, abstentions or withhold votes and broker non-votes will be entirely excluded from the vote and will have no effect on its outcome.
 
Abstentions are counted in determining the total number of shares present in person or represented by proxy and entitled to vote thereon with respect to a proposal that requires the affirmative vote of a majority of such shares and, therefore, will have the same effect as a vote against: (i) the proposal to approve the 2014 Amended and Restated Stock Compensation Plan (an amendment to the 2006 Amended and Restated Stock Option and Incentive Plan); (ii) the proposal to approve, on an advisory basis, the compensation of our named executive officers as disclosed in these materials; and (iii) the proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2014.  Broker non-votes are not counted in determining the number of shares present in person or represented by proxy and entitled to vote thereon with respect to a proposal that requires the affirmative vote of a majority of such shares and, therefore, will not affect the outcome of the voting on these proposals.
 
What is the effect of the advisory vote?
 
The vote of the stockholders regarding the compensation of our named executive officers as disclosed in these materials is an advisory vote, and the results will not be binding on the Board of Directors or the Company.  However, the Board of Directors and the Compensation Committee, which is comprised of independent directors, will consider the outcome of the vote when making future executive compensation decisions.
 
Can I change my vote after I have voted?
 
You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting.  You may change your vote on a later date via the Internet or by telephone (in which case only your latest Internet or telephone proxy submitted prior to the Annual Meeting will be counted), by signing and returning a new proxy card or voting instruction form with a later date, or by attending the Annual Meeting and voting in person.  However, your attendance at the Annual Meeting will not automatically revoke your proxy, unless you properly vote at the Annual Meeting.  In addition, you may specifically request that your prior proxy be revoked by delivering to the Company’s Corporate Secretary at 25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061, a written notice of revocation prior to the Annual Meeting.
 
Who are the proxies who will vote my shares at the Annual Meeting if I timely return my proxy card?
 
The Company has designated Harry H. Herington, the Company’s Chairman of the Board and Chief Executive Officer, and William F. Bradley, Jr., the Company’s Executive Vice President, Chief Administrative Officer, General Counsel, and Secretary, with full power of substitution, to vote the authorized proxies during the Annual Meeting.
 
 
6

 
 
Is my vote confidential?

It is the Company’s policy to maintain the confidentiality of proxy cards, ballots, and voting tabulations that identify individual stockholders, except they may be disclosed to officers, directors, authorized employees, and retained advisors to the Company, and where disclosure is mandated by law and in other limited circumstances.

Where can I find the voting results of the Annual Meeting?
 
The Company intends to announce preliminary voting results at the Annual Meeting and disclose final results in a current report on Form 8-K or quarterly report on Form 10-Q filed with the SEC within four business days after the Annual Meeting.  If final results are not yet known within that four business day period, the Company will disclose preliminary voting results in a Form 8-K and file an amendment to the Form 8-K to disclose the final results within four business days after such final results are known.
 
Who is paying for the cost of this proxy solicitation?
 
The Company is paying the costs of the solicitation of proxies.  The Company has retained Broadridge Investor Communication Services to assist in the distribution of proxy materials and tally the vote.  NIC may supplement the proxy solicitations by additional communications, which may include communications by mail, fax, telephone or personal delivery or by otherwise furnishing such communications to stockholders on the Internet, but no additional compensation will be paid to directors, officers or employees for such solicitation.  The Company will request brokers, banks and other nominees who hold shares of NIC common stock in their names to furnish the Notice and, if requested, printed proxy materials, to beneficial owners of the shares and will reimburse such brokers, banks and nominees for their reasonable expenses incurred in forwarding solicitation materials to such beneficial owners.
 
Who can help answer my questions?
 
If you have any questions about the matters proposed in this Proxy Statement or the procedures for voting your shares, you should contact:
 
NIC Inc.
Attention: Corporate Secretary
25501 West Valley Parkway, Suite 300
Olathe, Kansas 66061
(877) 234-3468

 
7

 
 
_________________
 
STRUCTURE AND PRACTICES OF THE BOARD OF DIRECTORS
_________________
 
NIC’s business and affairs are managed under the direction of the Board of Directors.  Currently, there are nine directors:  Harry H. Herington; Art N. Burtscher; Daniel J. Evans; Karen S. Evans; Ross C. Hartley; C. Brad Henry; Alexander C. Kemper; William M. Lyons; and Pete Wilson.  All of the directors are standing for election and their biographies appear on pages 23 to 26.  Directors Daniel J. Evans and Karen S. Evans are not related to each other.
 
Corporate Governance Principles and Best Practices and Code of Business Conduct and Ethics
 
The Board of Directors has adopted Corporate Governance Principles and Best Practices (“Principles and Best Practices”) that address the practices of the Board and, together with the Company’s Certificate of Incorporation, Bylaws and Board Committee charters, provide the framework for governance of NIC.  The Company has also adopted a Code of Business Conduct and Ethics, which applies to all employees, including the Chief Executive Officer and the Chief Financial Officer.
 
The Principles and Best Practices and the Code of Business Conduct and Ethics are available on the Company’s website at:
 
http://www.egov.com/Investors/CorporateGov.
 
If you would like to receive a paper copy of the Principles and Best Practices or the Code of Business Conduct and Ethics by mail, send your request in writing to the Corporate Secretary, NIC Inc., 25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061.  The Company intends to disclose any changes in or waivers from its Code of Business Conduct and Ethics by posting such information on its website or by filing a Form 8-K with the SEC, as required.
 
Meetings of the Board
 
In 2013, the NIC Board of Directors had four regularly scheduled meetings, and special meetings were held as necessary, for a total of six meetings. Four of the incumbent directors attended 100% of the meetings of the Board and the committees to which the director was assigned, two of the incumbent directors attended 95% of the meetings of the Board and the committees to which the director was assigned, one of the incumbent directors attended 85% of the meetings of the Board and the committees to which he was assigned, and two of the incumbent directors attended 80% of the meetings of the Board and the committees to which the director was assigned. The directors, in the aggregate, attended approximately 93% of the Board meetings.  In addition, management and the directors communicate informally on a variety of topics, including suggestions for Board or committee agenda items, recent developments, and other matters of interest to the directors.  The Board has access to management at all times.  Directors standing for election are encouraged to attend the Annual Meeting of Stockholders.  All directors standing for election at the 2013 Annual Meeting of Stockholders attended the meeting in person or by phone.
 
Independence
 
The Board evaluates the independence of each director in accordance with applicable laws and regulations, the listing standards of the NASDAQ Stock Market (“NASDAQ”) and the criteria set forth in NIC’s Principles and Best Practices.  These standards include evaluating material relationships with NIC, if any, to the best of each director’s knowledge, including vendor, supplier, consulting, legal, banking, accounting, charitable and family relationships.  Based on the recommendation of the Corporate Governance and Nominating Committee, the Board of Directors has determined for the calendar year 2013 that all of the directors, except Mr. Herington, are independent as required by applicable laws and regulations, by the listing standards of NASDAQ and by NIC’s Principles and Best Practices.  The Board has also assessed the independence of the members of the Audit, Compensation, and Corporate Governance and Nominating Committees based on applicable laws and regulations, the listing standards of NASDAQ and NIC’s Principles and Best Practices and has found all members of those committees to be independent.  The Board’s findings are included in the discussion of the committees below.
 
 
8

 
 
 The Company is aware that certain proxy advisory firms have previously recommended a “withhold” vote for Mr. Hartley, apparently based on the determination that Mr. Hartley is an “affiliated outside director” because he participated in the founding of the Company over 20 years ago and served as an officer of a subsidiary of the Company in the 1990s.  It is the policy of certain proxy advisory firms that “affiliated outside directors” should not serve on the Company’s independent board committees.  The Company disagrees with these recommendations.  The Board of Directors has determined that Mr. Hartley is “independent” as defined in the listing standards of the NASDAQ Stock Market and the rules of the SEC.  The Company believes that Mr. Hartley provides significant value as a member of the Corporate Governance and Nominating Committee and is not biased in carrying out his responsibilities as a committee member as a result of his prior service to the Company.
 
In determining the independent directors, the Board considered the fact that, during part of the last fiscal year, Mr. Hartley's adult daughter was a non-executive, at-will employee of the Company whose compensation did not exceed the thresholds for disclosure under the SEC's related party disclosure rules. The Board determined that this employment relationship would not interfere with Mr. Hartley’s exercise of independent judgment in carrying out the responsibilities of a director of the Company. Ms. Hartley was selected to the Presidential Innovation Fellows program as a member of the MyUSA team and took a leave of absence from the Company beginning in June 2013.  Following the completion of this program, Ms. Hartley was selected to continue her work with the Federal government and resigned from the Company during the first quarter of 2014.
 
Stockholder Communications with Directors
 
A stockholder who would like to communicate directly with the Board, a committee of the Board or with an individual director, should send the communication to:
 
NIC Inc.
Board of Directors [or committee name or director’s name, as appropriate]
25501 West Valley Parkway, Suite 300
Olathe, Kansas 66061
 
Also, stockholders can contact the Board of Directors at board@egov.com.
 
NIC will forward all such stockholder correspondence to the Board, committee or individual director, as appropriate.  This process has been approved by the independent directors of NIC.
 
Board Leadership Structure
 
Harry H. Herington serves as the Company’s Chairman of the Board and Chief Executive Officer.  Art N. Burtscher serves as the Lead Independent Director.  The Board believes that combining the positions of Chairman of the Board and Chief Executive Officer and having a Lead Independent Director provides an efficient and effective leadership model for the Company, combining clarity on strategy and decision-making with effective independent oversight.  The Board believes that the combined role of Chairman of the Board and Chief Executive Officer promotes unified leadership and direction for the Company and provides a single leader to guide the Company in executing the Company’s business strategy.  The Board does not believe that the Board’s independence is compromised by having a single person serve as Chairman of the Board and Chief Executive Officer.  The Board believes that having a Lead Independent Director ensures that a strong, independent director leads the Board’s independent directors and is a single point of contact for the Chairman on most routine board items, especially between meetings.  The Board believes this structure avoids the management issues that often arise when the Chairman of the Board and Chief Executive Officer duties are separated.  Further, a Lead Independent Director helps facilitate dialogue between the Board and stockholders by specifically identifying an independent director available for consultation and communication.
 
 
9

 
 
Pursuant to the Company’s Bylaws, the Chairman of the Board is responsible for presiding over all meetings of the Board of Directors and performs such other duties and may exercise such other powers as from time to time may be assigned to him or her by the Bylaws or by the Board or which he believes are appropriate.  The Lead Independent Director’s powers, duties and responsibilities established by the Board include the following:  (a) calling and presiding at executive sessions of the Board at which only independent directors are permitted to be present, along with other persons invited to attend such sessions by the Lead Independent Director or a majority of the  independent directors; (b) as deemed appropriate by the Lead Independent Director, communicating with other independent directors in advance of each executive session to develop an agenda of issues for discussion in the executive session; (c) presiding at all meetings of the Board at which the Chairman of the Board is not present, including executive sessions of the independent directors; (d) calling special meetings of the Board; (e) serving as liaison between the Chairman of the Board and the independent directors; (f) reviewing and/or supplementing materials sent to the Board that are initially prepared by or under the direction of the Chairman of the Board; (g) reviewing and/or supplementing meeting agendas for the Board that are initially prepared by the Chairman of the Board; (h) reviewing meeting schedules that are initially prepared by the Chairman of the Board in order to assure that there is sufficient time for discussion of all agenda items; (i) making recommendations to the Board regarding the structure of Board meetings; (j) recommending matters for consideration by the Board; (k) serving as an independent point of contact for stockholders wishing to communicate with the Board other than through the Chairman of the Board; (l) collaborating with the Chairman of the Board on recommending tasks to be assigned to the appropriate committees; (m) with the approval of the Corporate Governance and Nominating Committee, overseeing the annual evaluation of the Board and its committees; and (n) having the right to engage legal, financial and other advisers to represent the independent directors.
 
Risk Oversight
 
The Board has delegated to the Audit Committee, consisting solely of independent directors, the responsibility to oversee the assessment and management of the Company’s risks, including reviewing with management significant risk exposures potentially facing the Company and the policies and steps implemented by management to identify, assess, manage and monitor such exposures.  The Company’s Compensation Committee, consisting solely of independent directors, is responsible for overseeing the management of risks relating to the Company’s compensation plans and arrangements and reporting to the Audit Committee and the Board.  The Board is regularly informed through committee reports regarding the Company’s risks, and reviews and discusses such risks in overseeing the Company’s business strategy and operations.
 
 
10

 
 
Committees of the Board
 
As described below, there are three standing committees of the Board.  Each committee’s activities are governed by a charter that is available on the Company’s website at http://www.egov.com/Investors/CorporateGov, or by sending your request in writing to the Corporate Secretary, NIC Inc., 25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061.
 
The table below shows the members of each Committee of the Board:
 
Audit
Committee
 
Compensation
Committee
 
Corporate Governance and
Nominating Committee
Art N. Burtscher, Chairman
 
Alexander C. Kemper, Chairman
 
William M. Lyons, Chairman
Karen S. Evans
 
Art N. Burtscher
 
Daniel J. Evans
Alexander C. Kemper
 
Daniel J. Evans
 
Karen S. Evans
William M. Lyons 
 
C. Brad Henry
 
Ross C. Hartley
   
Pete Wilson
 
C. Brad Henry
       
Pete Wilson

The Audit Committee
 
The Audit Committee oversees management’s responsibility for the integrity of the Company’s accounting and financial reporting and systems of internal controls.  The Committee also oversees the performance of the Company’s independent registered public accounting firm and the Company’s compliance with legal and regulatory requirements.  In addition, the Committee has the responsibility to oversee the assessment and management of the Company’s risks.  The Audit Committee met five times during 2013.  The report of the Audit Committee is included in this Proxy Statement starting on page 20.
 
The Board of Directors has determined that all of the members of the Audit Committee are independent as required by applicable laws and regulations, the listing standards of NASDAQ and NIC’s Principles and Best Practices.  The Board of Directors has determined that at least one member of the Committee, Mr. Burtscher, qualifies as an “audit committee financial expert.”
 
The Compensation Committee
 
The Compensation Committee is responsible for the establishment and oversight of the Company’s executive compensation program.  The Committee also has responsibility for general oversight of the Company’s compensation policies and practices for all employees, particularly with respect to how such policies relate to the achievement of Company business goals and the Company’s management of risk.  It is the responsibility of the Committee to review, recommend and approve changes to the Company’s compensation policies and benefits programs and to otherwise ensure that the Company’s compensation philosophy is consistent with the Company’s best interests and is properly implemented.  The Committee establishes the compensation levels of the Company’s Chief Executive Officer and the Company’s other executive officers, and reviews and makes recommendations to the Board regarding the level and form of the Company’s director compensation.  The Committee also administers the Company’s stock plans, including the 2006 Amended and Restated Stock Option and Incentive Plan and the 1999 Employee Stock Purchase Plan.  The Committee also administers the NIC Inc. Executive Incentive Plan.  Finally, the Committee performs other duties related to compensation that the Board from time to time may assign.  The Compensation Committee held five meetings in 2013.  The Board of Directors has determined that all of the members of the Committee are independent as required by applicable laws and regulations, the listing standards of NASDAQ and NIC’s Principles and Best Practices.
 
 
11

 
 
The Compensation Committee may delegate any of its responsibilities to sub-committees and may delegate day-to-day administration of incentive and employee benefit plans to appropriate Company personnel.  In addition, upon occasion, matters have been escalated from the Compensation Committee to the full Board of Directors for action.  The executive officers receive assignments from the Compensation Committee, for example, researching compensation levels for employees, executives or directors at companies in comparable industries or of comparable size in terms of number of employees, annual revenues or market capitalization.  The Compensation Committee also tasks the executive team with the first, and subsequent, drafts of the executive compensation plan each year and with drafting revisions based upon Committee guidance.
 
The Compensation Committee has reviewed, with management, the design and operation of the Company’s compensation arrangements, including the performance objectives and target levels used in connection with incentive awards, and has evaluated the relationship between the Company’s risk management and these arrangements.  The Compensation Committee believes that the Company’s compensation policies and practices do not encourage unnecessary or excessive risk taking and that any risks arising from the Company’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on the Company.
 
The Committee has the authority to retain, approve fees for and terminate advisors, consultants and legal counsel as it deems necessary to assist in the fulfillment of its responsibilities.  Prior to engaging any such advisor, consultant or legal counsel, the Compensation Committee conducts an independence assessment of such advisor pursuant to applicable NASDAQ and SEC rules, but the Compensation Committee retains discretion to engage any such advisor, without regard to its independence, after considering the findings in such assessment.  The Compensation Committee also reviews and discusses with the appropriate officers of the Company any disclosures required under applicable SEC rules regarding conflicts of interest with respect to such advisors.
 
In December 2012, as further discussed below, the Compensation Committee, with the assistance of the executive team, engaged Semler Brossy Consulting Group, LLC (“SBCG”) to assess the Company’s management compensation structure, including executive compensation, for future periods and to perform peer review analysis among other public companies engaged in the information technology services industries with similar annual revenues, number of employees, market capitalization and other financial metrics.  SBCG undertook a similar analysis in December 2010 with respect to the compensation of the Company’s directors.  As required under applicable SEC rules, the Company reviewed the relationships among SBCG and the Company’s directors and executive officers in order to assess whether the work performed by SBCG raised any conflicts of interest.  The Company did not identify any such conflicts of interest in its inquiry of these parties as a part of this assessment.
 
The Corporate Governance and Nominating Committee
 
The Corporate Governance and Nominating Committee met six times in 2013.  The Board of Directors has determined that all of the members of the Committee are independent as required by applicable laws and regulations, the listing standards of NASDAQ and NIC’s Principles and Best Practices.  The Committee focuses on two primary areas: corporate governance and nomination of directors.
 
The Committee provides oversight and guidance to the Board of Directors to ensure that the membership, structure, policies, and practices of the Board and its committees facilitate the effective exercise of the Board’s role in the governance of the Company.  The Committee reviews and evaluates the policies and practices with respect to the size, composition, independence and functioning of the Board and its committees and reflects those policies and practices in NIC’s Principles and Best Practices, which can be found on the Company’s website.  The Committee also oversees the Company’s stock ownership guidelines for non-employee directors and certain executive officers.
 
 
12

 
 
Nomination of Directors
 
The Corporate Governance and Nominating Committee evaluates the qualifications of candidates for election as directors.  In exploring potential candidates for directors, the Committee considers individuals recommended by members of the Committee, other directors, members of management, stockholders and self-nominated individuals.  In nominating candidates, the Committee takes into consideration such factors as it deems appropriate on a case-by-case basis.  A discussion of factors that the Committee may consider is included under “Election of Directors” in this Proxy Statement beginning on page 22.
 
The Committee will consider Board nominees recommended by stockholders who provide the recommendation in accordance with the procedures in the Bylaws for stockholder nominations of directors.  The Committee intends to apply the same standards in considering candidates submitted by stockholders and self-nominated individuals as it does in evaluating candidates submitted by members of the Board of Directors and members of management.
 
The Bylaws require that a stockholder who wishes to nominate an individual for election as a director at the Company’s 2015 Annual Meeting of Stockholders must give the Company advance written notice no earlier than 120 days and no later than 90 days prior to the anniversary date of this year’s Annual Meeting.  Accordingly, notice of any director nomination that a stockholder intends to present at the Company’s 2015 Annual Meeting must be received at the Company’s principal executive offices not earlier than January 6, 2015 and not later than February 5, 2015.  The Bylaws also require a stockholder who wishes to nominate an individual or him or herself for election as a director to provide certain specified information.  This specified information includes, among other things, certain information about the stockholder and certain information about the nominee, such as the nominee’s name, address, principal occupation, relationship with the nominating stockholder, a completed questionnaire and the nominee’s written consent to being named a nominee and to serve as a director if elected.
 
Stockholders may request a copy of the Bylaw requirements from:
 
Corporate Secretary
NIC Inc.
25501 West Valley Parkway, Suite 300
Olathe, Kansas 66061
 
Notice of any director nominations for this year’s Annual Meeting must have been received no earlier than January 7, 2014 and no later than February 6, 2014.  NIC did not receive any stockholder nominations of directors within this timeframe.
 
The Board has determined that a majority of the Board members are independent directors.  Each nominee for director is an existing director standing for re-election.
 
 
13

 
 
Involvement in Certain Legal Proceedings
 
In connection with a settlement with the SEC in 2011 resolving its investigation relating to the reimbursement and disclosure by the Company of expenses to Jeffery S. Fraser, the Company’s former Chairman of the Board and Chief Executive Officer, the Company and Harry H. Herington, Chairman of the Board and Chief Executive Officer, consented to a permanent injunction against future violations of certain provisions of the federal securities laws and SEC rules which are set forth in exhibits to the Current Report on Form 8-K filed by the Company with the SEC on January 12, 2011 describing the settlement.
 
Stephen M. Kovzan, NIC’s Chief Financial Officer, informed the Company that he was unable to reach a settlement with the SEC on terms that he felt were acceptable. The SEC filed a civil complaint against him in the U.S. District Court for the District of Kansas on January 12, 2011, alleging violations of certain provisions of the federal securities laws detailed in that complaint relating to the reporting and disclosure of expenses by Mr. Fraser. On December 2, 2013, a federal jury of seven persons in Kansas City, Kansas, cleared Mr. Kovzan of any liability in connection with all alleged violations brought by the SEC against him. The SEC’s right to appeal the outcome of the trial has expired and the civil action against Mr. Kovzan is concluded.
 
 
14

 
 
_________________
 
DIRECTOR COMPENSATION
_________________
 
The structure and approach of the Company’s director compensation program in 2013 remained unchanged from 2012.

The Company provides the following cash compensation to its directors:  (1) an annual cash retainer of $24,000, (2) an annual cash retainer premium paid for committee chairs of $10,000 for the Audit Committee and $5,000 each for the Corporate Governance and Nominating Committee and the Compensation Committee, (3) an annual cash retainer premium paid for committee members of $5,000 for the Audit Committee and $2,500 each for the Corporate Governance and Nominating Committee and the Compensation Committee, and (4) quarterly Board meeting attendance fees of $2,500.  New directors receive a prorated retainer for the portion of the year served on the Board until the next Annual Meeting of Stockholders.  From an equity compensation standpoint, the Company’s Board compensation program provides for an annual grant of service-based restricted stock (with equal annual vesting over four years) with a grant date fair value of $60,000.  The ratio of equity to cash compensation is approximately 60% to 40%, which is in line with SBCG’s recommendation of a preponderance of total value coming from equity compensation.
 
Upon first joining the Board, any new director will receive an award of restricted stock (with equal annual vesting over four years) with an equivalent fair market value of $25,000 on the date of the award.  Directors are entitled to cash dividends on shares of unvested restricted stock (including initial and annual share grants) in the same amount and at the same time as dividends are paid to other holders of the Company’s common stock.
 
Directors who are also executive officers of the Company do not receive compensation for service on the Board of Directors.  Therefore, Mr. Herington is not listed in the Director Compensation table below.
 
All directors are eligible to participate in the Company’s 2006 Amended and Restated Stock Option and Incentive Plan.  Non-employee directors are not eligible to participate in the Company’s Employee Stock Purchase Plan.  Directors are reimbursed for travel expenses and other out-of-pocket costs incurred in connection with their attendance at meetings.
 
In March 2011, the Company adopted a stock ownership policy applicable to non-employee directors and the Company’s Executive Leadership Team, as further discussed below under the Compensation Discussion and Analysis section beginning on page 36.
 
In December 2010, after three years of the Company operating under its previous director compensation program, the Compensation Committee engaged SBCG to update its assessment of director compensation.  SBCG determined that director compensation levels were generally well-aligned with an updated peer group of companies and with the broader market, and were generally approximate to the peer group median.  SBCG referenced director compensation data for the same 15 companies referenced for its then recent executive compensation study, as further discussed below under Compensation Discussion and Analysis, and also referenced broader market survey data.
 
 
15

 
 
The following table provides information on the compensation of non-employee directors in 2013.
 
Director Compensation in Fiscal 2013 (1)
 
Name
(a)
 
Fees Earned
or Paid in
Cash ($)
(b)
 
Stock
Awards
($)(2)
(c)
 
All Other
Compensation ($)
(g)
 
Total ($)
(h)
Art N. Burtscher (3)
 
46,500
 
60,000
 
4,140
 
 110,640
Daniel J. Evans (4)
 
39,000
 
60,000
 
4,140
 
 103,140
Karen S. Evans (5)
 
41,500
 
60,000
 
2,946
 
 104,446
Ross C. Hartley (6)
 
36,500
 
60,000
 
4,140
 
 100,640
C. Brad Henry (7)
 
39,000
 
60,000
 
2,946
 
 101,946
Alexander C. Kemper (8)
 
44,000
 
60,000
 
4,140
 
 108,140
William M. Lyons (9)
 
44,000
 
60,000
 
4,140
 
 108,140
Pete Wilson (10)
 
36,500
 
60,000
 
4,140
 
 100,640
 
(1) 
The Option Awards, Non-Equity Incentive Plan Compensation and Change in Pension Value and Nonqualified Deferred Compensation Earnings columns have been omitted from the Director Compensation table because the Company does not provide director compensation in any of these categories.
   
(2) 
Amounts reported in the Stock Awards column represent the aggregate grant date fair value of such awards, computed in accordance with FASB ASC Topic 718.  However, these amounts do not include an estimate of forfeitures related to time-based vesting conditions, and assume that the non-employee director will perform the requisite service to vest in the award.  For assumptions used in determining these values, refer to Note 10 of the Company’s financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.  The grant date fair value does not reflect dividends payable on unvested shares of restricted stock.  The value of dividends declared on unvested shares of restricted stock is reported in the All Other Compensation column and not in the Stock Awards column.
   
(3) 
All Other Compensation for Mr. Burtscher consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 11,828 unvested shares of restricted stock.
     
 
At December 31, 2013, Mr. Burtscher directly owned the following unvested restricted stock awards:
     
  (i)  1,979 unvested service-based restricted shares, which vest on May 4, 2014;
     
  (ii)    2,362 unvested service-based restricted shares, which vest in two equal annual installments beginning on May 3, 2014;
     
  (iii)  3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iv)  3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014. 
 
 
16

 
 
(4) 
All Other Compensation for Governor Evans consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 11,828 unvested shares of restricted stock.
   
 
At December 31, 2013, Governor Evans directly owned the following unvested restricted stock awards:
   
  (i) 
1,979 unvested service-based restricted shares, which vest on May 4, 2014;
     
  (ii)  2,362 unvested service-based restricted shares, which vest in two equal annual installments beginning on May 3, 2014;
     
  (iii)  3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iv)  3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014. 
     
(5) 
All Other Compensation for Ms. Evans consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 8,417 unvested shares of restricted stock.
     
  At December 31, 2013, Ms. Evans directly owned the following unvested restricted stock awards:
   
  (i) 
930 unvested service-based restricted shares, which vest in two equal annual installments beginning on October 24, 2014;
     
  (ii)  3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and 
     
  (iii) 
3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014.
     
(6) 
All Other Compensation for Mr. Hartley consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 11,828 unvested shares of restricted stock.
     
  At December 31, 2013, Mr. Hartley directly owned the following unvested restricted stock awards: 
 
 
 
 
(i)  
1,979 unvested service-based restricted shares, which vest on May 4, 2014;
     
  (ii) 
2,362 unvested service-based restricted shares, which vest in two equal annual installments beginning on May 3, 2014;
     
  (iii) 
3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iv) 
3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014.
 
 
17

 
 
(7) 
All Other Compensation for Governor Henry consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 8,417 unvested shares of restricted stock.
   
 
At December 31, 2013, Governor Henry directly owned the following unvested restricted stock awards:
   
  (i) 
930 unvested service-based restricted shares, which vest in two equal annual installments beginning on October 24, 2014;
     
  (ii)  3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iii)  3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014.
     
(8) 
All Other Compensation for Mr. Kemper consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 11,828 unvested shares of restricted stock.
     
  At December 31, 2013, Mr. Kemper directly owned the following unvested restricted stock awards:
   
  (i) 
1,979 unvested service-based restricted shares, which vest on May 4, 2014;
     
  (ii)  2,362 unvested service-based restricted shares, which vest in two equal annual installments beginning on May 3, 2014;
     
  (iii) 
3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iv)  3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014. 
     
(9)  All Other Compensation for Mr. Lyons consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 11,828 unvested shares of restricted stock.
     
  At December 31, 2013, Mr. Lyons directly owned the following unvested restricted stock awards:
 
 
 
 
(i)  
1,979 unvested service-based restricted shares, which vest on May 4, 2014;
     
  (ii) 
2,362 unvested service-based restricted shares, which vest in two equal annual installments beginning on May 3, 2014; 
     
  (iii) 
3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iv) 
3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014.
 
 
18

 
 
(10) 
All Other Compensation for Governor Wilson consists of a cash dividend equivalent of $0.35 per share, declared by the Company in October 2013, on 11,828 unvested shares of restricted stock.
   
 
At December 31, 2013, Governor Wilson directly owned the following unvested restricted stock awards:
   
  (i) 
1,979 unvested service-based restricted shares, which vest on May 4, 2014;
     
  (ii)  2,362 unvested service-based restricted shares, which vest in two equal annual installments beginning on May 3, 2014;
     
  (iii)  3,933 unvested service-based restricted shares, which vest in three equal annual installments beginning on May 1, 2014; and
     
  (iv) 
3,554 unvested service-based restricted shares, which vest in four equal annual installments beginning on May 7, 2014.
 
The Board determined the terms and conditions of any such equity awards, including those that apply upon the termination of a non-employee director's service as a Board member.
 
 
19

 
 
_________________
 
REPORT OF THE AUDIT COMMITTEE
_________________
 
In the performance of its oversight function, the Audit Committee has reviewed and discussed with management and the independent registered public accounting firm the audited consolidated financial statements of the Company for the year ended December 31, 2013 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013.
 
In addition, the Audit Committee has received from and discussed with management and the independent registered public accounting firm various communications that the independent registered public accounting firm is required to provide to the Audit Committee, including the matters required by the Public Company Accounting Oversight Board, or PCAOB, AU Section 380 (Communication with Audit Committees), as modified or supplemented.  Finally, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, and has discussed with the independent registered public accounting firm its independence.
 
The members of the Audit Committee are not full-time employees of the Company and are not performing the functions of auditors or accountants.  As such, it is not the duty or responsibility of the Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards.  Members of the Audit Committee necessarily rely on the information provided to them by management, internal audit and the independent registered public accounting firm.
 
Based upon the reports and discussions described in this report, in reliance on management, internal audit and the independent registered public accounting firm, and subject to the limitations of our role, the Audit Committee recommended to the Board, and the Board has approved, the inclusion of the audited financial statements referred to above in the Company’s Annual Report on Form 10-K.
 
  Respectfully submitted,
     
   
The Audit Committee
   
Art N. Burtscher (Chairman)
   
Karen S. Evans
   
Alexander C. Kemper
    William M. Lyons 

 
20

 
 
Employee Complaint Procedures for Accounting and Auditing Matters
 
The Board has adopted a Hotline Reporting Policy (which contains employee complaint procedures for accounting and auditing matters) for all employees, which can be found on the Company’s website.  This document contains procedures for the Audit Committee to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters, as part of a Company-wide effort to allow for the confidential and anonymous submission by employees, contractors, and others of concerns regarding questionable accounting or auditing matters in the same manner as other employee complaints, including “whistle blower” complaints, which the Company terms “hotline reporting complaints or concerns.”  In May 2013, the Board amended the Hotline Reporting Policy to make clarifying changes to further encourage employees to report any complaints or concerns regarding fraud, corruption, policy violations, or illegal activities.  The Company has retained the services of NAVEX Global Inc. (formerly Ethicspoint.com) to provide an anonymous hotline reporting service independent of the Company.  This service also allows anonymous communication with the person expressing a concern, if the person permits it.  The website address and telephone number for submitting concerns or complaints are egov.ethicspoint.com and (855) 290-3374.  Concerns or complaints can also be mailed to:
 
NAVEX Global Inc.
6000 Meadows Road, Suite 200
Lake Oswego, OR 97035
 
 
21

 
 
_________________
 
ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)
_________________
 
The Board of Directors currently consists of nine directors.  Each of the nominees listed below is an incumbent director whose nomination to serve for a one-year term was recommended by the Corporate Governance and Nominating Committee and approved by the Board of Directors.  The nine nominees receiving the most votes will be elected.  Abstentions and broker non-votes have no effect on the election.  Proxies cannot be voted for a greater number of persons than the number of nominees named on the enclosed form of proxy, and stockholders may not cumulate their votes in the election of directors.
 
Each nominee has consented to stand for election and the Board does not anticipate that any nominee will be unavailable to serve.  However, if any nominee becomes unavailable to serve at the time of the Annual Meeting, the Board of Directors may provide for a lesser number of directors or designate substitute nominees.  If substitute nominees are designated, the persons named in the enclosed proxy will vote proxies for the remaining nominees and any substitute nominees, unless otherwise instructed by a stockholder.
 
If you wish to vote for or withhold your vote from all nominees, please mark the corresponding box on your proxy card.  If you do not wish your shares to be voted for a particular nominee, you should note that nominee’s name in the exception space provided on the proxy card.  The following biographies provide information about each nominee’s principal occupation and business experience, age, and other directorships, as well as current NIC Board committee memberships.
 
The Board of Directors, upon the recommendation of the Corporate Governance and Nominating Committee, recommends a vote FOR each of the nominees.
 
Name
Age
Position
Harry H. Herington
54
Chairman of the Board and Chief Executive Officer
Art N. Burtscher
63
Lead Independent Director
Daniel J. Evans
88
Director
Karen S. Evans
54
Director
Ross C. Hartley
66
Director
C. Brad Henry
50
Director
Alexander C. Kemper
48
Director
William M. Lyons
58
Director
Pete Wilson
80
Director

 
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The following is a brief description of the business experience of each nominee for director and a brief discussion of the specific experience, qualifications, attributes or skills that led to the conclusion that the nominee should serve as a director for the Company, in light of the Company’s business and structure.  In nominating candidates, the Committee takes into consideration such factors as it deems appropriate on a case-by-case basis, which may include experience, knowledge, skills, expertise, integrity, diversity of background and perspective,   ability to make independent analytical inquiries, understanding of the Company’s business environment, the interplay of the candidate’s experience with that of the other Board members and willingness to devote adequate time and effort to Board responsibilities. While the Company does not have a formal diversity policy, the Company believes that the Board’s deliberative process benefits from a reasonable diversity of backgrounds and perspectives. In reviewing the re-nomination of incumbent directors, the Committee also considers their participation at meetings, their understanding of NIC’s business and the environment within which the Company operates, their attendance, and their independence and relationships, if any, with the Company.
 
Harry H. Herington became the Company’s Chief Executive Officer in February 2008 and became the Chairman of the Board in May 2008.  He was elected to the Board of Directors in October 2006.  Mr. Herington served as President from May 2006 until February 2008 and as Chief Operating Officer from May 2002 until October 2006.  In addition, he served as the Company’s Executive Vice President-Portal Operations from January 1999 through April 2002. He served as one of the Company’s directors from May 1998 to February 1999.  He has also served as President of NICUSA, Inc., a wholly owned subsidiary of the Company, since 1998 and currently serves as a manager and officer of various subsidiaries of NICUSA, Inc. Mr. Herington has held numerous positions of authority and responsibility with the Company since 1995 as well as several positions of authority with other business and government organizations, which enables him to provide valuable leadership and insight into the Company’s strategic direction. By reason of his early involvement and efforts, Mr. Herington is considered a founder of NIC as it became a national company.  Mr. Herington is also involved in numerous civic and non-profit activities.  Mr. Herington holds a B.S. degree from Wichita State University in Kansas and a J.D. degree from the University of Kansas School of Law.
 
Art N. Burtscher has served as one of the Company’s directors since 2004, and was elected Lead Independent Director in February 2008.  He chairs the Audit Committee.  Mr. Burtscher currently serves as President-Western Region of Westwood Trust, a wholly-owned subsidiary of Westwood Holdings Group, LLC and a provider of trust services and a sponsor of common trust funds.  He served as Senior Vice President of Westwood Trust from 2010 through 2012.  Mr. Burtscher served as Chairman of McCarthy Group Advisors, L.L.C., an Omaha-based investment advisory firm, from 2004 to 2010. From 2000 to 2004, he was President of McCarthy Group Asset Management.  He has more than 30 years of financial services experience, including 13 years as President of Great Western Bank, N.A.  Mr. Burtscher currently serves on the boards of directors of American National Bank, Jet Linx, LLC, Novation Companies, Inc. (formerly NovaStar Financial), the Silverstone Group and Westwood Trust.  Mr. Burtscher’s extensive experience in the financial services industry enables him to provide valuable contributions to the Board regarding financial, business and investment matters and to serve as the audit committee financial expert. He graduated from Fort Hays State University in Kansas with a B.S. in Business Administration and is a graduate of the School of Mortgage Banking.
 
 
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Daniel J. Evans has served as one of the Company’s directors since 1998.  Governor Evans is the chairman of and has served as a consultant for Daniel J. Evans Associates Consulting, a consulting company in the State of Washington, since May 1989.  Governor Evans currently serves as a director of Costco Wholesale Corporation (NASDAQ: COST) and Archimedes Technology Group.  Mr. Evans has extensive service as a director, having served on more than 14 boards of directors and served on the audit committees of many of those boards. He also served as a U.S. Senator for the State of Washington from September 1983 to January 1989 and as the Governor of the State of Washington from January 1965 to January 1977.  The Board relies upon Governor Evans’s extensive experience in state government and industry in guiding the Company’s business strategy. Governor Evans holds a B.S. and an M.S. in civil engineering from the University of Washington.  Governor Evans is not related to Karen S. Evans, a nominee for director.
 
Karen S. Evans has served as one of the Company’s directors since October 2011.  Ms. Evans is currently the National Director of U.S. Cyber Challenge, a nationwide talent search and skills development program focused on the cyber workforce, as well as an independent consultant, providing guidance in the areas of leadership, management, and the strategic use of information technology.  Ms. Evans previously served as the de facto Chief Information Officer for the United States federal government as the Administrator of the Office of Electronic Government and Information Technology (IT) at the United States Office of Management and Budget, as well as the Chief Information Officer for the United States Department of Energy and the Director of the Information Resources Management Division, Office of Justice Programs in the United States Department of Justice. Her responsibilities additionally involved information security, privacy and access to, dissemination of and preservation of government information.  The Board relies upon Ms. Evans’s extensive experience in federal government and information technology in guiding the Company’s business strategy.  Ms. Evans holds a bachelor’s degree in chemistry and a Master’s degree in business administration from West Virginia University.  Karen S. Evans is not related to Governor Evans, a nominee for director.
 
Ross C. Hartley , one of the Company’s founders, served as a director when the original companies were formed beginning in 1991 that were later combined to form NIC Inc.  He became one of NIC Inc.’s directors upon its formation in 1998. Mr. Hartley also served as President of The Hartley Insurance Group, a group of independent insurance agencies in Kansas, from 1974 to 2000. Mr. Hartley retired from all active work in 2000 and since that time has managed his own investments.  He also serves as a director of Empire District Electric Company, a public utility located in Joplin, Missouri.  Mr. Hartley’s extensive experience with the Company since its founding and extensive business experience enables him to provide valuable guidance to the Board in overseeing the Company’s business. Mr. Hartley holds a B.S. in mathematics from Baker University in Baldwin City, Kansas and a J.D. degree from the University of Kansas School of Law.
 
C. Brad Henry has served as one of the Company’s directors since October 2011.  Governor Henry is currently of counsel to the law firm of Lester, Loving and Davies in Edmond, Oklahoma and a founding member of Henry-Adams Companies, LLC, a general consulting firm. In 2010, Governor Henry was appointed by President Barack Obama to the six-member Council of Governors, which works closely with the Secretary of Defense, the Secretary of Homeland Security, and other defense and national security advisors on the synchronization and integration of state and federal military services.  He served as governor of the State of Oklahoma for two consecutive terms ending in 2011, the maximum allowed under Oklahoma law. Prior to his election as governor, he practiced law and served 10 years in the Oklahoma State Senate, chairing the Senate Judiciary Committee and serving as vice-chair of the Senate Economic Development Committee.  The Board relies upon Governor Henry’s extensive experience in state government and industry in guiding the Company’s business strategy.  Governor Henry holds a bachelor’s degree in economics from the University of Oklahoma and a J.D. degree from the University of Oklahoma School of Law.
 
 
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Alexander C. Kemper has served as one of the Company’s directors since 2007.  He chairs the Compensation Committee.  Mr. Kemper is the chairman of the board of The Collectors Fund, a private equity fund focused on alternative asset classes, and serves as chairman and chief executive officer of C2FO (formerly Pollenware), a leading provider of payment optimization technology and early cash flow delivery for corporations.  He founded Perfect Commerce Inc., an application service provider for Internet sourcing and procurement tools and related professional services, and served as chairman and chief executive officer from 2000 to 2006.  Under his leadership, Perfect Commerce created the Open Supplier Network TM (OSN TM ) and became the largest and fastest growing provider of on-demand supplier relationship management (SRM) technology in the United States.  Before founding Perfect Commerce, Mr. Kemper was the chairman of the board and CEO of UMB Bank, N.A. and CEO of UMB Financial Corp., a NASDAQ-traded financial services company with assets of more than $10 billion. He is an active angel and venture investor and currently serves on several corporate boards, including UMB Financial Corp. (NASDAQ: UMBF), UMB Bank, AXA Art, USA (NYSE: AXA), Sipvine, SCD Probiotics and BATS Exchange, the third largest stock exchange in the world. Mr. Kemper has extensive experience in finance, banking, investment, management and board service, as well as extensive experience with technology companies, which enables him to provide valuable guidance to his fellow directors on such matters. Mr. Kemper holds a B.A. degree from Northwestern University.
 
William M. Lyons has served as one of the Company’s directors since 2009. He chairs the Corporate Governance and Nominating Committee.  Mr. Lyons was president and chief executive officer of American Century Companies, Inc., a Kansas City-based investment manager, until his retirement in March 2007. Mr. Lyons joined American Century in 1987 as assistant general counsel and during his tenure also served as its general counsel, executive vice president, and chief operating officer. Mr. Lyons was named president in 1997 and chief executive officer in 2000, in which capacity he served until March 2007. Mr. Lyons also served as a director of American Century Companies, Inc. and numerous investment companies affiliated with American Century Companies, Inc. While at American Century, Mr. Lyons also was a senior executive of several operating subsidiaries, including American Century Investment Management, Inc., American Century Investment Services, Inc., and American Century Services Corp. He is currently a member of the board of directors of Morningstar, Inc. (NASDAQ: MORN) and The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PHLX (all wholly owned subsidiaries of The NASDAQ OMX Group (NASDAQ: NDAQ)) and other civic and not-for-profit entities. Mr. Lyons’s leadership of American Centuries Companies, Inc. through a period of substantial growth enables him to provide valuable guidance to the Board on business strategy and financial matters. Mr. Lyons holds a bachelor’s degree in history from Yale University and a J.D. degree from Northwestern University School of Law.
 
 
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Pete Wilson has served as one of the Company’s directors since 1999. Governor Wilson served as Governor of the State of California from 1991 until 1999.  Prior to serving as Governor of California, Governor Wilson served in the U.S. Senate for eight years, representing the State of California from 1983 to 1991, and served as the mayor of San Diego, California from 1971 to 1983.  Governor Wilson is a principal at Bingham Consulting Group, a business consulting firm.  Governor Wilson is also a director of The Irvine Company, and U.S. TelePacific Corp, and is a director and founder of the California Mentoring Foundation. He is a member of the California State Chamber of Commerce Board of Directors, and a member and Founding Chair of the Southern California Leadership Council.  Governor Wilson is a Distinguished Visiting Fellow of the Hoover Institution at Stanford University, and serves as a Trustee of the Ronald Reagan Presidential Foundation, the Richard Nixon Foundation, and the Criminal Justice Legal Foundation. He is past Chair (current Capital Campaign Chair) of the National World War II Museum.  Governor Wilson is also a former member of the Defense Policy Board (advisory to the Secretary of Defense) and the President’s Foreign Intelligence Advisory Board and formerly served on the Thomas Weisel Partners board of advisors.  The Board draws upon Governor Wilson’s extensive experience inside and outside government in overseeing the Company’s business strategy and developing relationships with government partners.  He received his undergraduate degree from Yale University and his law degree from Boalt Hall (University of California at Berkeley).  After graduating from Yale, Governor Wilson spent three years in the Marine Corps as an infantry officer.
 
The Board of Directors, upon the recommendation of the Corporate Governance and Nominating Committee, recommends a vote FOR the election of Messrs. Herington, Burtscher, Evans, Hartley, Henry, Kemper, Lyons and Wilson and Ms. Evans.
 
 
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_________________
 
2014 AMENDED AND RESTATED STOCK COMPENSATION PLAN
 
(An amendment and restatement of the
2006 Amended and Restated Stock Option and Incentive Plan)
(ITEM 2 ON PROXY CARD)
_________________
 
OVERVIEW

                We believe that equity compensation aligns the interests of management and employees with the interests of other stockholders. Our Board has adopted, subject to the approval of our stockholders, an amendment and restatement of the  2006 Amended and Restated Stock Option and Incentive Plan, as amended May 5, 2009 (the “2006 Plan”), to be known as the 2014 Amended and Restated Stock Compensation Plan (the “Plan”), which is summarized below. A copy of the Plan, as proposed to be amended and restated, is attached as Appendix A to the proxy statement filed with the SEC. The following description of the material features of the Plan is qualified in its entirety by reference to the provisions of the Plan.

Summary of the Proposed Amendments

                We are asking stockholders to approve an amendment and restatement of our 2006 Plan which restatement, if approved, will result in the following material amendments:

Increase in Number of Shares Available for Issuance.  The number of shares of Common Stock that are available for issuance under the Plan will increase by 1,538,469 shares to five million (5,000,000) shares of Common Stock available for issuance of new Awards as of March 7, 2014. If the five million shares available for issuance of new Awards is added to all shares presently subject to outstanding Awards on the Effective Date, the total is 15,825,223, which is defined in the amended and restated plan as the Maximum Share Limit (the “Maximum Share Limit”). We believe that increasing the number of shares available for issuance under the Plan is advisable to ensure that a sufficient reserve of shares is available for future Awards under the Plan.

Amendment to the Term of the Plan .   A new 10-year 2014 Plan term will begin upon stockholder approval of the amendment and restatement of the Plan. With respect to the ability of the Company to make grants of incentive stock options, such ability under the amended and restated Plan will be limited to ten (10) years from date of stockholder approval. With respect to awards other than incentive stock options (“ISOs”), the Company’s ability to make such awards will extend beyond the tenth (10th) anniversary of stockholder approval of the amendment and restatement of the Plan. If the amendment and restatement is not approved by stockholders, the 2006 Plan will terminate on December 31, 2015, unless it is sooner terminated by the Board.

Amendment to Substitute Award Provisions . Awards granted under the Plan to substitute for stock or stock-based awards held by current and former service providers of another entity who become service providers of ours in connection with mergers or similar corporate events or transactions, will not count against the Plan’s share limitations.

In approving an increase in the shares available for issuance under the Plan, the Board considered that 3,461,531 shares are currently available for issuance under the Plan with respect to currently outstanding and future awards, representing approximately 5% of the number of shares of the Company’s common stock outstanding as of March 7, 2014. The proposed increase in shares available represents approximately 2% of the number of shares of the Company’s common stock outstanding as of March 7, 2014. The Board took into account generally the past issuances of shares under the Plan and the proposed extension of the expiration date of the Plan in approving the proposed increase in shares. The Board did not rely upon specific projections of future share issuances under the Plan or specific data regarding the Plan’s historical burn rate, or upon the advice of any compensation consultant, in making the determination to propose an increase in the shares that may be issued under the Plan.  The closing price of our Common Stock on March 7, 2014, as reported by Nasdaq, was $20.76 per share.
 
 
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SUMMARY OF THE PLAN

Purpose

                The purpose of the Plan is to provide a means by which employees, officers and directors of NIC, and any company affiliated with NIC, and any consultant to NIC or any of its affiliated companies may be given an opportunity to benefit from participation in the ownership of Common Stock through the granting of stock options and restricted stock awards.  Substantially all of the Company’s employees are eligible to participate in the Plan. The Company, by means of the Plan, seeks to retain the services of persons who are now employees or directors of or consultants to the Company, to secure and retain the services of new employees, directors and consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

Administration

                The Plan provides that it is to be administered by the Board of Directors.  The Board has the power, subject to the provisions of the Plan, to determine when and to whom each stock option and restricted stock award will be granted, the terms of each stock option and award, which need not be identical, including the number of shares underlying an option or an award and the vesting schedule of the option or award.

                The Board has the power to delegate administration of the Plan to a committee composed solely of outside directors.  The Board may also delegate to a committee that includes directors other than outside directors the authority to grant options or restricted stock awards to persons who are not officers or directors of NIC, or persons who are not or not expected to be subject to Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).  The Board is also authorized to delegate to an officer of the Company the authority to grant options or restricted stock awards to persons who are not officers or directors of NIC, or persons who are not or not expected to be subject to Internal Revenue Code Section 162(m), provided that each option granted has an option exercise price not less than the fair market value of our Common Stock on the grant date and is evidenced by an option agreement approved by the Board.

                The Plan is currently administered by the Compensation Committee.

Stock Subject to Plan

                If any award expires or otherwise terminates, in whole or in part, without having been exercised in full, the shares underlying such award revert to and are again available for issuance under the Plan.  The number of shares available under the Plan are subject to appropriate adjustment in the event of merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure, or other corporate transactions as our Board or the committee administering the Plan determines to require an equitable adjustment.  If any such event occurs, the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan, and the outstanding options and awards will be appropriately adjusted in the class(es), number of shares and price per share of stock subject to such outstanding options and awards.
 
 
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  Additionally, if the proposed amendment and restatement is approved, shares underlying substitute awards issued in connection with a merger or similar corporate transaction consummated with a third-party shall not be subject to the Plan’s share limitations.

Eligibility

                Incentive stock options may be granted under the Plan only to employees, including executive officers.  Incentive stock options must also satisfy certain conditions and limitations established under the Code.  Non-qualified stock options and restricted stock awards may be granted to employees, executive officers, directors and consultants.  As of December 31, 2013,the number of non-employee directors of the Company eligible to receive awards under the Plan was eight, the number of executive officers of the Company eligible to receive awards under the Plan was four, and the number of employees (other than executive officers) of the Company eligible to receive awards under the Plan was 140.  Because all members of our Board and each of our executive officers are eligible for awards under the Plan, each such person has a personal interest in the approval of the Plan.

                Subject to automatic adjustment in the event of certain corporation transactions which change our capitalization (e.g., stock split) as discussed above, no person may be granted awards covering more than 200,000 shares of Common Stock per calendar year. The purpose of this limitation is generally to permit NIC to be able to deduct for tax purposes the compensation attributable to the awards granted under the Plan, subject to the other requirements for deductibility under the Code.

Terms of Options

                The following is a description of the permissible terms of stock options under the Plan.  Individual option grants may be more restrictive as to any or all of the permissible terms described below. As of December 31, 2013, the Company has no outstanding stock options and the Company has not granted stock options under the Plan since 2005.
  
Exercise Price/Payment

                Under the Plan, the exercise price for each stock option shall be the price determined by the Board but in no event may be less than 100% of the fair market value of Common Stock on the date of the option grant, except for certain grants pursuant to an assumption or substitution for another option in a manner satisfying the applicable provisions of the Code.  The exercise price of options granted under the Plan must be paid either: (1) in cash at the time the option is exercised; or (2) as set forth in form of option agreement approved by the Board: (i) by delivery of other shares of Common Stock; (ii) by written direction to an authorized broker to sell the shares of Common Stock purchased upon exercise of the option, and payment of the appropriate portion of the proceeds thereof to the Company; (iii) pursuant to a deferred payment or other arrangement with the optionee; or (iv) any combination of the above.

 
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Exercise/Vesting

                Options granted under the Plan may be (but are not required to be) allotted in installments that become exercisable in cumulative increments (“vest”) as determined by the Board.  To the extent provided by the terms of an option, an optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a cash payment upon exercise, by authorizing the Company to withhold a portion of the stock otherwise issuable to the optionee, by delivering already-owned and unencumbered Common Stock, or by a combination of these means.
 
Term

                The Plan provides that, except as otherwise provided in the applicable option agreement, an option will terminate on the earlier of the date that is three months after the termination of the optionee’s relationship with NIC as an employee, director or consultant (except upon death or disability), as applicable, or the original expiration date of the option.  Special rules apply in the case of such a termination due to death or disability.  In all events, an incentive stock option will terminate if still outstanding on the 10-year anniversary of the date of grant.

Restrictions on Transfer

                Except as otherwise provided in the applicable stock option agreement or the Plan, no stock option may be transferred by the optionee other than by will or the laws of descent or distribution.

Acceleration of Exercisability and Vesting

                The Board has the power to accelerate the time at which a stock option may first be exercised.

Terms of Restricted Stock Awards

                A restricted stock award is an award of shares of Common Stock that is subject to certain restrictions and a substantial risk of forfeiture.  Restricted stock granted under the Plan is subject to such restrictions on transferability and other restrictions as the Board may impose.  The Board may also impose other restrictions, including limitations on the right to vote or the right to receive dividends.

                All awards of restricted stock will be subject to a “substantial risk of forfeiture” as defined by Section 409A-1(d) of the Code.  Unless otherwise determined or waived by the Board, upon termination of employment during the applicable restriction period, restricted stock that is at that time subject to restrictions shall be forfeited. At its discretion, NIC may retain physical possession of the certificate evidencing the restricted stock award until all restrictions have lapsed.

Duration, Amendment and Termination

                The proposed Plan is an amendment and restatement of our 2006 Amended and Restated Stock Option and Incentive Plan, as amended May 5, 2009, and will remain in effect, subject to the right of our Board to terminate the Plan (subject to certain limitations set forth in the Plan), until all shares subject to it have been purchased or acquired according to the Plan’s provisions. If the amendment and restatement is not approved by stockholders, the Plan will terminate on December 31, 2015, unless it is sooner terminated by the Board. Any awards granted before the Plan is terminated may extend beyond the expiration date. Under the proposed amendment and restatement, no ISOs will be issued under the Plan after May 6, 2024.
 
 
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The Board may amend the Plan at any time or from time to time; however, no amendment shall be effective unless approved by the stockholders of NIC within 12 months before or after the adoption of the amendment, where the amendment will (1) increase the number of shares reserved for awards under the plan; or (2) modify certain requirements as to eligibility for participation in the Plan or modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code.

                The Board may amend the terms of any stock option or restricted stock award without approval of the Company’s stockholders, subject to the restrictions on option repricing discussed below.

Restrictions on Repricing

                Under the Plan, the Board of Directors or the committee administering the Plan may not affect the repricing of any outstanding options, including a repricing by the cancellation of any outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different amount of shares of stock, except in the case of an option granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.

New Plan Benefits

                The Board of Directors has not made any grants of awards under the Plan that are conditioned upon stockholder approval of the proposed amendment and restatement of the Plan.  It is not possible to predict the benefits or amounts that will be received by or allocated to particular individuals or groups of individuals if the amendment and restatement of the Plan is approved.  In addition, the Company has not granted stock options under the Plan since 2005, no stock options have been outstanding since 2010, and the Company does not currently anticipate granting stock options under the Plan in the future.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

                The Federal income tax discussion set forth below is a general description of the federal income tax consequences relating to awards under the Plan, in the normal operation thereof, based on existing federal income tax laws and regulations.  The description is not intended as a complete summary of such laws or as a legal interpretation, and does not describe state, local or foreign income or other tax consequences. Holders of awards under the Plan should consult their own tax advisers regarding the tax consequences applicable to awards under the Plan.

Incentive Stock Options

                Incentive stock options granted under the Plan are intended to be eligible for the favorable federal income tax treatment accorded “incentive stock options” under the Code.

                Generally, there are no federal income tax consequences to the optionee or NIC by reason of the grant or exercise of an incentive stock option.  However, the exercise of an incentive stock option may cause an optionee to be subject to, or result in an increase in, liability for alternative minimum tax because the excess of the fair market value of the stock received on exercise over the amount paid for the stock must be recognized as an alternative minimum tax adjustment.

If an optionee holds stock acquired through exercise of an incentive stock option for more than two years from the date on which the option is granted, and more than one year from the date on which the shares are transferred to the optionee upon exercise of the option, any gain or loss on a disposition of such stock will be capital gain or loss.  Generally, if the optionee disposes of the stock before the expiration of either of these holding periods (a “disqualifying disposition”), at the time of disposition, the optionee will realize taxable ordinary income equal to the lesser of: (1) the excess of the stock’s fair market value on the date of exercise over the exercise price; or (2) the optionee’s actual gain, if any, on the purchase and sale.  The optionee’s additional gain, or any loss, upon the disqualifying disposition will be a capital gain or loss, which will be long-term if the optionee has held the stock more than 12 months. Otherwise the capital gain or loss will be short-term.  To the extent the optionee recognizes ordinary income by reason of a disqualifying disposition, the Company generally will be entitled, subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and certain other requirements, to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs.
 
 
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Non-Qualified Stock Options

                Non-qualified stock options granted under the Plan generally have the following federal income tax consequences.  Generally, there are no tax consequences to the participant by reason of the grant of such a stock option.  Upon exercise of the stock option, the recipient normally will recognize taxable ordinary income equal to the excess of the stock’s fair market value over the exercise price, if any. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse, unless the participant elects to be taxed on receipt of the stock. With respect to employees, the Company is generally required to withhold income and employment taxes based on the ordinary income recognized.  Generally, the Company will be entitled, subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and certain other requirements, to a business expense deduction equal to the taxable ordinary income realized by the participant.  Upon disposition of the stock, the optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock, plus any amount recognized as ordinary income upon acquisition, or vesting, of the stock.  Such capital gain or loss will be long-term or short-term, depending on whether the stock was held for more than one year.

Deductibility of Executive Compensation

Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain employees in a taxable year to the extent that compensation exceeds $1 million for a covered employee. It is possible that compensation attributable to stock options under the Plan, when combined with all other types of compensation received by a covered employee from NIC, may cause this limitation to be exceeded in any particular year.

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with United States Treasury regulations issued under Section 162(m) of the Code, compensation attributable to stock options will qualify as performance-based compensation, provided that: (1) the stock option plan contains a per-employee limitation on the number of shares for which stock options may be granted during a specified period; (2) the per-employee limitation is approved by the stockholders; (3) the award is granted by a compensation committee comprised solely of two or more “outside directors”; and (4) the exercise price of the option is not less than the fair market value of the stock on the date of grant.

The Plan is intended to permit option grants to a covered employee that qualify as performance-based compensation exempt from the $1 million deduction limitation. Because of the uncertainties associated with the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m) will in fact be deductible.
 
 
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Restricted Stock Awards

                Under Section 83(a) of the Code, shares of stock granted to a person in connection with the person’s performance of services to the issuer but subject to a “substantial risk of forfeiture” are not subject to income taxation until the risk of forfeiture lapses.  Under the regulations promulgated by the Department of the Treasury under Section 83(a), stock is subject to a “substantial risk of forfeiture” if a recipient’s continued rights in the shares are conditioned on the future performance of substantial services to the issuer or the completion of any other condition related to the purpose for the initial grant of shares, and if there is a substantial possibility that the conditions will not be satisfied.  The shares of restricted stock will generally be subject to a “substantial risk of forfeiture” while they are unvested.

Ordinarily, a recipient of unvested restricted stock will not pay income tax on the value of the shares until the shares become vested.  The recipient will then have a basis in the shares equal to the value of the shares on the day they vest and are taxed.  When the recipient subsequently sells the shares, any gain or loss will be treated as a capital gain or loss.

                Any person who receives unvested shares of stock in connection with services performed for the issuer may make an irrevocable election under Section 83(b) of the Code to be taxed on the value of the shares in the year in which the shares are received rather than when the shares vest.  Awards under the Plan are intended to qualify for Section 83(b) treatment.  A participant under the Plan must make and file with the Internal Revenue Service a written election to be taxed at the time of the award within 30 days of the date of the award, and will pay ordinary income tax on the value of the shares when they are received. A participant who makes this “83(b) election” will take a basis in the stock equal to the value of the award shares when they are issued.  If the award shares vest and the participant sells the shares, any gain or loss on the transaction will be a capital gain or loss.  If shares in respect of which such an election was made are later forfeited, such forfeiture shall be treated as a sale or exchange of the shares, and the grantee will recognize capital gain or loss in the year of such forfeiture equal to the difference between any amount realized on the disposition and the amount previously recognized as ordinary income in connection with the election, provided that the shares are a capital asset in the hands of the grantee.

                When the value of the vested shares (or unvested shares for which a Section 83(b) election is made) is taxed, the shares will be treated as salary if the recipient is an employee of NIC and otherwise will be treated as shares received in exchange for services.  With respect to employees, the Company is generally required to withhold income and employment taxes at the time the restricted stock award shares are taxed.

Other Tax Consequences

                State tax consequences may in some cases differ from those described above.  Awards under the Plan may in some instances be made to employees who are subject to tax in jurisdictions other than the United States and may result in tax consequences differing from those described above.

 
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Equity Compensation Plan Information

The following table provides information regarding securities to be issued upon the exercise of outstanding options, warrants and rights and securities available for issuance under the Company’s equity compensation plans as of December 31, 2013:
 
      A       B       C    
                           
Plan Category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
outstanding as of
December 31, 2013
   
Weighted average
exercise price of
outstanding options,
warrants and rights
shown in Column A
   
Number of
securities available
for future issuance
as of December 31, 2013
   
Equity compensation plans approved by stockholders:
                         
Restricted stock awards
    -     $ -       3,746,926   (See Note (1) 
Employee stock purchase plan
 
See Note (2)
   
See Note (2)
      1,446,136    
 
                         
Equity compensation plans not approved by stockholders
    -       -       -    
Total
    -       -       5,193,062    

(1)  
The amount shown excludes 1,043,816 shares subject to outstanding unvested restricted stock awards.

(2)  
March 31, 2013 was the purchase date of common stock for the most recently completed offering period under the Company’s employee stock purchase plan. Therefore, as of such date, no purchase rights were outstanding. The purchase price for the offering period ended March 31, 2013, was $10.33 per share, and the total number of shares purchased was 87,578.

Required Vote and Board Recommendations

Approval of the amendments to the Plan require the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the Annual Meeting and entitled to vote thereon.

                 The Board of Directors recommends a vote FOR the proposed approval of the 2014 Amended and Restated Stock Compensation Plan (an amendment and restatement of the 2006 Amended and Restated Stock Option and Incentive Plan).

 
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_________________
 
EXECUTIVE COMPENSATION
_________________
 
REPORT OF THE COMPENSATION COMMITTEE
_________________
 
The Committee has reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) portion of this Proxy Statement with management.  Based on the Committee’s review and discussions, the Committee has recommended to the Board of Directors that the CD&A be included in this Proxy Statement and the Company’s Annual Report on Form 10-K.
 
  Respectfully submitted,
     
   
The Compensation Committee
   
Alexander C. Kemper (Chairman)
   
Art N. Burtscher
   
Daniel J. Evans
    C. Brad Henry
     Pete Wilson

 
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_________________
 
COMPENSATION DISCUSSION AND ANALYSIS
_________________
 
Philosophy and Objectives of the Executive Compensation Program
 
For the fiscal year ended December 31, 2013, our named executive officers (“named executive officers” or “NEOs”) as defined by SEC regulations for compensation disclosure purposes included our four Executive Leadership Team members and one member of our Senior Management Steering Group as follows:
 
Name
Title
Harry H. Herington
Chairman of the Board and Chief Executive Officer
Stephen M. Kovzan
Chief Financial Officer
William F. Bradley, Jr.
Executive Vice President, Chief Administrative Officer, General Counsel, and Secretary
Robert W. Knapp, Jr.
Chief Operating Officer
Ron E. Thornburgh
Senior Vice President of Business Development
 
Mr. Herington, in his role as Chief Executive Officer, has formally designated an Executive Leadership Team, comprised of the Company’s most experienced senior executives having the most knowledge about the Company and its operations.  The Executive Leadership Team provides advice and counsel to Mr. Herington on a regular basis and assists in formulating strategy and tactics for furthering the Company’s business.  Executive Leadership Team members are Messrs. Herington, Kovzan, Bradley and Knapp.

Mr. Herington also formally designated a Senior Management Steering Group to provide a forum for discussing risks and opportunities identified by the various NIC divisions that might affect the growth and stability of the Company.  The Senior Management Steering Group is comprised of the Executive Leadership Team, as well as Mr. Thornburgh, and Ms. Aimi Daughtery, the Company’s Chief Accounting Officer.  Mr. Herington regularly consults with this broader group of senior management.

The Company is committed to increasing stockholder value through profitable growth and the execution of specific strategies.  Superior performance by our executive team is essential to these goals, so we have structured our executive pay programs to attract and retain talented, highly-qualified executives, to reward performance through incentive compensation and to align the interests of executives and stockholders through longer-term equity-based compensation.  The Company’s Compensation Committee (referred to in this CD&A as the “Committee”) has adopted a straightforward approach to executive compensation, whereby material components of pay are tied to elements of the Company’s financial performance.  This approach reinforces the Company’s commitment to collaboration for the benefit of the Company, particularly among its Executive Leadership Team.  The Committee structures its compensation programs to align executive and stockholder interests, by fostering a team-based environment that recognizes the Company’s entrepreneurial history and strong record of financial performance.
 
Also, the Committee considers carefully the views and input of stockholders when determining executive pay.  On May 7, 2013, stockholders voted strongly in favor of the Company’s approach to executive compensation – a 99% advisory ‘say on pay’ vote outcome of all shares voted.
 
 
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Role of Executive Officers in Compensation Decisions 
 
Our Chief Executive Officer, Chief Financial Officer and other executive officers attended portions of Committee meetings throughout the year in order to provide information and help explain data relating to matters considered by the Committee.  Executive officers, however, were not present during deliberations or determination of their respective compensation or during executive sessions.  In addition, our Chief Executive Officer and Chief Financial Officer submitted recommendations to the Committee regarding salary, bonus, equity compensation, performance goals and overall compensation levels for executive officers.  All decisions regarding the compensation of executive officers ultimately were made solely by the Committee, which considered these recommendations and exercised its discretion to modify certain recommended adjustments or awards based on a number of factors considered by the Committee, as described below.  The Committee’s determinations regarding compensation, including the performance targets for annual cash compensation and performance-based restricted stock, were generally consistent with the recommendations of management.
 
The Executive Compensation Program for Messrs. Herington, Kovzan, Bradley, and Knapp
 
The Committee has maintained a very consistent approach and structure for compensation of the members of the Executive Leadership Team since 2008, with modest adjustments from year to year, determined by the Committee, to maintain strong alignment with our business objectives and organizational context.  The core program for the Executive Leadership Team is comprised of base salary, short-term cash incentive compensation (i.e., annual cash bonus), and a two-pronged, long-term, equity-based incentive that includes annual restricted stock grants with (i) a service-based component and (ii) a performance-based component. The Company believes the mix of short-term incentive and base cash compensation and longer-term service-based and performance-based equity compensation continues to best promote the Committee’s goals of executive retention, rewarding and providing incentives for short-term and long-term performance and aligning the interests of executives and stockholders.
 
The Executive Incentive Plan and Tax Considerations.   Section 162(m) of the Internal Revenue Code and the related regulations limits publicly-held companies, such as the Company, to an annual deduction for federal income tax purposes of $1 million for services performed by specified executive officers, usually its named executive officers other than the chief financial officer, who are employed by the Company at the end of the year. However, if compensation meets the criteria for “qualified performance-based compensation,” the Company may deduct that compensation without limit under Section 162(m).
 
To qualify as performance based:
 
(i)
the compensation must be paid solely on account of the attainment of one or more pre-established, objective performance goals;
 
(ii)
the performance goal under which compensation is paid must be established by a compensation committee comprised solely of two or more directors who qualify as outside directors for purposes of the exception;
 
(iii)
the material terms under which the compensation is to be paid must be disclosed to and subsequently approved in a separate vote by stockholders of the corporation before payment is made; and
 
(iv)
the compensation committee must certify in writing before payment of the compensation that the performance goals and any other material terms were in fact satisfied.
 
 
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As described above, one of the conditions for meeting the “qualified performance-based compensation” requirement is periodic stockholder approval of the material terms of the performance goals under which the compensation is paid.
 
In 2012, our Board of Directors adopted and our stockholders approved the NIC Inc. Executive Incentive Plan (“EIP”), which provided an upper limit on cash bonuses and performance-based equity awards to be awarded to key executives upon achievement of certain objective performance goals.  The EIP did not change the Company’s existing compensation programs and did not increase the number of shares of NIC common stock that have been authorized by stockholders for issuance under its stock plans. The EIP is intended to operate as an “umbrella plan” for granting cash bonuses and performance-based equity awards that are intended to qualify as performance-based compensation under our current and future compensation programs and that are intended to be deductible for federal income tax purposes under the Internal Revenue Code.
 
In early 2013, the Compensation Committee adopted the Management Annual Incentive Plan for Senior Executives (“MAIPSE”), which operates as a plan-within-a-plan under the EIP with respect to annual cash incentive bonuses.  Cash bonuses granted under that plan are intended to qualify as “qualified performance-based compensation” under Section 162(m).  The design of the MAIPSE gives the Committee discretion to establish bonuses for our executive officers based on an assessment of the individual’s achievements and overall contributions to the Company, while intending to preserve the Company’s ability to deduct the bonuses to the greatest extent permitted under Section 162(m).
 
The MAIPSE establishes an initial performance requirement, the “outer layer,” pursuant to which an executive may earn the initial right to receive the maximum bonus under the EIP.  The MAIPSE then establishes a second performance requirement, the “inner layer,” consisting of specific threshold, target and superior performance-weighted goals or objectives for operating income, total revenue and cash flow return on invested capital, similar to prior years.  The potentially achievable bonuses under this second performance requirement are all less than or equal to the maximum possible bonus specified in the EIP which was approved by the stockholders and operates as an “umbrella plan.”  This framework of a plan under an umbrella plan is intended to comply with the Section 162(m) regulations while allowing the program to operate similarly to prior years.
 
While the Committee considers the deductibility of awards as one factor in determining executive compensation, the Committee also considers other factors in approving compensation and retains the flexibility to grant awards, such as service-based restricted stock, that it determines to be consistent with the Company’s goals for its executive compensation program even if the award is potentially not deductible by the Company for tax purposes.  In addition, because of the uncertainties associated with the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m) will in fact be deductible.
 
 
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2013 Executive Compensation Study.   In December 2012, with two full years under the previous executive compensation program, the Committee engaged SBCG to update its assessment of the Company’s executive compensation program for the members of the Executive Leadership Team.  The Committee engaged SBCG primarily because of its familiarity with the Company’s business and organizational context, as well as the Company’s executive compensation program.  More specifically, the Committee was intent upon reviewing the Company’s overall approach to executive compensation in the context of newly-executed employment agreements with the executive officers.  Further, this 2013 study was one of the factors considered by the Committee in determining pay for 2013.  SBCG does no other work for and has no other business relationships with the Company beyond its service to the Committee.  Specifically, the Committee asked SBCG to:
 
Review and, if necessary, update the peer group used to benchmark executive compensation levels; and
 
Perform a competitive assessment of target pay opportunities for the Executive Leadership Team against the peer group and broader market.
 
In 2010, SBCG developed a peer group of 15 companies by screening the broader market using several filters.  The criteria used by SBCG to select the peer group were as follows: (1) United States publicly traded companies (excluding foreign companies trading American depositary receipts in the United States), (2) relevant information technology companies using Global Industry Classification Codes for Application Software, Internet Software and Service, Data Processing and Outsourced Services, and IT Consulting and Other Services, (3) companies of comparable size and similar business models, with primary consideration given to annual revenue, assets and market capitalization, and (4) companies with similar business focus and customers, with additional consideration given to earnings, assets, and number of employees.  Since the 2010 study, four of the 15 peer group companies have been acquired or taken private, reducing to 11 the number of viable peers.  The four companies no longer included in the Company’s peer group are Blackboard Inc. (BBBB), Internet Brands Inc. (INET), LoopNet Inc. (LOOP) and S1 Corp. (SONE).
 
 To offset the loss of the four companies, SBCG again applied similar screening criteria, and in so doing, identified eight companies for inclusion in the peer group.  These eight companies are of comparable business focus to NIC, though not necessarily direct competitors, and each are of comparable organizational size relative to the other peer companies and to NIC.  The resulting 19-company peer group is as follows:
 
ACI Worldwide, Inc. (ACIW)*
Move Inc. (MOVE)
Blackbaud Inc. (BLKB)
Official Payments Holdings, Inc. (OPAY)
(which was acquired by ACI Worldwide, Inc.
(ACIW) on November 5, 2013)
Bottomline Technologies, Inc. (EPAY)*
Online Resources Corp. (ORCC)
CoStar Group Inc. (CSGP)*
Open Table, Inc. (OPEN)*
DealerTrack Holdings Inc. (TRAK)
Perficient Inc. (PRFT)
Dice Holdings Inc. (DHX)
Tyler Technologies Inc. (TYL)
EPIQ Systems Inc.(EPIQ)
Vocus Inc. (VOCS)
Higher One Holdings, Inc. (ONE)*
XO Group Inc. (XOXO)
j2 Global, Inc. (JCOM)*
(formerly Knot Inc. (KNOT))
Liquidity Service, Inc. (LQDT)*
 
LivePerson Inc. (LPSN)*
 

* - new peer added in SBCG’s 2013 study
 
 
39

 

SBCG’s 2013 study indicated that structural, or target pay opportunities for the Executive Leadership Team have become more closely aligned with the competitive market, though still below in certain respects.  More specifically, SBCG’s 2013 study indicated the following:
 
Base salaries are generally within the competitive  range of market, defined as being roughly +/- 10% of the market median;
 
Target total annual cash (i.e., base salary and annual cash incentive) is toward the lower end of the competitive range for the CEO and within the competitive range for the other Executive Leadership Team members in the study – again, where competitive range is roughly +/-10% of market median; and
 
Target total annual compensation (i.e., target total annual cash and long-term equity incentives) is below the competitive range for the CEO and CFO and within the competitive range of market for the other two Executive Leadership Team members – for total pay, the competitive range is considered to be +/-15% of market median.
 
Although the Committee considers a number of different factors in setting compensation, as described in this proxy statement, the Committee considers this competitive assessment carefully in setting compensation opportunities for the Executive Leadership Team.  Furthermore, the Committee’s general intention is to position target opportunities for the Executive Leadership Team at the competitive median.  For Mr. Herrington, as Chief Executive Officer, the Committee has moved and may continue to move pay closer to market over time, with a heavy emphasis on incentive pay, in keeping with the Company’s strong orientation toward performance-based pay, to the extent practicable taking into account all other factors considered by the Committee.
 
Summary of changes to executive compensation program for 2013.   On February 5, 2013, the Committee approved executive compensation for 2013, taking into account SBCG’s study and management’s recommendations.  There were no changes to the basic structure of the executive compensation program consisting of base salary, an annual cash incentive, and a two-pronged, long-term equity-based incentive that includes annual restricted stock grants with (i) a service-based component and (ii) a Company performance-based component.  The Committee increased base salaries of the Executive Leadership Team by 3% as a general merit award.  The Committee made no other changes to compensation levels and structure for the members of the Executive Leadership Team other than the Chief Executive Officer.  For the Chief Executive Officer, the Committee made certain modifications to the annual cash incentive and the two long-term, equity-based components  to (i) increase target incentive percentages of base salary, including percentages above and below Target for performance-based components, in keeping with the Committee’s intention to progressively increase, over a multi-year period, total compensation opportunities via incentive pay as discussed above.  Finally, and for all members of the Executive Leadership Team, the Committee adjusted certain performance levels used to evaluate Company performance, with consideration to strong recent performance and expectations for continued strong performance going forward.  These adjustments set the basis upon which annual incentives for 2013 would be earned, as well as the basis upon which vesting of the performance-based restricted stock granted in 2013 will be determined.  Changes to the 2013 executive compensation program are further discussed below.
 
Base salary.   The Committee awarded merit increases in base salary for each of the members of the Executive Leadership Team primarily in recognition of the Company’s strong financial performance. Under the terms of the program, the base salaries of executive officers are subject to change by the Committee from time to time.
 
 
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In 2013, the Committee increased base salaries of each of the members of the Executive Leadership Team as follows:
 
Name
 
Previous Base Salary
   
New Base Salary
   
Percentage Increase
 
Harry H. Herington
  $ 465,500     $ 479,500       3%  
Stephen M. Kovzan
  $ 297,000     $ 306,000       3%  
William F. Bradley, Jr.
  $ 297,000     $ 306,000       3%  
Robert W. Knapp, Jr.
  $ 297,000     $ 306,000       3%  
 
Annual cash incentives.   Annual cash incentives place a portion of each Executive Leadership Team member’s annual compensation at risk to encourage behavior and drive results that create value for the Company’s stockholders in the near term.
 
As further discussed above, the 2013 annual cash incentive was granted under the Management Annual Incentive Plan for Senior Executives, or MAIPSE, which establishes initial performance requirements, or the “outer layer,” pursuant to which an executive may earn the right to receive the maximum award under the NIC Inc. Executive Incentive Plan, or EIP, which provides an upper limit on cash bonuses to be awarded upon achievement of certain objective performance goals.  The outer layer component of the MAIPSE for 2013 was as follows:  positive net income, as reported on NIC’s consolidated statement of income for the 2013 fiscal year, or total revenues, as reported on NIC’s consolidated statement of income, that equal or exceed $210 million for the 2013 fiscal year.  NIC achieved both of these qualifications for the 2013 fiscal year and thus the executives achieved the Section 162(m) maximum incentive award possible, which is the lesser of (a) 200% of the officer’s base salary on the last day of 2013, or (b) $2.5 million, as step one in the process.
 
As the next step in the process, the yearly “inner layer” component of the MAIPSE established the criteria within which the Committee will exercise its discretion for awards based upon attainment of Company financial goals that will be used to determine actual award amounts that are below the Section 162(m) maximum incentive award.  The Committee in effect uses its “negative discretion” to reduce the Section 162(m) maximum awards, as it deems appropriate, based on the Company’s financial performance relative to these pre-determined criteria.  Within these boundaries, the Committee has discretion to vary the actual awards to take into consideration the particular events of the year in coming to its final award for each executive officer.  The following is a discussion of the inner layer component of the MAIPSE.
 
The 2013 MAIPSE for the Executive Leadership Team measures annual Company performance using the following key financial metrics as performance criteria:
 
Operating income: 50% weighting
 
Total revenues: 25% weighting
 
Cash flow return on invested capital (“CFROIC”), excluding income taxes paid: 25% weighting
 
Management and the Committee believe that these metrics drive stockholder value in the near term and comprise a strong pay-for-performance relationship.  The definitions of operating income and total revenues are consistent with those terms defined in generally accepted accounting principles and may be derived directly from the face of the consolidated statements of income included in the Company’s Annual Report on Form 10-K for the applicable annual period.  CFROIC is defined as consolidated cash flow from operating activities (excluding income taxes paid), minus capital expenditures, the difference of which is divided by the difference between total assets and non-interest bearing current liabilities.  Consolidated cash flow from operating activities and capital expenditures may be derived from the face of the consolidated statements of cash flows included in the Company’s Annual Report on Form 10-K for the applicable annual period.  Total assets and non-interest bearing liabilities may be derived from the face of the consolidated balance sheets included in the Company’s Annual Report on Form 10-K for the applicable annual period.
 
 
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For 2013, the Committee retained the “target” performance levels for the Company for operating income, total revenues, and CFROIC, which were based upon the Company’s annual budget approved by the Board of Directors.
 
Performance of the Company at the target level is intended to result in an annual cash incentive at a specified percentage of the executive’s base salary. The Committee also determined a range of possible cash incentives above and below target performance for achieving “threshold” and “superior” performance.  For amounts between the threshold and target levels or between the target and superior levels, straight line interpolation is to be used.  No payments are to be awarded under the plan with respect to a performance criterion if threshold performance with respect to that criterion is not achieved, and no additional payments are to be awarded for performance in excess of the superior level.
 
Taking into account the current mix of compensation, the Company’s strong financial performance, management’s recommendations and the 2013 study, among other factors, and with the intention of increasing the target total annual compensation opportunity over a multi-year period as described above, with the emphasis on increasing incentive pay, the Committee increased the 2013 percentage levels of base salary for the Chief Executive Officer as follows:
 
   
Previous %
   
2013 %
   
Multiple of
Performance Level
 
of Base Salary
   
of Base Salary
   
Target
Threshold
    40 %     50 %  
0.5 X target
Target
    80 %     100 %  
1.0 X target
Superior
    134 %     167 %  
1.67 X target

For 2013, the Committee maintained the percentage levels of base salary for the other three members of the Executive Leadership Team as follows:
 
   
Previous %
   
2013 %
   
Multiple of
Performance Level
 
of Base Salary
   
of Base Salary
   
Target
Threshold
    30 %     30 %  
0.5 X target
Target
    60 %     60 %  
1.0 X target
Superior
    100 %     100 %  
1.67 X target
 
Threshold performance for incentive awards under each performance criterion remained at 0.5 times target in 2013 (the same as in 2012), and for superior performance each criterion remained at 2 times target (the same as in 2012).  However, the maximum total incentive payout for all three performance criteria when combined was capped at 1.67 times target (the same as in 2012).

The higher target percentage level established for the Chief Executive Officer reflects differences in the scope of duties and responsibilities of the Chief Executive Officer and, in part, the more significant “gap to market” for the Chief Executive Officer’s total cash compensation as discussed above, as compared to the other three members of the Executive Leadership Team.
 
 
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The following table sets forth what constituted threshold, target and superior Company performance levels for the performance criteria included in the MAIPSE for 2013:
 
    Performance Levels
Performance Criteria
 
Threshold
 
Target
 
Maximum
             
Operating income
 
90% of budget
 
Budget
 
110% of budget
             
Total revenues
 
95% of budget
 
Budget
 
105% of budget
             
Cash flow return on invested capital (excluding income taxes paid)
 
50%
 
 55%
 
60%
 
With respect to the likelihood of the Company achieving its annual budget goals, the Company establishes what it considered to be ambitious, yet achievable, annual budgets, whereby over time, approximately half of actual results would fall above or below budgeted performance.  Threshold and maximum performance levels in the table above were recommended by management and approved by the Committee based on the Company’s past performance with respect to these metrics generally and relative to budget.
 
After the end of the 2013 fiscal year, the Committee determined the Company’s actual financial performance for each of the three performance criteria as follows:
 
Performance
Criteria
 
2013 Actual Performance
   
2013 Target Performance
   
Actual
Performance
As % of
Target
 
                   
Operating income
  $ 52,610,052     $ 50,635,637       103.9 %
                         
Total revenue
  $ 249,278,665     $ 242,587,710       102.8 %
                         
Cash flow return on invested capital (excluding income taxes paid)
    51.8 %     55.0 %     94.1 %
 
As further discussed above in this proxy statement under “Involvement in Certain Legal Proceedings,” and in Note 7 in the Notes to Consolidated Financial Statements included in the Company’s 2013 Form 10-K as filed with the SEC, throughout 2013 the Company incurred significant obligations to advance legal fees and other expenses to Mr. Kovzan in connection with the civil action by the SEC against him.  On December 2, 2013, a federal jury of seven persons in Kansas City, Kansas, cleared Mr. Kovzan of any liability in connection with all alleged violations of certain provisions of the federal securities laws in the civil action brought by the SEC against him.  The SEC’s right to appeal the outcome of the trial has expired and the civil action against Mr. Kovzan is concluded.
 
 
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NIC’s actual financial results for 2013 included approximately $12.8 million of legal defense and other third-party costs related to the SEC matter.  These expenses were reduced by approximately $8.8 million of reimbursement from the Company’s directors’ and officers’ liability insurance carrier, resulting in a net expense of approximately $4.0 million related to the SEC matter in fiscal 2013.  The Executive Leadership Team and the Committee viewed such costs to be unusual, extraordinary and outside of management’s control in 2013, and as a result, the Committee exercised its negative discretion under the MAIPSE and excluded such costs that were in excess of the amount budgeted by the Company from the determination of the 2013 annual cash incentive award.  The following table sets forth the Company’s performance for each of the three performance criteria, excluding such costs, as follows:
 
Performance
Criteria
 
2013
Adjusted
Performance (excluding
certain costs
of the SEC
matter)
   
2013 Target Performance
   
Adjusted
Performance
As % of
Target
   
Payout
As % of
Target
   
Weighting
   
Weighted
Payout
As % of
Target
 
                                     
Operating income
  $ 56,102,275     $ 50,635,637       110.8 %     200.0 %     50 %     100.0 %
                                                 
Total revenue
  $ 249,278,665     $ 242,587,710       102.8 %     155.2 %     25 %     38.8 %
                                                 
Cash flow return on invested capital
(excluding income taxes paid)
    52.9 %     55.0 %     96.1 %     78.6 %     25 %     19.7 %
                               
                   
Total Payout as % of Target
      158.5 %
 
An annual incentive payment equaling approximately 158.4% of base salary (158.5% of the target opportunity, as noted in the table above) was paid to Mr. Herington and annual incentive payments equaling approximately 95.1% of base salary (158.5% of the target opportunity, as noted in the table above) were paid to Messrs. Kovzan, Bradley and Knapp in early 2014 based on the Company’s adjusted financial performance in relation to the performance criteria and performance levels included in the annual cash incentive plan for 2013.  The annual cash incentive payments for 2013 were as follows:
 
Name
 
2013 Annual Cash Incentive Payout
 
Harry H. Herington
  $ 759,738  
Stephen M. Kovzan
  $ 290,903  
William F. Bradley, Jr.
  $ 290,903  
Robert W. Knapp, Jr.
  $ 290,903  
 
Long-term, equity-based incentives.   As determined by the Committee, the Company’s long-term, equity-based incentive for the members of the Executive Leadership Team included in the executive compensation program provides for annual restricted stock grants with a service-based component and a Company performance component to compensate executives with regard to the Company’s long-term growth objectives.
 
 
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Service-Based Component
 
The Committee increased the 2013 annual amount of service-based restricted stock to be awarded to the Chief Executive Officer to 120% of the executive’s annual base salary (from 75% in 2012) in part to address the shortfall in overall opportunity relative to the competitive market.  Further, restricted shares underscore the alignment of executives’ interests with those of stockholders, and they provide a degree of certainty in an otherwise entirely performance-based equity portfolio.  The Committee maintained the 2013 annual amount to be awarded to the other three members of the Executive Leadership Team at 60% of each executive’s annual base salary.  The amounts of service-based restricted stock to be awarded to each member of the Executive Leadership Team were consistent with the recommendations of management.  The higher percentage of base salary for the Chief Executive Officer reflects differences in the scope of duties and responsibilities of the Chief Executive Officer as compared to the other three members of the Executive Leadership Team. Service-based restricted stock awards vest ratably over a four-year service period following the date of grant.  There is no performance component tied to the service-based award.  The members of the Executive Leadership Team are entitled to cash dividends on shares of unvested service-based restricted stock in the same amount and at the same time as dividends are paid to other holders of the Company’s common stock.  The Company believes that restricted shares further the alignment of executive interests with those of stockholders, foster share ownership and wealth creation and provide significant retention value.
 
On February 5, 2013, the Committee granted the members of the Executive Leadership Team the following awards of service-based restricted stock for 2013 based upon the above percentages of base salary (the closing market price of the Company’s common stock on February 5, 2013 was $16.24 per share):
 
Name
Service-Based
Restricted Shares
Harry H. Herington
35,431 shares
Stephen M. Kovzan
11,305 shares
William F. Bradley, Jr.
11,305 shares
Robert W. Knapp, Jr.
11,305 shares
 
Performance-Based Component
 
The performance component measures long-term Company performance using the following performance criteria:
 
Operating income growth (three-year compound annual growth rate, or “CAGR”): 25% weighting
 
Total revenue growth (three-year CAGR): 25% weighting
 
Cash flow return on invested capital (excluding income taxes paid) (three-year average): 50% weighting
 
As compared to the short-term cash incentive, the long-term, equity-based incentive places a higher weighting on CFROIC and a lower weighting on operating income growth, as management and the Committee believe that, of the three performance criteria, CFROIC is the primary driver of stockholder value over the long term.  Further, this differentiated weighting between the short- and long-term performance frameworks helps to balance the two incentive programs over time.
 
 
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The long-term incentive provides for annual grants of restricted stock tied to three-year performance periods. A new three-year period is intended to begin each year.  At the end of each three-year period, Messrs. Herington, Kovzan, Bradley, and Knapp receive a number of shares per a pre-defined schedule of threshold, target and superior Company performance.  Each level of performance is associated with a pre-defined payout, expressed as a percentage of base salary.  In 2013, the Committee increased the amount of restricted stock to be awarded at the end of the three-year performance period ending December 31, 2015 to the Chief Executive Officer for Company performance at the target levels to 120% of the executive’s base salary (compared to 100% in 2012), while the amount to be awarded to the other three members of the Executive Leadership Team for Company performance at target levels remained at 60% of each executive’s annual base salary.  The plan incorporated a range of possible equity incentives above and below target performance.  For the Chief Executive Officer, this range was from 60% of base salary for achieving threshold performance to 200% of base salary for achieving superior performance.  For the other three members of the Executive Leadership Team, this range was from 30% of base salary for achieving threshold performance to 100% of base salary for achieving superior performance.  For each performance measure, no shares are awarded if threshold performance is not achieved, and no additional shares are awarded for performance in excess of the superior level.  For amounts between the threshold and target levels or between the target and superior levels, straight line interpolation, rounded up to the next whole share, will be used to determine the portion of the award that becomes vested.
 
Taking into account the current mix of compensation, the Company’s strong financial performance, management’s recommendations and the 2013 study, among other factors, and with the intention of increasing target total annual compensation opportunity over a multi-year period, with the emphasis on increasing incentive pay, the Committee increased the 2013 percentage levels of base salary for the Chief Executive Officer as follows:
 
 
   
Previous %
   
2013 %
   
Multiple of
Performance Level
 
of Base Salary
   
of Base Salary
   
Target
Threshold
    50 %     60 %  
0.5 X target
Target
    100 %     120 %  
1.0 X target
Superior
    167 %     200 %  
1.67 X target

For 2013, the Committee maintained the percentage levels of base salary for the other three members of the Executive Leadership Team as follows:
 
   
Previous %
   
2013 %
   
Multiple of
Performance Level
 
of Base Salary
   
of Base Salary
   
Target
Threshold
    30 %     30 %  
0.5 X target
Target
    60 %     60 %  
1.0 X target
Superior
    100 %     100 %  
1.67 X target
 
Threshold performance for incentive awards under each performance criterion remained at 0.5 times target in 2013 (the same as in 2012), and for superior performance each criterion remained at 2 times target (the same as in 2012).  However, the maximum total incentive payout for all three performance criteria when combined was capped at 1.67 times target (the same as in 2012).  These levels were consistent with the levels approved by the Committee for the annual cash incentive, as further discussed above.

 
46

 
 
The following table sets forth threshold, target and superior Company performance levels for the performance criteria included in the long-term equity incentive plan for 2013:
 
   
Performance Levels
 
Performance Criteria
 
Threshold
   
Target
   
Maximum
 
Operating income growth (three-year CAGR)
    10%       15%       20%  
                         
Total revenue growth (three-year CAGR)
    10%       15%       20%  
                         
Cash flow return on invested capital (excluding income taxes) (three-year average)
    50%       55%       60%  

Performance levels in the table above were recommended by management and approved by the Committee based on the Company’s past and expected future performance.  The target performance level in the table above for operating income growth is higher than the Company’s performance for the one-year period ended December 31, 2012 (12.2%) and lower than the Company’s performance for the three-year period ended December 31, 2012 (25.2%). The threshold, target and maximum performance levels for operating income growth were lowered by 2% (200 basis points) as compared to the performance levels used for the 2012 grant, based in part upon the recommendation of management.  Management recommended the lower performance levels for operating income growth to align with then-expected future performance and in consideration of the strong results of the prior three-year period.  The performance levels for total revenue growth were not changed from the levels used for the 2012 grant.  Although the target performance level in the table above for total revenue growth is modestly lower than the Company’s performance for the one- and three-year periods ended December 31, 2012 (16.7%), management and the Committee again considered the strong results during prior periods.  The performance levels for CFROIC were not changed from the levels used for the 2012 grant.  The target performance level in the table above for CFROIC is higher than the Company’s performance for the one- and three-year periods ended December 31, 2012 (36.1% and 49.0%, respectively).
 
On February 5, 2013, the Committee granted the members of the Executive Leadership Team the following awards of performance-based restricted stock for 2013 pursuant to the terms of the long-term equity incentive (the closing market price of the Company’s common stock on February 5, 2013 was $16.24 per share):
 
Name
Performance-Based Restricted Shares Granted (1)
Harry H. Herington
59,170 shares
Stephen M. Kovzan
18,842 shares
William F. Bradley, Jr.
18,842 shares
Robert W. Knapp, Jr.
18,842 shares
 
(1) 
Represents the maximum number of performance-based restricted shares able to be earned by the NEO at the end of the three-year performance period ending December 31, 2015 pursuant to the terms of the long-term equity incentive.  The actual number of shares earned will be based on the Company’s performance as indicated above over the three-year period ending December 31, 2015.  No shares will be vested if threshold performance is not achieved, and no additional shares will be vested for performance in excess of the superior level.
 
The end of the 2013 fiscal year marked the completion of the three-year performance period under the long-term equity incentive granted in 2011.
 
 
47

 

The following table sets forth performance levels for the performance criteria included in the long-term equity incentive grant made to Messrs. Herrington, Kovzan, Bradley, and Knapp in 2011 and actual results for the three-year period ended December 31, 2013 as compared to target performance levels:
 
   
Performance Levels
   
Three-Year
Actual Results
   
Payout
         
Weighted
Payout
 
Performance Criteria
 
Threshold
   
Target
   
Superior
   
Actual
   
As % of
Target
   
As % of
Target
   
Weighting
   
As % of
Target
 
Operating income (three-year CAGR)
    12 %     17 %     22 %     21.4 %     125.9 %     188.2 %     25 %     47.1 %
Total revenue (three-year CAGR)
    10 %     15 %     20 %     15.6 %     103.7 %     111.2 %     25 %     27.8 %
Cash flow return on invested capital
(three-year average)
    45 %     50 %     55 %     47.4 %     94.9 %     74.4 %     50 %     37.2 %
                                               
                                   
Total Payout as % of Target
      112.1 %

Pursuant to the terms of the 2011 performance-based equity grant agreement, the members of the Executive Leadership Team have the opportunity to receive dividend equivalent shares for any cash dividends declared by the Company during the performance period and before any shares are paid under the agreement.  At the end of the three-year performance period, each member of the Executive Leadership Team receives an additional number of shares (“Dividend Shares”) determined as follows: (1) as of each date (the “Dividend Payment Date”) that the Company would otherwise pay a declared cash dividend on the total number of shares set forth in the agreement, the Company credits a number of Dividend Shares to a notional account established for the benefit of each member of the Executive Leadership Team, and the number of Dividend Shares so credited is calculated by dividing the amount of such hypothetical cash dividend payment by the fair market value of the Company’s common stock on the Dividend Payment Date (rounded down to the nearest whole Dividend Share); and (2) on the date some or all of the shares are paid under the agreement, a pro rata number of notional Dividend Shares will be converted into an equivalent number of Dividend Shares earned and paid to each member of the Executive Leadership Team based upon the actual number of underlying shares vested during the performance period.

Based on the Company’s performance as indicated above over the three-year period ended December 31, 2013, the actual number of shares earned by Messrs. Herington, Kovzan, Bradley and Knapp were as follows (representing 112.1% of the target opportunity, as noted in the table above):

Name
 
Restricted Shares Vested
   
Dividend Shares Earned
   
Total Shares
 
Harry H. Herington
    33,771       1,722       35,493  
Stephen M. Kovzan
    17,198       876       18,074  
William F. Bradley, Jr.
    17,198       876       18,074  
Robert W. Knapp, Jr.
    17,198       876       18,074  

 
48

 
 
The Executive Compensation Program for Ron E. Thornburgh
 
Ron E. Thornburgh has served as Senior Vice President of Business Development of the Company since February 2010 and was designated a member of the Senior Management Steering Group of the Company in September 2011. The Committee, after considering the recommendation of Mr. Herington, approved an individualized compensation program for Mr. Thornburgh for 2011 to reflect his unique job responsibilities.  As the primary officer responsible for business development, Mr. Thornburgh oversees the Company’s national sales and marketing efforts.  Mr. Thornburgh’s compensation program differs from the other four NEOs because he participates in a performance-based sales commission plan, as described below, and does not participate in a performance-based equity incentive plan.  The other components of Mr. Thornburgh’s compensation program include base salary, a short-term annual incentive (i.e., annual cash bonus), and a long-term, service-based equity incentive, as described below.
 
Base salary.   The Committee increased Mr. Thornburgh’s annual base salary by 3% in 2013 to $250,805 as a merit award primarily in recognition of the Company’s strong financial performance.
 
Annual cash incentive.   Under the terms of Mr. Thornburgh’s Profit Sharing and Incentive Program, Mr. Thornburgh’s annual cash incentive award is based on a pre-established Company annual operating income goal, and the award amount is calculated as a percentage of Mr. Thornburgh’s base salary, which is recommended by the CEO to, and approved in its sole discretion by, the Committee.  Mr. Thornburgh’s annual cash incentive target remained at 25% of his base salary for fiscal 2013 (the same as in 2012).  If the pre-established Company annual operating income goal had not been achieved, no annual cash incentive would have been paid, unless otherwise provided.  Based on the achievement of the 2013 Company operating income goal, the Company paid the annual cash incentive payment to Mr. Thornburgh totaling $62,700 in early 2014.
 
Long-term, service-based equity incentive.   Mr. Thornburgh’s long-term, equity-based incentive is comprised of an annual service-based restricted stock grant, in the amount of a percentage of his base salary, designed to strengthen his long-term commitment to the success of the Company, to promote ownership in the Company, and to motivate him to make significant contributions to the Company that increase stockholder value.  Under the terms of Mr. Thornburgh’s Profit Sharing and Incentive Program, the annual amount of service-based restricted stock to be awarded is a percentage of annual base salary recommended by the CEO to, and approved in its sole discretion by, the Committee.  The Committee did not change the percentage for 2013 (35%), because it determined the percentage remained appropriate for Mr. Thornburgh’s position based on the CEO’s recommendation.  Service-based restricted stock awards vest ratably over a four-year service period following the date of grant.  On February 5, 2013, the Committee granted Mr. Thornburgh 5,248 shares of service-based restricted stock for 2013 pursuant to the terms of the long-term incentive plan (the closing market price of the Company’s common stock on February 5, 2013 was $16.24 per share).
 
Sales commission plan.   The Company’s sales commission plans are designed to fairly compensate key employees who make significant contributions to secure new, profitable government contracts that advance the Company’s long-term growth.  The sales commission bonus plan established for Mr. Thornburgh is customized to his role as the leader of the national sales and marketing efforts.  Payments under the plan are generally made as a small percentage of the estimated total operating income (“ETOI”) from the contract over the contract’s initial term.  The Committee, after considering the recommendation of the CEO, determines the percentage of ETOI for which Mr. Thornburgh is eligible. The percentage of ETOI for which Mr. Thornburgh is eligible may differ from contract to contract based on the level of each person’s contribution to the successful award of a particular contract.  Each commission bonus is paid in installments over the initial term of the contract and adjusted annually based on both actual financial results of the contract to that date and updated financial forecasts for the remainder of the initial contract term.  No commission bonus is considered earned until the contract has been properly executed and the initial revenues from the contract have been collected by the Company.   Furthermore, a commission bonus payment is not considered earned and will not be paid unless Mr. Thornburgh is employed by the Company on each commission bonus payment date; provided, however, that under the terms of Mr. Thornburgh’s 2013 employment agreement described below, if Mr. Thornburgh is terminated during the three-year period following a change of control event, Mr. Thornburgh will receive the lesser of (i) the yearly commission as it was calculated to be paid under Mr. Thornburgh’s commission plan prior to the change of control, or (ii) the average of the yearly commissions actually paid each year for years two through the year of the change of control.
 
 
49

 
 
Named executive officers are not eligible to participate in regular sales commission plans provided to non-executive employees.  However, Mr. Knapp continues to collect some bonus payments attributable to commissions for contracts signed prior to the time he became an executive officer, and Mr. Thornburgh continues to collect some bonus payments attributable to commissions for contracts signed prior to the time he became a named executive officer.  In addition, each of them may from time to time be considered for bonuses approved by the Committee upon recommendation from the CEO for individual efforts toward the Company obtaining new contracts signed after the date Mr. Knapp became an executive officer and after the date Mr. Thornburgh became a named executive officer, respectively.  Both types of payments are reflected in the “Bonus” column of the Summary Compensation Table on page 53 of this Proxy Statement.
 
Executive Perquisites for 2013
 
Other components of executive compensation beyond base salary, annual cash incentives and long-term equity-based incentives include Company-paid executive life and disability insurance premiums for Messrs. Herington, Kovzan, Bradley, Knapp and Thornburgh pursuant to the terms of their employment agreements. With respect to these perquisites, the Committee considered the cost of each perquisite and the total amount of compensation otherwise provided to each executive.
 
Stock Ownership Requirements for Executive Leadership Team Members and Non-Employee Directors
 
In 2011, the Board of Directors approved a stock ownership policy, to be administered by the Corporate Governance and Nominating Committee.  Both the Board and management believe such a policy generally represents a progressive governance posture and can help underscore a principal objective of equity-based compensation by fostering alignment of Board and management interests with those of stockholders.  The policy is based on a “multiple of” approach to stock ownership whereby ownership guidelines for the members of the Executive Leadership Team are based on a multiple of base salary and for non-employee directors are based on a multiple of annual cash retainer.  The policy’s stock ownership requirements for each participant are as follows:
 
Non-employee directors: four (4) times annual cash retainer
 
Chief Executive Officer: six (6) times annual base salary
 
The Company’s Chief Financial Officer, Chief Administrative Officer and Chief Operating Officer: three (3) times annual base salary
 
NIC common stock that is vested and owned by the participant will count toward satisfaction of the policy’s requirements.  Stock owned by the participant includes shares owned outright (i.e., held individually or as co-owner with a spouse) and shares beneficially owned but held in trust or in another entity for the benefit of the participant and his or her immediate family.  Unvested equity awards do not count toward satisfaction of the policy’s requirements.  During times that the minimum ownership requirement is not attained, the participant is required to retain at least 50% (or such other percentage as subsequently set by the Corporate Governance and Nominating Committee) of net shares of common stock delivered through the Company’s equity compensation plans.  Net shares of common stock refer to those shares that remain after shares are forfeited, sold or netted to pay any exercise price of a stock option award and/or any withholding taxes with respect to a stock option award or the vesting of any restricted stock.  The policy contains a hardship provision administered by the Corporate Governance and Nominating Committee.
 
 
50

 
 
All non-employee directors and members of the Executive Leadership Team subject to the stock ownership requirements described herein currently meet such requirements, with the exception of Ms. Karen Evans and Governor C. Brad Henry, who were each appointed to the Board of Directors in October 2011 and currently own 2,241 shares of NIC stock outright.  Ms. Evans and Governor Henry are within the period allowed under the policy to come into compliance with the policy.
 
Prohibition of Hedging in Company Stock
 
All employees and non-employee directors of the Company are prohibited from trading in puts, calls or similar hedging options on the Company’s stock, or selling the Company’s stock “short,” as described in the Company’s Trading Policies and Disclosure of Non-Public Information.
 
Employment Agreements with Executive Officers
 
On February 5, 2013, the Company entered into employment agreements with each of Messrs. Herington, Kovzan, Bradley, Knapp and Thornburgh.  These agreements replaced NIC’s prior employment agreements with Messrs. Herington, Kovzan and Bradley that had been in place since 2000.  Messrs. Knapp and Thornburgh did not previously have employment agreements with NIC.  The new employment agreements each have substantially the same terms, except with respect to job titles and responsibilities, the amount payable to each executive officer and Mr. Thornburgh’s bonus paid in accordance with the sales commission plan, as described above. Each of the new employment agreements has a three-year term, and unless notice is provided at least six months prior to the end of the respective term, automatically renews for additional three-year terms.
 
The Committee believes that the new employment agreements include certain provisions that better reflect strong corporate governance practices, as well as protect stockholders’ interests in the event of a change of control of NIC or certain accounting restatements.  The prior form of employment agreement included a modified “single trigger” severance right under which an executive would be entitled to severance payments by voluntarily terminating employment after a change of control.  The new employment agreements replaced this right with a “double trigger” severance right under which an executive would only be entitled to severance payments in connection with a change of control if the executive terminates his employment for “Good Reason” or NIC terminates the executive without “Cause” (as each of those terms are defined in the agreement).  The Committee believes this provision better protects stockholders’ interests in the event of a change of control by, among other things, ensuring continuity in management following the transaction.  The new employment agreements also contain a clawback provision under which NIC may recoup incentive compensation paid to the executive in the event of an accounting restatement under certain circumstances.  The provision is based upon the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and will apply following the SEC’s adoption of final rules regarding the same.
 
 
51

 
 
The new employment agreements also provide additional protections to executives for certain compensation and benefits in the event of termination. For instance, the new agreements provide executives with certain death and disability benefits and payments, including the right to participate in and receive benefits under NIC’s new executive life and disability policies.  The new employment agreements also provide executives with severance benefits and payments upon their voluntary termination for “Good Reason” or NIC’s termination of their employment without “Cause” (as each of those terms are defined in the agreement), as well as enhanced severance benefits and payments in connection with the “double trigger” severance right discussed above in connection with a change of control.  The Committee believes these arrangements are reasonable and appropriate to retain and focus executives during periods of potential uncertainty.
 
Finally, the new employment agreements also provide the executives with a contractual right to certain compensation and benefits consistent with NIC’s historical pay practices, such as rights to paid vacation and minimum target levels for incentive compensation based upon the executives’ base salaries.  The Committee believes these additional rights are appropriate given NIC’s historical and anticipated future pay practices.
 
The Company has also included termination provisions in the various plans and award agreements relating to incentive compensation in which the named executive officers participate, which provisions will apply to the extent not covered by the employment agreements, such as in the case of death, disability or retirement.  The plans and award agreements generally provide that upon a change in control, performance-based awards vest at specified levels, due to the potential lack of executive control over performance conditions after the change in control, and service-based awards do not accelerate or vest if they are assumed by the acquiring entity.
 
In addition, each named executive officer has entered into indemnification agreements with NIC, each in a form approved by the Company’s Board and previously disclosed by the Company.  The Company has also entered into a form of the indemnification agreement with each of its directors.  The Company’s Board has further authorized the Company to enter into the form of indemnification agreement with future directors and executive officers of the Company and other persons or categories of persons that may be designated from time to time by the Board.  The indemnification agreement supplements and clarifies existing indemnification provisions of the Company’s Certificate of Incorporation and Bylaws and, in general, provides for indemnification to the fullest extent permitted by law, subject to the terms and conditions provided in the indemnification agreement.  The indemnification agreement also establishes processes and procedures for indemnification claims, advancement of expenses and costs and other determinations with respect to indemnification.

For additional discussion of employment agreements with executive officers, refer to the discussion below set forth under “Employment Agreements and Severance Payments.”

 
52

 
 
_________________
 
COMPENSATION TABLES
_________________

The following Summary Compensation Table sets forth summary information as to compensation received by the persons who served as the Company’s Chief Executive Officer and Chief Financial Officer during fiscal year 2013 and the three most highly compensated other executive officers whose total adjusted compensation exceeded $100,000 during fiscal year 2013, which are collectively referred to herein as the “named executive officers” or “NEOs”.
 
SUMMARY COMPENSATION TABLE (1)
 
Name and
Principal Position
 
Year
 
Salary
($)
   
Bonus
($)(2)
   
Stock
Awards
($)(3)
   
Non-Equity
Incentive Plan Compensation
($)(4)
   
All Other Compensation (Including Perquisites)
($)(5)
    Total ($)  
   
(a)
 
(b)
   
(c)
   
(d)
   
(f)
   
(g)
    (i)  
Harry H. Herington (6)
 
2013
    478,333       -       1,006,760       759,738       115,661       2,360,492  
Chairman of the Board and
 
2012
    460,458       58,566       739,614       292,831       67,701       1,619,170  
Chief Executive Officer
 
2011
    402,167       -       567,000       503,717       92,377       1,565,261  
                                                     
Stephen M. Kovzan (7)
 
2013
    305,250       -       321,233       290,903       55,011       972,397  
Chief Financial Officer
 
2012
    295,167       28,025       327,680       140,125       36,405       827,402  
   
2011
    273,500       -       302,500       273,624       43,786       893,410  
                                                     
William F. Bradley, Jr. (8)
 
2013
    305,250       -       321,233       290,903       70,523       987,909  
Executive Vice President,
 
2012
    295,167       28,025       327,680       140,125       36,405       827,402  
Chief Administrative Officer, General
 
2011
    273,500       -       302,500       273,624       40,972       890,596  
Counsel and Secretary                                                     
                                                     
Robert W. Knapp, Jr. (9)
 
2013
    305,250       20,000       321,233       290,903       55,225       992,611  
Chief Operating Officer
 
2012
    295,167       68,025       327,680       140,125       36,405       867,402  
   
2011
    273,500       40,000       302,500       273,624       40,321       929,945  
                                                     
Ron E. Thornburgh (10)
 
2013
    250,196       41,081       85,228       62,700       23,045       462,250  
Senior Vice President of
 
2012
    243,010       18,302       85,215       60,875       9,807       417,209  
Business Development
 
2011
    229,500       14,760       -       39,205       6,293       289,758  
 
 
   
(1)
The “Option Awards” and “Change in Pension Value and Non-qualified Deferred Compensation Earnings” columns have been omitted from the Summary Compensation Table because the Company did not grant any stock option awards to the named executive officers in the years presented and does not provide a pension program or other non-qualified deferred compensation. 
 
 
53

 
 
(2)
Amounts for 2012 for Messrs. Herington, Kovzan and Bradley and a portion of the amount for Mr. Knapp consist of a discretionary bonus of 20% of the 2012 non-equity incentive compensation, which was approved by the Compensation Committee in 2013 in recognition of the Company’s strong performance in 2012. Amounts for Mr. Knapp also include bonuses paid in lieu of the sales commissions attributable to a seven-year contract with the state of Texas, commencing on January 1, 2010, to manage the state’s official government portal, which was signed prior to the time Mr. Knapp became an executive officer (these bonuses represent the entire amount in 2013, $40,000 in 2012, and the entire amount in 2011).  A portion of the amount for 2013 and 2012 for Mr. Thornburgh consists of bonuses paid under his current compensation program for his involvement in securing certain government portal contracts subsequent to his designation as a named executive officer.  The remainder of the amount for 2013 and 2012 for Mr. Thornburgh and the entire amount for 2011 consist of bonuses paid in lieu of the sales commission Mr. Thornburgh would have earned under the sales commission plan for his involvement in securing certain government portal contracts prior to his designation as a named executive officer.  Mr. Thornburgh became ineligible to participate in the plan when he became a named executive officer. 
   
(3)
Amounts reported in the Stock Awards column represent the aggregate grant date fair value of such awards, computed in accordance with FASB ASC Topic 718.  Pursuant to SEC rules, the amounts shown reflect the probable outcome of performance conditions that affect the vesting of awards granted to the named executive officers.  However, these amounts do not include an estimate of forfeitures related to time-based vesting conditions, and assume that the named executive officer will perform the requisite service to vest in the award.  For assumptions used in determining these values, refer to Note 10 of the Company’s financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.  For additional information regarding stock awards for the named executive officers, refer to the “Grants of Plan-Based Awards in Fiscal 2013” and “Outstanding Equity Awards at 2013 Fiscal Year-End” tables included in this Proxy Statement beginning on page 59.  The grant date fair value does not reflect dividends payable on unvested shares of service-based or performance-based restricted stock.  The value of dividends paid on service-based restricted stock and the dollar amount of any cash dividend declared on shares subject to each outstanding performance-based restricted stock award during each year, based upon the maximum number of shares which may become vested under the performance-based restricted stock award, is reported in the All Other Compensation column and not in the Stock Awards column. 
   
(4)
For 2013, amount consists of compensation earned in 2013, based on the Company’s adjusted fiscal 2013 financial performance, but paid in 2014 under the Company’s Management Annual Incentive Plan for Senior Executives, or MAIPSE. Compensation earned equaled approximately 158% of the Chief Executive Officer’s base salary as of the February 5, 2013 grant date and 95% of the base salary for the other three members of the Executive Leadership Team as of February 5, 2013.  For 2012, amount consists of compensation earned in 2012, based on the Company’s fiscal 2012 financial performance, but paid in 2013 under the Company’s annual cash incentive plan. Compensation earned equaled approximately 63% of the Chief Executive Officer’s base salary as of the January 30, 2012 grant date and 47% of the base salary for the other three members of the Executive Leadership Team as of January 30, 2012.  For 2011, amount consists of compensation earned in 2011, based on the Company’s fiscal 2011 financial performance, but paid in 2012 under the Company’s annual cash incentive plan. Compensation earned equaled approximately 124% of the Chief Executive Officer’s base salary as of May 2011 and 99% of the base salary for the other three members of the Executive Leadership Team as of May 2011.  For Mr. Thornburgh, the amount in 2013 consists of compensation earned in 2013, based on the Company’s fiscal 2013 performance, but paid in 2014.  Compensation earned equaled 25% of Mr. Thornburgh’s base salary as of May 2013.  For Mr. Thornburgh, the amount in 2012 consists of compensation earned in 2012, based on the Company’s fiscal 2012 performance, but paid in 2013.  Compensation earned equaled 25% of Mr. Thornburgh’s base salary as of May 2012.  For Mr. Thornburgh, the amount in 2011 consists of compensation earned in 2011, based on the Company’s fiscal 2011 performance, but paid in 2012.  Compensation earned equaled 20% of Mr. Thornburgh’s base salary as of May 2011.  For additional information regarding the Company’s annual cash incentive plans, refer to the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36. 
 
 
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(5)
All Other Compensation includes (i) the dollar amount of cash dividends declared on unvested shares subject to a service-based restricted stock award during each year; (ii) the dollar amount of any cash dividend declared on shares subject to each outstanding performance-based restricted stock award during each year, based upon the maximum number of shares which may become vested under the performance-based restricted stock award; (iii) the dollar amount of Company 401(k) matching funds earned during 2013; and (iv) the dollar amount of executive life and disability premiums paid by the Company pursuant to the terms of each executive’s employment agreement.  Under each award agreement relating to the performance-based restricted stock awards, the actual dividend is payable to the named executive officer in the form of shares of Company common stock at the end of the three-year performance period for each award, but only to the extent the underlying shares have vested. At the end of the three-year performance period and on the date some or all of the shares are vested under the award, a pro rata number of notional dividend shares will be converted into an equivalent number of dividend shares earned and shall be paid to the named executive officers based upon the actual number of underlying shares vested during the performance period.  No dividends or dividend equivalents are paid on any performance-based restricted stock awards during the three-year performance period. The dollar amount of the dividends declared on service-based and performance-based restricted stock awards (based upon the assumed maximum vesting) for each named executive officer is described in Notes 6 through 9 below. The amounts shown do not reflect any forfeitures at the end of the respective performance period of dividends previously declared on shares of performance-based restricted stock (and disclosed in the table).
 
(6)  
In February 2013, the Compensation Committee increased Mr. Herington’s base salary approximately 3% from $465,500 to $479,500, as a merit award primarily in recognition of the Company’s strong financial performance.
   
 
In February 2012, the Compensation Committee increased Mr. Herington’s base salary approximately 15% from $405,000 to $465,500 as a merit increase in recognition of the Company’s strong financial performance and success in securing a record number of new state portal outsourcing contracts (four) in the previous year.
   
  In February 2011, the Compensation Committee increased Mr. Herington’s base salary approximately 3% from $391,400 to $405,000 as an approximate cost-of-living adjustment.
   
  For 2013, All Other Compensation for Mr. Herington consists of the following items: 
   
 
Cash dividend equivalent of $0.35 per share on 74,959 unvested shares of service-based restricted stock declared by the Company in October 2013 – $26,236;
  Dividend equivalent of $0.35 per share on the maximum number of shares which may vest under the performance-based restricted stock awards granted in 2011, 2012 and 2013 (See Note 5 above) – $60,339 (based upon the cash dividend declared in October 2013);
  Company 401(k) matching funds earned in 2013 – $8,750; and
  Value attributable to the Company’s payment of executive life and disability insurance premiums paid in 2013 – $20,336. 
     
 
The maximum grant date fair value of performance-based restricted stock awarded to Mr. Herington (which did not include dividends which may be paid on such restricted stock) was $960,918 in 2013, $777,385 in 2012 and $541,080 in 2011 assuming the highest level of performance conditions was achieved, while the amounts reported in the Stock Awards column reflect the probable outcome of performance conditions.  For additional information regarding Mr. Herington’s compensation, refer to the discussion under the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.
 
 
55

 
 
(7)  
In February 2013, the Compensation Committee increased Mr. Kovzan’s base salary approximately 3% from $297,000 to $306,000, as a merit award primarily in recognition of the Company’s strong financial performance.
   
 
In February 2012, the Compensation Committee increased Mr. Kovzan’s base salary by approximately 8% from $275,000 to $297,000 as a merit increase in recognition of the Company’s strong financial performance and success in securing a record number of new state portal outsourcing contracts (four) in the previous year.
   
  In February 2011, the Compensation Committee increased Mr. Kovzan’s base salary by approximately 3% from $267,800 to $275,000, as an approximate cost-of-living adjustment.
   
  For 2013, All Other Compensation for Mr. Kovzan consists of the following items:
   
 
Cash dividend equivalent of $0.35 per share on 32,527 unvested shares of service-based restricted stock declared by the Company in October 2013 – $11,384;
  Dividend equivalent of $0.35 per share on the maximum number of shares which may vest under the performance-based restricted stock awards granted in 2011, 2012 and 2013 (See Note 5 above) – $23,959 (based upon the cash dividend declared in October 2013);
  Company 401(k) matching funds earned in 2013 – $8,750; and
 
Value attributable to the Company’s payment of executive life and disability insurance premiums paid in 2013 – $10,918.
     
 
The maximum grant date fair value of performance-based restricted stock awarded to Mr. Kovzan (which did not include dividends which may be paid on such restricted stock) was $306,000 in 2013, $297,000 in 2012 and $275,000 in 2011 assuming the highest level of performance conditions was achieved, while the amounts reported in the Stock Awards column reflect the probable outcome of performance conditions.  For additional information regarding Mr. Kovzan’s compensation, refer to the discussion under the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.
 
(8)  
In February 2013, the Compensation Committee increased Mr. Bradley’s base salary approximately 3% from $297,000 to $306,000, as a merit award primarily in recognition of the Company’s strong financial performance.
   
 
In February 2012, the Compensation Committee increased Mr. Bradley’s base salary by approximately 8% from $275,000 to $297,000 as a merit increase in recognition of the Company’s strong financial performance and success in securing a record number of new state portal outsourcing contracts (four) in the previous year.
   
 
In February 2011, the Compensation Committee increased Mr. Bradley’s base salary by approximately 3% from $267,800 to $275,000, as an approximate cost-of-living adjustment.
   
  For 2013, All Other Compensation for Mr. Bradley consists of the following items:
   
 
Cash dividend equivalent of $0.35 per share on 32,527 unvested shares of service-based restricted stock declared by the Company in October 2013 – $11,384;
  Dividend equivalent of $0.35 per share on the maximum number of shares which may vest under the performance-based restricted stock awards granted in 2011, 2012 and 2013 (See Note 5 above) – $23,959 (based upon the cash dividend declared in October 2013);
  Company 401(k) matching funds earned in 2013 – $8,750; and
  Value attributable to the Company’s payment of executive life and disability insurance premiums paid in 2013 – $26,430.
     
 
The maximum grant date fair value of performance-based restricted stock awarded to Mr. Bradley (which did not include dividends which may be paid on such restricted stock) was $306,000 in 2013, $297,000 in 2012 and $275,000 in 2011 assuming the highest level of performance conditions was achieved, while the amounts reported in the Stock Awards column reflect the probable outcome of performance conditions. For additional information regarding Mr. Bradley’s compensation, refer to the discussion under the Compensation Discussion and Analysis section of this Proxy Statement on page 36.
 
 
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(9)  
In February 2013, the Compensation Committee increased Mr. Knapp’s base salary approximately 3% from $297,000 to $306,000, as a merit award primarily in recognition of the Company’s strong financial performance.
   
 
In February 2012, the Compensation Committee increased Mr. Knapp’s base salary by approximately 8% from $275,000 to $297,000 as a merit increase in recognition of the Company’s strong financial performance and success in securing a record number of new state portal outsourcing contracts (four) in the previous year.
   
 
In February 2011, the Compensation Committee increased Mr. Knapp’s base salary by approximately 3% from $267,800 to $275,000, as an approximate cost-of-living adjustment.
   
  In 2013, 2012 and 2011, Mr. Knapp was awarded sales commission bonuses of $20,000, $40,000 and $40,000, respectively, as authorized by the Compensation Committee for efforts by Mr. Knapp in connection with the Company’s seven-year contract with the state of Texas, commencing on January 1, 2010, to manage the state’s official government portal, which was signed prior to the time Mr. Knapp became an executive officer.
   
  For 2013, All Other Compensation for Mr. Knapp consists of the following items: 
   
 
Cash dividend equivalent of $0.35 per share on 32,527 unvested shares of service-based restricted stock declared by the Company in October 2013 – $11,384;
  Dividend equivalent of $0.35 per share on the maximum number of shares which may vest under the performance-based restricted stock awards granted in 2011, 2012 and 2013 (See Note 5 above) – $23,959 (based upon the cash dividend declared in October 2013);
  Company 401(k) matching funds earned in 2013 – $8,750; and
 
Value attributable to the Company’s payment of executive life and disability insurance premiums paid in 2013 – $11,132.
     
 
The maximum grant date fair value of performance-based restricted stock awarded to Mr. Knapp (which did not include dividends which may be paid on such restricted stock) was $306,000 in 2013, $297,000 in 2012 and $275,000 in 2011 assuming the highest level of performance conditions was achieved, while the amount reported in the Stock Awards column reflects the probable outcome of performance conditions.  For additional information regarding Mr. Knapp’s compensation, refer to the discussion under the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.
 
 
57

 
 
(10)  
In February 2013, the Compensation Committee increased Mr. Thornburgh’s base salary approximately 3% from $243,500 to $250,805, as a merit award primarily in recognition of the Company’s strong financial performance.
   
 
In February 2012, the Compensation Committee increased Mr. Thornburgh’s base salary by approximately 5% from $231,750 to $243,500 as a merit increase in recognition of the Company’s strong financial performance and success in securing a record number of new state portal outsourcing contracts (four) in the previous year.
   
 
In September 2011, the Company determined that Mr. Thornburgh met the definition of an “executive officer” pursuant to Rule 3b-7 under the Securities Exchange Act of 1934, as amended (“Exchange Act”).  Mr. Thornburgh’s base salary was $231,750 at the time he was designated an executive officer and remained unchanged.
   
  In 2013, Mr. Thornburgh was awarded a bonus of $31,702 for his involvement in securing certain government portal contracts, which were signed prior to the time Mr. Thornburgh became a named executive officer.  In 2012, Mr. Thornburgh was awarded a bonus of $13,785 for his involvement in securing certain government portal contracts, which were signed prior to the time Mr. Thornburgh became a named executive officer.  In addition, Mr. Thornburgh was awarded a sales commission bonus in 2013, 2012 and 2011 of $9,379, $4,517 and $14,760, respectively, for his involvement in securing certain government portal contracts, which were signed prior to the time Mr. Thornburgh became a named executive officer.
   
  For 2013, All Other Compensation for Mr. Thornburgh consists of the following items: 
   
 
Cash dividend equivalent of $0.35 per share on 15,507 unvested shares of service-based restricted stock declared by the Company in October 2013 – $5,428;
  Company 401(k) matching funds earned in 2013 – $3,063; and
  Value attributable to the Company’s payment of executive life and disability insurance premiums paid in 2013 – $14,554.
 
 
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GRANTS OF PLAN-BASED AWARDS IN FISCAL 2013
 
The following table sets forth information concerning grants of restricted stock awards and incentive plan awards to the named executive officers during the fiscal year ended December 31, 2013.
 
         
Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards
   
Estimated Future Payouts Under
Equity Incentive Plan Awards
   
 All Other
Stock Awards: Number
   
 Grant Date
Fair Value of Stock and
 
Name
 
Grant Date
   
Threshold
($)(1)
   
Target
($)(1)
   
Maximum
($)(1)
   
Threshold
(#)(2)
   
Target
(#)(2)
   
Maximum
(#)(2)
   
 of Shares of Stock or Units
(#)(3)
   
Option
Awards
($)(4)
 
(a)
 
(b)
   
(c)
   
(d)
   
(e)
   
(f)
   
(g)
   
(h)
   
(i)
   
(l)
 
                                                       
Harry H.
Herington
   
2-5-13
     
239,750
     
479,500
      800,765       -       -       -       -       -  
     
2-5-13
      -       -        -       17,716       35,431       59,170        -       431,360  
     
2-5-13
      -       -        -       -        -        -       35,431       575,399  
                                                                         
Stephen M.
Kovzan
    2-5-13       91,800       183,600       306,000       -       -       -       -       -  
      2-5-13        -        -        -       5,653       11,305       18,842       -       137,639  
      2-5-13        -        -        -        -        -        -       11,305       183,593  
                                                                         
William F.
Bradley, Jr.
    2-5-13       91,800       183,600       306,000       -       -       -       -       -  
      2-5-13        -        -        -       5,653       11,305       18,842       -       137,639  
      2-5-13        -        -        -        -        -        -       11,305       183,593  
                                                                         
Robert W.
Knapp, Jr.
    2-5-13       91,800       183,600       306,000       -       -       -       -       -  
      2-5-13        -        -        -       5,653       11,305       18,842       -       137,639  
      2-5-13        -        -        -        -        -        -       11,305       185,593  
                                                                         
Ron E.
Thornburgh
    2-5-13       -       62,700       -       -       -       -       -       -  
      2-5-13        -        -        -        -       -       -       5,248       85,228  
 
(1)
For Messrs. Herington, Kovzan, Bradley, and Knapp, represents a grant pursuant to the Company’s 2013 MAIPSE that will be paid out to each of the four members of the Executive Leadership Team if certain Company financial performance criteria are satisfied.  The Compensation Committee determined a “target” performance level for the Company for each of three performance criteria (operating income, total revenue and cash flow return on invested capital).  Performance of the Company at the target level will result in an annual cash incentive that is 100% of Mr. Herington’s base salary and 60% of the base salary for Messrs. Kovzan, Bradley, and Knapp.  The Committee also determined a range of possible cash incentives above and below target performance, ranging from 50% of Mr. Herington’s base salary for achieving “threshold” performance to 167% of Mr. Herington’s base salary for achieving “superior” performance, and ranging from 30% of base salary for Messrs. Kovzan, Bradley, and Knapp for achieving “threshold” performance to 100% of base salary for Messrs. Kovzan, Bradley, and Knapp for achieving “superior” performance.  For amounts between the threshold and target levels or between the target and superior levels, straight line interpolation will be used.  No payments are awarded under the plan if threshold performance is not achieved, and no additional payments are awarded for performance in excess of the superior level.  For Mr. Thornburgh, the annual cash incentive will be paid out if the Company achieves a pre-established operating income goal for the year and will result in an award equal to 25% of Mr. Thornburgh’s base salary.  Annual incentive payments equaling approximately 158% of base salary were paid to Mr. Herington, 95% of base salary were paid to Messrs. Kovzan, Bradley, and Knapp and 25% of base salary were paid to Mr. Thornburgh in early 2014 based on the Company’s adjusted fiscal 2013 financial performance in relation to the performance criteria and performance levels included in the respective annual cash incentive plans for 2013, as further discussed in the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.  Under the MAIPSE for 2013 for Messrs. Herington, Kovzan, Bradley, and Knapp, the Committee retained sole discretion to reduce or eliminate an executive’s bonus to reflect either (i) the executive’s performance or (ii) unanticipated factors.  In addition, under the plan for 2013, the Committee had the discretion to adjust the calculated annual cash incentive amount (based on actual results vs. target) upwards or downwards by up to the maximum payout allowable under the plan based on the Company’s relative performance to market and/or its peer group for the performance period.  Under the plan for Mr. Thornburgh, Mr. Herington retained sole discretion to recommend the reduction or elimination of Mr. Thornburgh’s bonus to reflect either (i) Mr. Thornburgh’s performance or (ii) unanticipated factors.  For additional information regarding the Company’s 2013 annual cash incentive plans for the NEOs, refer to the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.
 
 
59

 
 
 
(2)
For Messrs. Herington, Kovzan, Bradley and Knapp, represents a grant of performance-based restricted stock on February 5, 2013 that will vest in whole or in part on February 5, 2016 if certain Company financial performance criteria are satisfied.  The annual grants of performance-based restricted stock tied to three-year performance periods.  A new three-year period is intended to begin each year.  At the end of each three-year period, members of the Executive Leadership Team receive a number of shares per a pre-defined schedule of threshold, target and superior Company performance.  The three-year performance period for this grant is the three-year period ending December 31, 2015.  Each level of performance is associated with a pre-defined payout, expressed as a percentage of base salary.  The amount of restricted stock to be awarded at the end of each three-year performance period to Mr. Herington for Company performance at the target levels is 120% of the executive’s base salary, and the amount to be awarded to the other members of the Executive Leadership Team for Company performance at target levels is 60% of each executive’s annual base salary.  The grant incorporates a range of possible equity incentives above and below target performance.  For Mr. Herington, this range is from 60% of base salary for achieving threshold performance to 200% of base salary for achieving superior performance.  For the other members of the Executive Leadership Team, this range is from 30% of base salary for achieving threshold performance to 100% of base salary for achieving superior performance.  For each performance measure, no shares are awarded if threshold performance is not achieved, and no additional shares are awarded for performance in excess of the superior level.  For amounts between the threshold and target levels or between the target and superior levels, straight line interpolation, rounded up to the next whole share, will be used to determine the portion of the award that becomes vested.
   
 
Each member of the Executive Leadership Team has the opportunity to receive dividend equivalents for any cash dividend declared during the three-year performance period on shares subject to a performance-based restricted stock award, which dividend equivalents are payable in the form of shares of Company common stock, based upon the pro rata number of shares earned and vested under each performance-based restricted stock award.  Such cash dividend amount shall be divided by the fair value of the Company’s common stock on the dividend payment date to determine the maximum number of notional shares to be awarded.  At the end of the three-year performance period and on the date some or all of the shares are paid, a pro rata number of notional dividend shares will be converted into an equivalent number of dividend shares and paid to each member of the Executive Leadership Team based upon the actual number of underlying shares vested during the performance period.  No dividend equivalents are paid on any performance-based restricted stock awards during the three-year performance period.  Such dividend shares are not included in the calculation of the estimated future payouts under equity incentive plan awards.  For additional information regarding the Company’s long-term, equity-based incentives, refer to the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.
   
(3)
For Messrs. Herington, Kovzan, Bradley, Knapp and Thornburgh, represents a grant of service-based restricted stock on February 5, 2013.  The amount of restricted stock awarded to Mr. Herington was 120% of the executive’s base salary, and the amount of restricted stock awarded to Messrs. Kovzan, Bradley, and Knapp was 60% of each executive’s base salary.  The number of shares granted was based upon the closing market price of the Company’s Common Stock on February 5, 2013 of $16.24 per share.  The grant vests in four equal annual installments beginning on February 5, 2014.  The amount of restricted stock awarded to Mr. Thornburgh was 35% of the executive’s base salary.  The number of shares granted was based upon the closing market price of the Company’s Common Stock on February 5, 2013 of $16.24 per share.  The grant vests in four equal annual installments beginning on February 5, 2014.  For additional information regarding the Company’s long-term, equity-based incentives for all of the named executive officers, refer to the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 36.
 
(4)
Represents the aggregate grant date fair value of such awards, computed in accordance with FASB ASC Topic 718. Pursuant to SEC rules, the amounts shown reflect the probable outcome of performance conditions that affect the vesting of awards granted to the named executive officers.  However, these amounts do not include an estimate of forfeitures related to time-based vesting conditions, and assume that the named executive officer will perform the requisite service to vest in the award.  For assumptions used in determining these values, refer to Note 10 of the Company’s financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.  The grant date fair value did not reflect future dividends which might be paid on unvested shares of service-based or performance-based restricted stock.  The value of dividends declared on such restricted stock is reported in the All Other Compensation column of the Summary Compensation Table.
 
 
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OUTSTANDING EQUITY AWARDS AT 2013 FISCAL YEAR-END

The following table sets forth information concerning outstanding restricted stock awards for the named executive officers at December 31, 2013.
 
   
Option Awards
   
Stock Awards
 
Name
 
Number of Securities Underlying
Unexercised Options
(#)
Exercisable
   
Number of Securities Underlying
Unexercised Options
(#)
Unexercisable
   
Equity
Incentive Plan Awards:
Number of Securities Underlying