Electro Scientific Industries, Inc.
ELECTRO SCIENTIFIC INDUSTRIES INC (Form: DEF 14A, Received: 07/14/2016 06:01:41)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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Electro Scientific Industries, Inc.

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Notice of Annual Meeting of Shareholders
 
 
To the Shareholders of Electro Scientific Industries, Inc.:
The Annual Meeting of Shareholders of Electro Scientific Industries, Inc. (ESI) will be held at ESI’s offices, 13900 NW Science Park Drive, Portland, Oregon, on Thursday, August 18, 2016 at 2:30 p.m. Pacific Daylight Time, for the following purposes:
1.
To elect the five directors named in the proxy statement for a term of one year. John Medica, Raymond A. Link, Laurence E. Cramer, Frederick A. Ball, and Richard H. Wills are nominees for election for a one-year term.
2.
To approve an amendment to the 2004 Stock Incentive Plan to increase the number of authorized shares under the plan by 2,750,000 shares, and make several modifications to the plan described in this proxy statement, including changes to prohibit liberal share recycling for restricted stock and restricted stock units, eliminate the ability to grant reload options, expanding the prohibition on repricing awards, provide a minimum vesting period for stock options and stock appreciation rights and increase certain annual grants limits.
3.
To approve, on an advisory basis, the compensation of our named executive officers.
4.
To ratify the Audit Committee’s selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending April 1, 2017.
5.
To transact any other business that properly comes before the meeting.
Only shareholders of record at the close of business on June 15, 2016 will be entitled to vote at the annual meeting.
Your vote is very important. Whether or not you expect to attend in person, we urge you to vote your shares at your earliest convenience. Promptly voting your shares by phone, via the internet, or by signing, dating, and returning the enclosed proxy card will ensure the presence of a quorum at the meeting. An addressed envelope for which no postage is required if mailed in the United States is enclosed if you wish to vote by mail. Submitting your proxy now will not prevent you from voting your shares at the meeting if you desire to do so, as your proxy is revocable at your option. Retention of the proxy is not necessary for admission to or identification at the meeting.
IMPORTANT NOTICE REGARDING THE INTERNET AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON THURSDAY, AUGUST 18, 2016 : This proxy statement and the Company’s 2016 Annual Report to Shareholders are also available at http://investors.esi.com/proxy.cfm.
By Order of the Board of Directors

Paul Oldham
Vice President of Administration, Chief
Financial Officer and Corporate Secretary
Portland, Oregon
July 14, 2016




ELECTRO SCIENTIFIC INDUSTRIES, INC.
PROXY STATEMENT
The mailing address of the principal executive offices of the Company is 13900 NW Science Park Drive, Portland, Oregon 97229-5497. The approximate date this proxy statement and the accompanying proxy forms are first being mailed to shareholders is July 14, 2016 .
SOLICITATION AND REVOCABILITY OF PROXY
The enclosed proxy is solicited on behalf of the Board of Directors of Electro Scientific Industries, Inc., an Oregon corporation, for use at the Annual Meeting of Shareholders to be held on August 18, 2016 . The Company will bear the cost of preparing and mailing the proxy, proxy statement and any other material furnished to the shareholders by the Company in connection with the annual meeting. Proxies will be solicited by use of the mail and the internet, and officers and employees of the Company may, without additional compensation, also solicit proxies by telephone, fax or personal contact. Copies of solicitation materials will be furnished to fiduciaries, custodians and brokerage houses for forwarding to beneficial owners of the stock held in their names.
Any person giving a proxy in the form accompanying this proxy statement has the power to revoke it at any time before its exercise. The proxy may be revoked by filing an instrument of revocation or a duly executed proxy bearing a later date with the Corporate Secretary of the Company. The proxy may also be revoked by affirmatively electing to vote in person while in attendance at the meeting. However, a shareholder who attends the meeting need not revoke the proxy and vote in person unless he or she wishes to do so. All valid, un-revoked proxies will be voted at the Annual Meeting in accordance with the instructions given.
Common Stock is the only outstanding authorized voting security of the Company. The record date for determining holders of Common Stock entitled to vote at the Annual Meeting is June 15, 2016 . On that date there were 31,471,682 shares of Common Stock outstanding, entitled to one vote per share. The Common Stock does not have cumulative voting rights.
MULTIPLE SHAREHOLDERS SHARING THE SAME ADDRESS
If you and other residents at your mailing address each own shares of Common Stock in street name, your broker or bank may have sent you a notice that your household will receive only one annual report and proxy statement. This practice, known as “householding,” reduces the Company’s printing and postage costs. If any shareholder residing at that address wishes to receive a separate annual report or proxy statement, write or telephone the Company as follows: Investor Relations, Electro Scientific Industries, Inc., 13900 NW Science Park Drive, Portland, Oregon 97229-5497, (503) 641-4141. Contact the Company in the same way if you and other residents at your mailing address are receiving multiple copies of the annual report and proxy statement and wish to receive a single copy in the future.

PROPOSAL 1: ELECTION OF DIRECTORS
Pursuant to the Company’s Bylaws as in effect prior to March 2015, the Board of Directors is divided into three classes, with the term of office of one class expiring each year. In March 2015 the Bylaws were amended so that directors are elected to one year terms, provided that directors previously elected to three-year terms will not have their terms shortened. In addition, effective immediately following the 2016 Annual Shareholders Meeting, the size of the Board of Directors will be set at six.
John Medica, Raymond A. Link, Laurence E. Cramer, Frederick A. Ball, and Richard H. Wills are nominees for re-election for a one-year term. These nominees are recommended by the Corporate Governance and Nominating Committee. Under Oregon law, if a quorum of shareholders is present at the 2016 Annual Meeting, the directors elected will be the five nominees for election as directors who receive the greatest number of votes cast at the meeting. Abstentions and broker non-votes will have no effect on the results of the vote. Unless otherwise instructed, proxy holders will vote the proxies they receive for Messrs. Medica, Link, Cramer, Ball and Wills. If any of the nominees for election as director at the 2016 Annual Meeting becomes unavailable for election for any reason (none being known at this time), the proxy holders will have discretionary authority to vote pursuant to the proxy for a substitute or substitutes.
The term of Robert R. Walker expires at the 2016 Annual Meeting. Mr. Walker was not nominated for election at the annual meeting and is retiring from the Board. David Nierenberg resigned from the Board in February of 2016.
The following table briefly describes the Company’s nominees for directors, the directors whose terms will continue, and those directors who are retiring from the Board of Directors.

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Name, Age, Principal Occupation, and Other Directorships
 
Director
Since
 
Term
Expires
Nominees
 
 
 
 
Richard H. Wills, 61,   (Chairman), was President and CEO of Tektronix, Inc., a test, measurement, and monitoring company, from 2000 until 2008, and its Chairman from 2001 through 2008. He joined Tektronix in 1979 and served in a range of marketing, product development and management roles, including President of the Measurement Business and President of Regional Operations for both Europe and the Americas. He holds a master's degree in business administration from the University of Oregon and a bachelor's degree in computer systems from Linfield College. Mr. Wills is also a director of FEI Company and Chairman of the Board of General Fusion, a private energy company in Vancouver, Canada. Mr. Wills was appointed as a director by the Board of Directors in August 2015 and has served as the Chairman of the Board of Directors since February 2015.

Mr. Wills brings to the Board expertise in strategic planning, corporate governance, marketing and technology, as well as experience serving on the board of another public company.
 
2014

 
2016

John Medica, 58, served from 2007 until 2015 as Vice Chairman and Corporate Adviser of Compal Group, a leading global electronics related Original Design Manufacturer (ODM) based in Taiwan with annual revenues in excess of $25 billion. Mr. Medica also served as a member of the Board of Directors of National Instruments from June 2008 through May 2014 and is a Trustee at Wake Forest University. He retired as a Senior Vice President and co-leader of the Product Development organization at Dell Inc. in April 2007 after fourteen years of service and, prior to joining Dell, he served ten years at Apple Inc. in a variety of product development and operations-related executive roles. He also has served as a Board Member-Advisor of two start-up technology companies, Visible Brands and Aviacomm, over the past two years.  

Mr. Medica brings to the Board significant expertise in the electronics consumer products industries and Asian electronics manufacturing, as well as experience serving on the boards of other public companies.
 
2015

 
2016

Raymond A. Link, 62, served as Executive Vice President and Chief Financial Officer of FEI Company, a leading supplier of scientific and analytical instruments for nanoscale imaging from July 2005 to April 2015. He remained with FEI to assist with transitioning this role to his successor until November 2015. Prior to this, Mr. Link served as Vice President and Chief Financial Officer of TriQuint Semiconductor, Inc., a manufacturer of electronic signal processing components for wireless communication. Mr. Link joined TriQuint in July 2001 as a result of TriQuint’s merger with Sawtek, Inc. where he was the Vice President and Chief Financial Officer since September 1995. He is also on the Board of Directors of nLight Inc., a private company that makes high-power semiconductor lasers and FormFactor Inc., a manufacturer of probe cards and electrical test and measurement equipment for the semiconductor industry. Mr. Link was previously on the board of Cascade Microtech which was acquired by FormFactor in June 2016. Mr. Link received a B.S. degree from the State University of New York at Buffalo and an M.B.A. from the Wharton School at the University of Pennsylvania. Mr. Link is also a licensed Certified Public Accountant and a Fellow with the National Association of Corporate Directors.

Mr. Link brings to the Board important financial management experience and expertise, as well as operations experience with another high-technology public company.
 
2015

 
2016

Frederick A. Ball , 54, was appointed Executive Vice President and Chief Administrative Officer of Marketo Inc., a leading marketing automation company, in March of 2016. Prior to that Mr. Ball served as the Senior Vice President and Chief Financial Officer from May 2011 to March 2016. Prior to joining Marketo, Mr. Ball served as the Chief Financial Officer of Webroot Software, Inc., a software security solutions provider, from June 2008 to April 2011. Prior to that, Mr. Ball had been the Chief Financial Officer for a number of private and public technology companies including BigBand Networks, Inc. and Borland Software Corporation. Mr. Ball also served as Vice President, Mergers and Acquisitions for KLA-Tencor Corporation, a manufacturer of semiconductor equipment, and prior to that as its Vice President of Finance. Mr. Ball was with PricewaterhouseCoopers LLC for over 10 years. Mr. Ball is a director at Advanced Energy Industries, Inc., a provider of power and control technologies, and is chair of its audit committee and a member of its nominating and governance committee.
 
Mr. Ball brings to the Board important financial management experience and financial expertise, having served as Chief Financial Officer of several high-technology companies. He also brings significant experience with mergers and acquisitions within the semiconductor equipment industry as well as experience as a result of serving on the board of directors of another public company.
 
2003

 
2016


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Name, Age, Principal Occupation, and Other Directorships
 
Director
Since
 
Term
Expires
Nominees
 
 
 
 
Laurence E. Cramer, 65, has been with Continuum Electro-Optics, a manufacturer of high energy laser systems for medical, industrial and scientific research, for the past 16 years where he held the positions of Vice President of R&D, Vice President / General Manager and President. Prior to that, he was President of Laser Diode Inc., a manufacturer of GaAs laser diodes for military and telecom applications. Prior to that he spent 15 years at Spectra-Physics in a range of management roles including, Manager of Marketing and Sales, Strategic Product Group Manger, and President of Spectra-Physics Laser diode systems, developer of advanced diode pumped solid state laser systems. He was a Board Member and past President of the Laser Institute of America, and was a member of the U.S. Department of Commerce Technical Advisory Committee in Electronics from 1988 to 1994. He holds a BA degree in Chemistry and Physics from DePauw University, a PhD in Chemistry from Northwestern University and a Masters Certificate in Six Sigma from Villanova University.

Mr. Cramer brings to the Board significant expertise in lasers and laser development.
 
2015

 
2016


Name, Age, Principal Occupation, and Other Directorships
 
Director
Since
 
Term
Expires
Director Whose Term Continues
 
 
 
 
Edward C. Grady ,   69, is currently President and Chief Executive Officer (CEO) of the Company and assumed this role in February 2014. He has served on the board of the Company since 2008 and, prior to becoming CEO of the Company, he served as CEO and Chairman at REEL Solar, Inc., a venture funded developer and manufacturer of low cost, high efficiency, thin film solar panels. In February 2014, REEL Solar was sold to a Chinese solar power manufacturer and power provider. Prior to that he served as President and CEO of Brooks Automation, Inc., a company that offers solutions that optimize productivity for the semiconductor and other industries, including clean tech and data storage. Mr. Grady retired from Brooks Automation in 2007. Prior to joining Brooks in 2003, he ran the wafer inspection and metrology groups at KLA-Tencor Corporation, a manufacturer of semiconductor equipment. Prior to KLA-Tencor, he was Chief Executive Officer of Hoya Micromask, a supplier of photo masks and services to the semiconductor industry. He started his career as an engineer for Monsanto Electronic Materials Company, Inc., a manufacturer of silicon wafers to the semiconductor industry, and eventually rose to the position of Vice President of Worldwide Sales. Mr. Grady is also a member of the board of directors at Advanced Energy Industries, Inc., a provider of power and control technologies.

Mr. Grady brings to the Board extensive technical knowledge and manufacturing, engineering, sales, business and operations experience in a high-technology environment. He also brings important business development and leadership experience as well as experience as a result of serving on the boards of directors of other public companies .
 
2008

 
2017


Name, Age, Principal Occupation, and Other Directorships
 
Director
Since
 
Directors Who Will Retire at the Annual Meeting
 
 
 
Robert R. Walker , 65, is retired from Agilent Technologies, Inc., a measurement company, where he served as Executive Vice President and Chief Financial Officer from May 2000 until December 2001. From May 1999 until May 2000, he was Senior Vice President and Chief Financial Officer. During 1997 and 1998, Mr. Walker served as Vice President and General Manager of Hewlett-Packard Company’s Professional Services Business Unit, a provider of computer services. From 1993 to 1997, he led Hewlett-Packard’s information systems function, serving as Vice President and Chief Information Officer from 1995 to 1997. Mr. Walker formerly served as a member of the Board of Directors for Brocade Communications Systems, Inc., a networking solutions provider, from 2005 until 2008, Liberate Technologies, a supplier of TV set-top box software, from 2003 until 2005, when it became a private company, and InterTrust, a digital rights management company, from 2002 until 2003, when it became a private company.
 
2003

 


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CORPORATE GOVERNANCE GUIDELINES AND INDEPENDENCE
The Company’s Board of Directors has approved and adopted the Corporate Governance Guidelines and Governance and Nominating Committee Charter that are on the Company’s website at http://investors.esi.com/governance.cfm . Under the Company’s Corporate Governance Guidelines, which reflect the current standards for “independence” under the NASDAQ Stock Market listing standards and the Securities and Exchange Commission rules, two-thirds of the members of the Board of Directors must be independent as determined by the Board of Directors. The Board of Directors has made the following determinations with respect to each director’s independence for each director that served during the year:
 
 
 
 
Director
  
Status (1)
Frederick A. Ball
  
Independent
Laurence E. Cramer
 
Independent
Richard J. Faubert
  
Independent (3)
Edward C. Grady
  
Not Independent (2)
Barry L. Harmon
  
Independent (3)
Raymond A. Link
 
Independent
John Medica
 
Independent
David Nierenberg
  
Independent (4)
Jon D. Tompkins
  
Independent (3)
Robert R. Walker
  
Independent
Richard H. Wills
 
Independent
 
(1)
The Board’s determination that a director is independent was made on the basis of the standards set forth in the Corporate Governance Guidelines.
(2)
Mr. Grady is President and Chief Executive Officer of ESI and therefore is not independent in accordance with the standards set forth in the Corporate Governance Guidelines.
(3)
Mssrs. Faubert, Harmon and Tompkins retired at the 2015 annual meeting.
(4)
Mr. Nierenberg resigned in February 2016.
The Company has also adopted a Code of Conduct and Business Practices applicable to the Company’s directors, officers, employees and agents of ESI and its subsidiaries and a Code of Ethics for Financial Managers. Copies of the Company’s Code of Conduct and Business Practices and Code of Ethics for Financial Managers are available on the Company’s website at http://investors.esi.com/governance.cfm .
BOARD LEADERSHIP STRUCTURE AND RISK OVERSIGHT
Board Leadership
In accordance with our Corporate Governance Guidelines, it is the practice of the Board of Directors to select a director as Chairman of the Board who qualifies as independent as defined in the Corporate Governance Guidelines. If the Chairman of the Board ceases to qualify as independent, the Board of Directors will designate an independent director to serve as Lead Director. The Company believes that this structure enhances the Board’s oversight of management, strengthens the Board’s ability to communicate its views to management, increases the Board’s independence and otherwise enhances our governance.
Risk Oversight
The Board as a whole is responsible for overseeing our risk management function and certain members of the Company’s senior management team are expressly authorized by the Board to be responsible for implementation of the Company’s day-to-day risk management processes. In connection with the Board’s annual strategic and financial plan review, senior management makes a multidisciplinary presentation to the Board on significant strategic, operational, financial, legal and compliance risks facing the Company. At the other three quarterly Board meetings, senior management provides an update to the Board on specific risk-related issues. Additionally, the Board reviews a comprehensive assessment of the Company's risk and associated mitigating factors and actions annually.
Additionally, the Board is actively involved in oversight of certain risk areas conducted primarily through committees of the Board, as described in the charters of each of the committees. The Compensation Committee is responsible for overseeing the management of the Company’s executive compensation plans and incentive arrangements and routinely reviews these

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programs to ensure that incentives do not present inappropriate risk and are aligned with shareholder interests. The Audit Committee oversees management of financial reporting, information technology, legal, the external audit relationship, functioning of internal controls and insurance related risks. This oversight includes meeting with management on at least a quarterly basis. As frequently as necessary, the Audit Committee Chair meets with senior management, the Company’s outside counsel and the Company’s independent auditors to discuss any hotline complaints, allegations of violations of the Code of Ethics and other ethical, legal or compliance matters. On a quarterly basis, internal audit reports on the progress of the annual control testing to the Audit Committee and any related findings. Any significant findings are followed up on and corrected under the direction of the Audit Committee and the senior management team.
The Nominating and Corporate Governance Committee manages risks associated with the qualifications and independence of the Board of Directors and potential conflicts of interest. The Board satisfies their risk oversight responsibility through reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from management responsible for oversight of particular risks within the Company.
FISCAL YEAR
The Company’s fiscal year consists of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, all references to fiscal year 2016 in this document are to the 53 -week period ended April 2, 2016 ; references to fiscal year 2015 are to the 52 -week period ended March 28, 2015 and references to fiscal year 2014 are to the 52 -week period ended March 29, 2014 .
BOARD COMPENSATION
During fiscal year 2016 , the Board of Directors held seven meetings, and each member of the Board of Directors attended at least 75 percent of the aggregate number of the meetings of the Board of Directors and the committees of which he was a member. All directors were reimbursed for all reasonable expenses incurred in attending meetings. Directors are expected to attend shareholder meetings. All directors then in office attended the 2015 annual meeting of shareholders.
Directors who are not employees of the Company receive the following fees to the extent applicable to the individual directors: (a) an annual cash retainer of $75,000 for the service as the Chairman of the Board; (b) an annual cash retainer of $45,000 for non-Chairman Board service; and (c) an annual fee of $20,000, $15,000, and $10,000 for service as Chair of the Audit Committee, Compensation Committee, and Nominating & Governance Committee, respectively; and (d) an annual fee of $7,500, $5,000, and $4,000 for non-chairman service on the Audit Committee, Compensation Committee, and Nominating & Governance Committee, respectively. The Company also provides for reimbursement in the amount of $2,500 every two years for continuing education programs relating to the performance of duties of a director of a public company.
Non-employee directors also receive equity grants of restricted stock units (RSUs) as a component of their total compensation.
On May 14, 2015 , each director who was not a full-time employee of the Company was granted 12,000 RSUs under the 2004 Stock Incentive Plan to vest 100% immediately prior to the 2016 Annual Meeting of Shareholders, provided, however, that if any director terminates service prior to such time, the award shall be prorated. On August 18, 2015, in connection with their appointment to the Board, Laurence E. Cramer, Raymond A. Link, and John Medica were granted 24,000 RSUs under the 2004 Stock Incentive plan that vest annually on the first four anniversaries of the grant date. For those directors only serving a partial term, the awards and cash retainers were prorated accordingly.

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FISCAL YEAR 2016 DIRECTOR COMPENSATION
The following table shows compensation earned by the Company’s non-employee directors in fiscal year 2016 .
 
Name
 
Fees Earned or
Paid in Cash
($)
 
 
 
Stock
Awards
($) (1)
 
 
 
All Other
Compensation
($)
 
Total
($)
Frederick A. Ball
 
$
61,255

 
  
 
$
67,560

 
(7)
 
$

 
$
128,815

Laurence E. Cramer (2)
 
$
34,442

 
  
 
$
113,280

 
(8)
 
$

 
$
147,722

Richard J. Faubert (3)
 
$
24,926

 
  
 
$
6,756

 
(3)
 
$

 
$
31,682

Barry L. Harmon (3)
 
$
31,030

 
 
 
$
13,512

 
(3)
 
$

 
$
44,542

Raymond A. Link (2)
 
$
39,677

 
(5)
 
$
113,280

 
(8)
 
$

 
$
152,957

John Medica (2)
 
$
33,000

 
  
 
$
113,280

 
(8)
 
$

 
$
146,280

David Nierenberg (4)
 
$
57,155

 
  
 
$
40,536

 
(4)
 
$

 
$
97,691

Jon D. Tompkins (3)
 
$
36,305

 
  
 
$
13,512

 
(3)
 
$

 
$
49,817

Robert R. Walker
 
$
62,491

 
(6)
 
$
67,560

 
(6) (7)
 
$

 
$
130,051

Richard H. Wills
 
$
90,309

 
 
 
$
67,560

 
(7)
 
$

 
$
157,869

 
(1)
Represents the full grant date fair value of the awards granted to each director in the fiscal year ended April 2, 2016 , computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 “Compensation – Stock Compensation” (ASC Topic 718). Awards are valued at the closing market price of the Company’s common stock on the grant date.
(2)
Messrs. Cramer, Link and Medica were newly elected at the 2015 Annual Meeting on August 18, 2015. The compensation set forth in the table reflects a partial year of service.
(3)
The terms of Messrs. Faubert and Tompkins expired on August 18, 2015. Mr. Harmon also elected to retire at that time. The compensation set forth in the table reflects a partial year of service.
(4)
Mr. Nierenberg resigned on February 22, 2016. The compensation set forth in the table reflects a partial year of service.
(5)
Mr. Link elected to defer cash compensation to the Company’s deferred compensation plan beginning January 1, 2016.
(6)
Mr. Walker elected to defer entire compensation to the Company’s deferred compensation plan.
(7)
Comprised of a grant of 12,000 restricted stock units on May 14, 2015, which vest on the 2016 annual meeting date.
(8)
Comprised of a grant of 24,000 restricted stock units on August 14, 2015, which vest one-fourth annually on the first four anniversaries of the date of grant.
Under the deferred compensation plan, directors can generally elect to defer a minimum of 10% and a maximum of 100% of the fees they receive from the Company for their service on the Board. Cash amounts credited to the deferred compensation plan will earn a rate of return based on investment funds selected by the participants from a prescribed menu of investment options. Generally, deferred amounts will be paid in a lump sum upon termination, except in the case of retirement, in which case the deferred amounts will be paid in a lump sum or in annual installments for up to ten years, as elected by the director. Directors may also defer payment of restricted stock units granted to them by the Company. Payment will be in shares of Company common stock under the same terms as cash amounts.
BOARD COMMITTEES
Audit Committee
The Company maintains an Audit Committee that currently consists of Raymond A. Link (Chairman), Robert R. Walker, and Laurence E. Cramer. All of the members of the Audit Committee are “independent directors” in accordance with the NASDAQ Stock Market listing standards and pursuant to the criteria established in Section 10A(m) of the Securities Exchange Act of 1934, as amended. Each of Messrs. Link and Walker has financial reporting oversight experience, including serving as chief financial officer of a public company. The Board of Directors has determined that each of Messrs. Link, Walker and Cramer is an audit committee financial expert as defined in SEC rules. The Audit Committee Charter requires the Audit Committee to review any transaction with a related person or in which a related person has a direct or indirect interest and to determine whether to ratify or approve the transaction, with such ratification or approval to occur only if the Committee determines that the transaction is fair to the Company or otherwise in the interest of the Company. During 2016, the board evaluated the Audit Committee composition and appointed a new Audit Committee Chairman, bringing a fresh perspective and adding the skill set of another experienced financial executive to the Audit Committee. Under the direction of the Audit Committee Chairman and consistent with best practices, in 2016 the Audit Committee evaluated the Company's risk assessment process, internal and external audit relationships, and other control processes. As a result of these activities, the Audit

7



Committee voted to change external auditors from KPMG LLP to Deloitte & Touch LLP with the goal of improving the audit process and reducing the associated cost to the Company. On a regular basis, the Audit Committee meets with management and with representatives of the Company's independent registered public accounting firm, Deloitte & Touche LLP, including meetings without the presence of management. The Audit Committee met fifteen times in fiscal year 2016 .
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended March 28, 2015, the Company had material weaknesses related to the risk assessment process and the accounting and disclosure of complex, judgmental accounting matters and non-routine transactions. In response to these findings, the Audit Committee, in conjunction with management, initiated and monitored a remediation plan to address these items. Specifically, management made significant efforts in fiscal 2016 to improve internal controls over financial reporting. The Company committed considerable resources to the design, implementation, documentation, and testing of internal controls and with the oversight of senior management and our audit committee, the Company took steps to remediate the underlying causes of the material weaknesses as follows:
Overall
The Company assessed and documented the design and operation of certain controls in light of the associated risks, particularly those controls relating to the risk assessment process, complex and judgmental accounting matters and non-routine transactions. This analysis was done to remediate the material weaknesses and also as part of the adoption of Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013.
Enterprise risk assessment
The Company made changes to improve the integration of the enterprise risk assessment within the control environment, including regular communication of findings to the Audit Committee and evaluation of risks as they might impact the Company across multiple areas. The Company improved documentation relating to this risk assessment and the evaluation of the impact on financial reporting and internal controls.
Monitoring of significant changes in the business and alignment with financial reporting
The Company implemented a quarterly monitoring and impact assessment, which institutionalizes regular monitoring to identify and evaluate significant, unusual, non-routine and complex accounting matters. This analysis is driven by cross-functional inputs from within the Company, monitoring of external indicators, and consideration of how changes in the business may impact historical conclusions or policies in the current period. All identified significant or unusual items require further analysis and disposition regarding accounting treatment.
Accounting expertise
The Company developed and implemented a process to determine when and if to involve a subject matter expert for significant, unusual, non-routine and complex accounting matters.
Management concluded that the material weaknesses in internal control over financial reporting identified in 2015 were remediated as of April 2, 2016. See the Report of the Audit Committee for the Audit Committee's assessment and conclusion regarding this matter.
Compensation Committee
The Company maintains a Compensation Committee that currently consists of Frederick A. Ball (Chairman), Richard H. Wills and John Medica . All members of the Compensation Committee have been determined to be independent by the Board of Directors in accordance with the NASDAQ Stock Market listing standards and Securities and Exchange Commission rules. The Compensation Committee has been delegated authority to set officers’ compensation and to grant awards under the Company’s stock incentive plan. For additional information about the Compensation Committee, see “Compensation Discussion and Analysis,” set forth below. The Compensation Committee met nine times in fiscal year 2016 .
Corporate Governance and Nominating Committee
The Company maintains a Corporate Governance and Nominating Committee that currently consists of John Medica (Chairman), Laurence E. Cramer and Raymond A. Link. All members of the Corporate Governance and Nominating Committee have been determined to be independent by the Board of Directors in accordance with the NASDAQ Stock Market listing standards and Securities and Exchange Commission rules. The Corporate Governance and Nominating Committee assists the Board of Directors in fulfilling its oversight responsibilities related to seeking candidates for membership on the Board of Directors, assessing the corporate governance policies and processes of the Board of Directors and reviewing from

8



time to time the policies of the Board of Directors related to director qualifications, compensation, tenure and retirement. The Corporate Governance and Nominating Committee met four times in fiscal year 2016 .
Shareholder Nominations
Shareholders may recommend individuals for consideration by the Corporate Governance and Nominating Committee to become nominees for election to the Board of Directors by submitting a written recommendation to the Corporate Governance and Nominating Committee c/o Chairman of the Corporate Governance and Nominating Committee, Electro Scientific Industries, Inc., 13900 NW Science Park Drive, Portland, Oregon 97229-5497. Communications should be sent by overnight or certified mail, return receipt requested. Submissions must include sufficient biographical information concerning the recommended individual, including age, five-year employment history with employer names and a description of the employer’s business, whether the individual can read and understand financial statements, and board memberships, if any, for the Corporate Governance and Nominating Committee to consider. The submission must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders. Recommendations received by January 31, 2017 will be considered for nomination for election at the 2017 Annual Meeting of Shareholders. Recommendations received after January 31, 2017 will be considered for nomination for election at the 2018 Annual Meeting of Shareholders. Following the identification of the director candidates, the Corporate Governance and Nominating Committee will meet to discuss and consider each candidate’s qualifications and shall determine by majority vote the candidate(s) whom the Corporate Governance and Nominating Committee believes would best serve the Company. In evaluating director candidates, the Corporate Governance and Nominating Committee will consider a variety of factors, including the composition of the Board as a whole, the characteristics (including independence, age, skills and experience) of each candidate, and the performance and continued tenure of incumbent Board members. The Committee believes that candidates for director should have certain minimum qualifications, including high ethical character, a reputation that enhances the image and reputation of the Company, being highly accomplished and a leader in his or her respective field, relevant expertise and experience, the ability to exercise sound business judgment and the ability to work with management collaboratively and constructively. The Committee also values diversity. In addition, the Committee believes that at least one member of the Board should meet the criteria for an “audit committee financial expert” as defined by Securities and Exchange Commission rules and that at least two-thirds of the members of the Board should meet the definition of independent under the NASDAQ Stock Market listing standards and Securities and Exchange Commission rules. The Committee also believes the Company’s Chief Executive Officer should participate as a member of the Board. A candidate recommended by a shareholder will be evaluated in the same manner as a candidate identified by the Committee.
COMMUNICATIONS WITH BOARD
Any shareholder who desires to communicate with the Board of Directors, individually or as a group, may do so by writing to the intended member or members of the Board of Directors, c/o Corporate Secretary, Electro Scientific Industries, Inc., 13900 NW Science Park Drive, Portland, Oregon 97229-5497. Communications should be sent by overnight or certified mail, return receipt requested. All communications will be compiled by the Secretary and submitted to the Board of Directors in a timely manner.
RECOMMENDATION BY THE BOARD OF DIRECTORS
The Board of Directors recommends that shareholders vote FOR the election of the nominees named in this Proxy Statement.

9



SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of the Common Stock of the Company as of June 15, 2016 by (i) each person known to the Company to be the beneficial owner of more than 5% of the Company’s Common Stock, (ii) each of the Company’s current directors and nominees for director, (iii) each individual named in the Summary Compensation Table and (iv) all directors and executive officers of the Company on June 15, 2016 as a group. Applicable percentage of ownership is based on 31,471,682 shares of Common Stock outstanding as of June 15, 2016 together with applicable options (including stock appreciation rights) and restricted stock units held by such shareholders. Shares of Common Stock subject to options exercisable at June 15, 2016 or exercisable within 60 days after June 15, 2016 and shares of Common Stock underlying restricted stock units vested at June 15, 2016 or vesting within 60 days after June 15, 2016 , are deemed outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other person.  
Name of Beneficial Owner
 
Amount and Nature of
Beneficial Ownership (1)
 
 
 
Approximate
Percent of Class
Frederick A. Ball
 
61,390

 
(2)
 
*
Laurence E. Cramer
 
6,000

 
 
 
*
Raymond A. Link
 
15,000

 
 
 
*
John K. Medica
 
28,050

 
 
 
*
Robert R. Walker
 
67,480

 
(3)
 
*
Richard H. Wills
 
42,133

 
 
 
*
Robert DeBakker
 
212,459

 
(4)
 
*
Edward C. Grady
 
421,715

 
(5)
 
*
Paul Oldham
 
381,780

 
(6)
 
*
Bing-Fai Wong
 
153,943

 
(7)
 
*
Nierenberg Investment Management Company, Inc.
 
2,773,080

 
(8)
 
8.81%
19605 NE 8 th  Street, Camas, WA 98607
 
 
 
 
 
 
Dimensional Fund Advisors LP
 
2,277,250

 
(8)
 
7.24%
Palisades West, Building One, 6300 Bee Cave Road,
Austin, TX 78746
 
 
 
 
 
 
BlackRock Institutional Trust Company, N.A.
 
1,865,924

 
(8)
 
5.93%
400 Howard Street, San Francisco, CA 94105
 
 
 
 
 
 
Investment Counselors of Maryland, LLC
 
1,715,680

 
(8)
 
5.45%
803 Cathedral Street, Baltimore, MD 21201
 
 
 
 
 
 
10 directors and executive officers (as of June 15, 2016) as a group
 
1,389,950

 
  
 
4.42%
*
Less than 5 percent.

(1)
Shares are held directly with sole investment and voting power unless otherwise indicated.
(2)
Includes 28,515 shares deferred under the Company’s deferred compensation plan.
(3)
Includes 57,805 shares deferred under the Company’s deferred compensation plan.
(4)
Includes 120,000 shares subject to stock options and stock appreciation rights that were exercisable at or that would become exercisable within 60 days after  June 15, 2016 .
(5)
Includes 287,403 shares subject to stock options and stock appreciation rights that were exercisable at or that would become exercisable within 60 days after  June 15, 2016 . In addition, includes 65,762 shares deferred under the Company’s deferred compensation plan.
(6)
Includes 263,500 shares subject to stock options and stock appreciation rights that were exercisable at or that would become exercisable within 60 days after  June 15, 2016 .
(7)
Includes 88,750 shares subject to stock options and stock appreciation rights that were exercisable at or that would become exercisable within 60 days after  June 15, 2016 . In addition, includes 5,284 shares deferred under the Company’s deferred compensation plan.
(8)
Based on the institutional holding report provided by Nasdaq as of June 16, 2016, which reflects the most recent Schedule 13D, 13F or 13G (or amendments thereto) filed by such person with the SEC.

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EXECUTIVE OFFICERS
As of June 15, 2016 , the executive officers of the Company were as follows:
 
Name
 
Age
 
Position
Edward C. Grady
 
69

 
President and Chief Executive Officer
Paul Oldham
 
53

 
Senior VP of Administration, Chief Financial Officer and Corporate Secretary
Robert DeBakker
 
58

 
Senior VP of Worldwide Operations
Bing-Fai Wong
 
57

 
Vice President of Customer Operations
See Mr. Grady’s biography under “Proposal 1: Directors Whose Terms Continue."
Mr. Oldham joined the Company on January 7, 2008 as Vice President of Administration, Chief Financial Officer and Corporate Secretary. Mr. Oldham was promoted to Senior Vice President of Administration, Chief Financial Officer, and Corporate Secretary in the fourth quarter of fiscal 2016. Prior to joining ESI, Mr. Oldham was employed at Tektronix, Inc., a test, measurement, and monitoring company, since 1988, where he held several senior leadership positions including Vice President Finance and Corporate Controller, European Operations Controller, and most recently Vice President Treasurer and Investor Relations. 
Mr. DeBakker was appointed Vice President of Worldwide Operations in September 2004 and was promoted to Senior Vice President of Worldwide Operations in the fourth quarter of fiscal 2016. From 2000 to 2004, he was employed with IBM, a provider of business and information technology services, first as Vice President i/p Series Manufacturing, then as Vice President Strategy Integrated Supply Chain and finally as Vice President x Series Integrated Supply Chain. From 1997 to 2000, Mr. DeBakker was Vice President of Operations of Sequent Computer Systems, a manufacturer and provider of information technology solutions.
Mr. Wong was promoted to Vice President of Customer Operations in May 2009 and joined ESI in May 1998 from Giga-tronics, an electronics manufacturer. During his tenure at ESI, Mr. Wong has held a variety of positions including Director of Sales and Service and Senior Director of Marketing. In addition, during 2016 Mr. Wong was appointed President of our China operations. Mr. Wong previously worked for Hewlett-Packard Company, a provider of computer and printer products and services, and began his career at Philips HK Ltd., an electronics manufacturer.
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Discussion and Analysis (CD&A) describes our executive compensation philosophy and how the Compensation Committee (the “Committee”) of the Board of Directors applies this philosophy in compensating our executive officers.
The Company's named executive officers for fiscal 2016 (the “NEOs”) were as follows:
Edward C. Grady
Paul Oldham
Robert DeBakker
Kerry Mustoe
Bing-Fai Wong
President & Chief Executive Officer
Senior Vice President of Administration, Chief Financial Officer & Corporate Secretary
Senior Vice President of Worldwide Operations
Vice President of Finance, Corporate Controller & Chief Accounting Officer*
Vice President of Customer Operations
*Ms. Mustoe retired from her position on December 18, 2015.
Executive Summary
Electro Scientific Industries, Inc. (ESI) is in the second year of a significant turnaround effort that started with a change in the Chief Executive Officer in February 2014. This effort encompasses a wide range of areas, including long-term strategy, governance, leadership, and shorter-term objectives and tactics. The management team and Board of Directors believe that the Company’s fiscal year 2016 revenue growth of 16% and shareholder returns of 16%, outperforming the 50th percentile of our peers, demonstrates the focus and commitment to aligning the Company’s objectives and actions with long-term shareholder value.

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Edward C. Grady, a director of the Company, was appointed CEO in February 2014, shortly before the start of fiscal year 2015. Mr. Grady quickly assessed the Company’s situation and worked with the management team to develop a turnaround strategy, estimated to take approximately three years. The first year was intended to be an investment year to reposition the company’s products and channels, the second year would be a transition year with continued product introduction and stabilizing financial results, and the third year a profitable growth year focused on product placement and adoption to drive growth. This strategy was presented to the Board of Directors in May 2014.
Fiscal year 2016 marked the second year, or transition year, of ESI’s turnaround effort. Under Mr. Grady’s leadership, ESI made significant progress in achieving its financial goals in the transition year and the impact of the turnaround strategy has become increasingly evident, as the Company grew revenues for the first time in four years, achieved profitability in the fourth quarter, generated positive cash from operations and advanced the Company strategy by introducing several new products that are believed to serve as a platform for long-term growth. At year end, ESI’s stock price had appreciated 17% from the prior year.
Key execution efforts included the introduction of several key new products with placements at new and existing customers, investment to localize development capability in key geographies, continued expansion of our China presence and sales channel, integration of a newly acquired China-based company, restructuring and other operational improvements. The Company introduced several new products in 2015 and 2016 that have increased ESI’s addressable market by nearly $1 billion.
The Board of Directors and the Compensation Committee of the Board of Directors (the “Committee”) actions related to CEO compensation have been designed to focus on short and long-term shareholder value growth and recognize executive’s contributions to the Company during the second year of our turn-around strategy.
Compensation Philosophy
The Board of Directors and the Committee believe that the Company's executive compensation program objectives should attract and retain talented executives; motivate executives to execute long-term business strategies while achieving near-term financial targets; and align executive performance with the Company's short-term and long-term goals for delivering shareholder value.
The Company has developed a total compensation philosophy that ties a significant portion of executive compensation to achieving pre-established financial and operational results. The elements of the Company's compensation program for executives are base salary, annual cash incentives, long-term equity incentives and a non-qualified deferred compensation plan which allows executives to defer a portion of their incentive cash compensation and restricted stock units granted during the plan year. Performance-based pay is a major element of executive compensation, which includes annual cash incentives and long-term stock-based equity incentives.
Additionally, the Company has an employee stock purchase plan, a 401(k) retirement plan and provides health care and other benefits to executives on the same basis as it does for all other employees. The current named executive officers have change in control severance agreements, under which they are eligible to receive certain payments and benefits in the event of a termination of employment under certain circumstances following a change in control of the Company. The change of control severance agreements include double-trigger provisions and do not allow for excise tax gross-ups.
Each element of the Company's executive compensation program serves a different purpose, but in combination, enables the Company to support its compensation philosophy and to offer compensation competitive with companies with similar business focus and similar revenue levels and market capitalization.
The Compensation Committee
The Committee consists entirely of independent non-employee directors as defined by the rules of the NASDAQ Stock Market, the Company's Corporate Governance Guidelines, and the Committee's charter. The current members of the Committee

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are Frederick A. Ball (Chairman), John Medica and Richard H. Wills. The Committee's authority and responsibilities are set forth in a charter adopted by the Board of Directors, which the Committee reviews annually. The Charter is available for review on the Company's web site at www.esi.com .
The Committee reviews and approves the compensation of all of the Company's executives, including the Chief Executive Officer (CEO). The Committee has full authority to determine annual base salary and incentive compensation, equity incentives and all other compensation for the executives. The Committee reviews and approves all equity grants to executives and annual equity grants to all other employees.
Determinations regarding annual cash incentives, long-term incentives and other elements of compensation are made consistent with the Committee's compensation philosophy and in a manner that the Committee believed to be appropriate and reasonable based on Company performance.
Base salary and incentive compensation award decisions for all executive officers are made at the first quarterly meeting of the Committee in each fiscal year in conjunction with the annual performance reviews for the prior fiscal year. The Committee reviews historic and current information regarding each element of compensation for each executive. It receives recommendations from the CEO as to compensation of other executives, and the CEO participates in discussions regarding their compensation. The Committee meets in executive session without the CEO to determine his compensation.
The Committee has engaged Compensia Inc., a national compensation consulting firm, as an independent outside compensation consultant with respect to executive and director compensation. The Committee has sole authority to retain and terminate Compensia. Compensia reports solely to the Committee for all services related to executive compensation and did not provide any other services to the Company in fiscal year 2016 except for those related to executive and director compensation. The Committee has assessed the independence of Compensia taking into account, among other things, the factors set forth in Exchange Act Rule 10C-1 and the rules of the NASDAQ Stock Market, and has concluded that no conflict of interest exists with respect to the work that Compensia performs for the Committee.
Compensation-Related Risks
The Committee believes that the Company's executive incentive compensation arrangements do not encourage executives to take unnecessary or excessive risks that could threaten the value of the Company. For example, a significant portion of the executives' performance-based compensation is in the form of long-term equity incentives which generally vest over three to four years, thereby focusing the executives on the Company's long-term interests. As a matter of best practice, the Company will continue to monitor its executive compensation program to ensure that it continues to align the interest of executives with those of its shareholders while avoiding unnecessary or excessive risk.
Competitive Positioning
The Committee uses comparative information from a group of similarly-situated business and labor market competitors as well as similarly-sized broad technology industry companies in reviewing the compensation of our executives including companies selling high technology equipment or components such as lasers, photonics, optical components and semiconductors, particularly where the ultimate end-products serve a broad array of consumer or industrial markets.
In February 2015, the Committee conducted a detailed review and approved a new peer group intended to provide greater financial comparability, determined primarily with reference to revenue and market capitalization. Peer companies were selected based on the following criteria:
Comparable revenue size (.5 - 2.5X ESI’s revenue of $184 million, or approximately $100 million - $460 million)
Comparable market capitalization (.5X - 4.0X ESI’s current market cap)
Similar business focus, including companies selling high technology equipment or components such as lasers, photonics, optical components, semiconductors, particularly where the ultimate end-products serve a broad array of consumer or industrial markets.
For fiscal year 2016, the following changes were made to the company’s peer group:
The removal of Advanced Energy Industries, Coherent, II-VI, Intevac, IPG Photonics, Newport and Rofin Sinar because their revenue and market cap fell outside the peer selection criteria.
To expand the peer group size, Axcelis Technologies, Cascade Microtech, FormFactor, GSI Group, Mattson Technology, Vishay Precision Group and Xcerra were added because they met the peer selection criteria.

13



The current peer group is made up of the following companies:
Affymetrix, Inc.                 Nanometrics, Inc.    
Axcelis Technologies, Inc.             Rudolpf Technologies, Inc.            
Cascade Microtech, Inc.            Ultratech, Inc.
Cohu, Inc.                    Veeco Instruments, Inc.
Form Factor, Inc.                Vishay Precision Group, Inc.
GSI Group, Inc.                Xcerra Corporation
Mattson Technology, Inc.
Compensia provided a market analysis to the Committee for fiscal year 2016 executive compensation using publicly available peer group proxy filings, Peer Company Radford January 2015 High Tech Industry Survey and the Radford January 2015 High Tech Industry broad high-tech industry data for companies with revenue of $50 million to $500 million. Data points were blended together to create a “market average”. The Committee reviewed the analysis provided by Compensia and believes that this information reflects the talent pool from which the Company competes for executive talent.
The Committee generally targets the 50th percentile of similarly-situated peer group companies. Superior performance may allow for total compensation to be achieved above the 50th percentile.
Consideration of Say-on-Pay Vote Results
The advisory (non-binding) proposal regarding compensation of the named executive officers submitted to shareholders at the August 2015 Annual Meeting of Shareholders was approved by over 93% of the votes cast. The Committee considered this vote to reflect strong alignment of the Company's executive compensation program with shareholder interests. 
The Company will conduct a Say-on-Pay vote annually.
CEO Compensation
The Committee considered Mr. Grady’s overall qualifications, executive level experience and market data and determined to set his base salary at $590,000 when he joined the Company in February, 2014. For fiscal year 2016, Mr. Grady’s base salary of $590,000 placed at approximately the 75th percentile of the revised peer company CEOs. Commensurate with the Company’s position in a multi-year turnaround and associated expense constraints, Mr. Grady has not received a base salary increase since joining the company.
For fiscal year 2016, the “effective” target for the CEO under the Management Incentive Plan (MIP) was 55% of his target cash incentive if the revenue target and all the shared management objectives were achieved. Payout for Mr. Grady under the fiscal year 2016 MIP for the CEO was based on the same measures as for the rest of the executives and he earned a 33% payout.
The Board of Directors have a strong belief and expectation that Mr. Grady should be rewarded if he is successful in turning around the Company, therefore his compensation is heavily performance based. Though the Company’s fiscal year 2016 financial performance improved substantially, the lower “effective” target under the MIP and 33% payout resulted in his actual cash compensation being well below fiscal year 2016 target levels.
The Company provides limited perquisites to Mr. Grady for spousal travel to Portland from his home in Nevada and rental housing near corporate headquarters in Portland, Oregon. The Company compensates Mr. Grady for the income tax liability he incurs as a result of these perquisites.
In May 2015, Mr. Grady was awarded 170,000 time-based RSUs (TRSUs) and 23,000 stock-settled stock appreciation rights (SARs), with the grants vesting 50% on each of the first two anniversaries of the date of grant. The vesting schedule reflects that the grant was made at the beginning of the second year of the three year turn around period anticipated by the Board of Directors and was intended to retain Mr. Grady and align his rewards with the turnaround period.
Mr. Grady has in place a Change in Control Agreement that remains in effect for 12 months following the effective date of the change in control. The agreement provides for severance equal to 24 month’s base salary, a lump-sum payment equal to 100% of target bonus, and 12 month’s medical and dental insurance for Mr. Grady and his dependents. This agreement contains a “double trigger” provision that provides payments and benefits only in the event that: (i) ESI is involved in a change of control transaction; and (ii) his employment is terminated (or constructively terminated) in connection with the change in control within a 12-month period or he retires not less than 60 days following the change in control.

14



Executive Compensation
In setting executive compensation for fiscal 2016 , the Committee reviewed the Company's existing compensation programs and philosophy in light of current industry compensation practices and trends. Applying this philosophy for each executive officer, the Committee reviewed base salary, annual cash incentives, long-term incentives and all other elements of total compensation and compared these components to comparable elements of compensation at the peer group companies.
Base Salaries
Base salary levels are reviewed annually at the first fiscal quarterly meeting of the Committee. Base salaries for executives are determined by evaluating the responsibilities of the position and the experience of the individual and by reference to the competitive marketplace for corporate executives, including a comparison to base salaries for comparable positions at peer group companies. The Committee targets base salary compensation levels for executives, including the named executive officers, generally at levels approximating the 50th percentile of the compensation market ranges provided by Compensia. However superior performance may allow for total compensation to be achieved above the 50th percentile. The Committee believes targeting these salary levels is required to attract and retain talented executives.
Base salaries for the named executive officers were placed at approximately the 50th percentile of market ranges provided by Compensia. Commensurate with the critical stage of the turnaround effort and need to control expenses, the named executive officers did not receive base salary increases in fiscal year 2016 .
Annual Cash Incentive Compensation
The Company's executives, including Mr. Grady, are eligible to participate in an annual cash incentive plan, referred to as the Management Incentive Plan (MIP), based on financial objectives included in the Profit Sharing Plan (PSP) which is applicable to all employees, as well as an additional 20% potential payout based on a set of shared management objectives (MBOs). The PSP objectives and the MBOs are established at the beginning of each fiscal year and include specific financial objectives based on the Company's annual operating plan as approved by the Board of Directors. Approximately 93% of the Company's employees participate in the PSP and approximately 7% participate in the MIP.
For fiscal year 2016 the Committee simplified the PSP to be based solely on specified levels of revenue. The Committee believes that this approach focused the entire Company on top line growth, the measure most critical to the Company's success at this point in the turnaround. Commensurate with the Company’s position in the turnaround and the associated expense constraints, the PSP targeted a 35% payout for 100% achievement of the revenue target in the fiscal year 2016 annual operating plan. The MIP included the same 35% targeted PSP payout for 100% achievement of the operating plan revenue target with an additional 20% of base salary targeted payout based on shared MBOs. These strategic objectives were reviewed and approved by the Committee at the beginning of fiscal year 2016 . Commensurate with the Company’s position in the turnaround, the total targeted awards for each executive under the MIP for fiscal year 2016 was 55%. Accordingly, the executives, including Mr. Grady, could only earn 55% of their stated target opportunity for achieving the revenue target and all the MBOs.
The Committee set a baseline plan and a minimum threshold based on fiscal year 2015 forecasted revenue level ($158 million) which the Committee considered to be a rigorous goal at which payouts would commence, given the point in the turnaround. The Committee also set an accelerated payout for performance above fiscal year 2016 plan target revenue to incent and reward employees. Performance was measured and earned quarterly and paid annually.
For fiscal year 2016 , the baseline targets and thresholds for revenue were as follows:

15



The fiscal year 2016 revenue was $184 million, up 16% compared to fiscal year 2015 actual revenue of $159 million, and resulted in an 18.95% achievement score for our PSP.
Fiscal Year 2016 Shared Management Objectives (MBOs)
The MBOs in the MIP, based on 20 possible points, are performance measures against an aggressive set of shared business objectives related to new product introductions, market growth, market penetration, localization of operations and gross margins, as described below:
FY16 MBOs
Points
Penetration in the integrated circuit (IC) packaging market measured by systems placements and qualification
3
Established leadership in the high density interconnect market with first system builds and systems
4
Build and release new picosecond laser and transfer to manufacturing
3
Design and delivery of new low-cost platform for the China market to new customers
5
Development of fulfillment intra-China dock merge and turn-key capability with overall expense reduction
3
Gross Margin
2
Total
20
Due to the significant challenge of achievement at this point in the turnaround, the gross margin MBO incentive provided for a payment opportunity above 20% if gross margin performance was greater than operating plan target. The fiscal 2016 MIP payout for the MBOs was determined to be 14 of the possible 20 points, or 70%, based upon performance and a review of the objectives as of the end of the fiscal year.
The Committee assigned each executive officer, including Mr. Grady, short term incentive targets of 60-100% of base salary to calculate benefits under the MIP. However, for fiscal year 2016, only 55% of target levels could be achieved based on plan performance. Amounts are only payable to individuals still employed on the date of payout. Accordingly, Kerry Mustoe was not eligible for payout under the fiscal year 2016 plan.

The cash incentive program under MIP delivered compensation below fiscal year 2016 target levels for NEOs with a payout of 33%. While formal target incentive opportunities as a percentage of salary align with the 50th percentiles of the peer group, the “effective” targets for fiscal 2016 were below the 25th percentile.
Long-Term Incentive Compensation
As part of the overall compensation philosophy, the Board of Directors and the Committee believes that long-term incentive compensation should be aligned to shareholder and executive interests. The Compensation Committee will continue to evaluate compensation decisions as we move forward in our turnaround phase, focusing on the alignment of executive compensation with shareholder value growth.
In considering potential changes to the executive pay program for fiscal year 2016, the management team and the Committee engaged in thoughtful conversation to determine the appropriate long-term equity vehicle and performance based measures given the phase in the turnaround. After careful consideration, the committee determined that the most appropriate and motivating executive annual long term incentive compensation program for fiscal year 2016 would consist of a mix of 50% of the value in SARs and 50% of the value in TRSUs. The use of SARs was to focus long-term incentive on shareholder value creation through stock price appreciation and the TRSUs to provide retentive value and alignment with shareholder interests at this phase of the turnaround. The annual equity awards in fiscal year 2016 were consistent with the philosophy established by the Committee that awards be at levels approximating the 50th percentile of the compensation peer group.

16



The Committee believes that this mix of long-term incentive compensation would motivate and the retain talented executives, motivate executives to execute long-term business strategies while achieving near-term financial targets, and align executive performance with the Company's short-term and long-term goals for delivering shareholder value.
Time-based Restricted Stock Unit Awards. TRSUs are intended to serve as a retention incentive for all executives. TRSUs awarded in fiscal year 2016 vest annually over four years, other than those granted to the CEO. The 5,000 TRSUs granted in February 2016 to Messrs. Oldham and DeBakker for recognition of superior performance, expanded responsibility and promotion to Senior Vice President vest on the first anniversary of the date of grant. In recognition of expanded responsibility focused on successful China Strategy and temporary relocation to the region, the grant in February 2016 to Mr. Wong of 4,000 TRSUs vest fifty percent on each of the first two anniversaries of the date of grant. All TRSUs have a “double trigger” in the event of a change in control and are not to be otherwise prorated in the event of termination of employment prior to vesting except in the case of termination due to death or disability.
In considering potential changes to the executive pay program for fiscal year 2017, the Committee determined that a significant portion of long term executive compensation should be based on aggressive performance goals. As a result, the Committee granted a mix of 50% performance-based restricted stock units measured by Relative Total Shareholder Returns and 50% TRSUs to executives.
The Committee believes that these changes continue the effectiveness of the program and are aligned with shareholder interests.
Executive Severance
In connection with her retirement, Ms. Mustoe entered into a separation agreement with the Company pursuant to which she received a payment of $188,626.
Stock Ownership Guidelines
The Company maintains stock ownership guidelines for its executive management and directors.
The stock ownership guidelines for executive management are intended to further motivate executives to focus on Company performance, drive high performance among individuals within the organization overall, and support the Company's compensation philosophy. The stock ownership guidelines require executive management to own and hold a specific number of shares of the Company's common stock with a value determined as follows:
3x base salary for CEO
1x base salary for Vice Presidents
The stock ownership guidelines for directors require them to own and hold an amount of common stock determined as a multiple of each director's annual retainer, which is then converted to specific number of shares of the Company's common stock. The guideline for directors is 3x the annual retainer.
Executives will generally have five years to achieve ownership levels. Shares owned outright, employee stock purchase plan shares, and unvested restricted stock units will be included. Vested or unvested stock options and stock appreciation rights are not included. Each of the Company's named executive officers has satisfied the applicable stock ownership guidelines.
Compensation Recovery
Under the Company's 2004 Stock Incentive Plan, the Board of Directors is permitted to suspend the exercise or vesting of an award if it believes a participant, other than a non-employee director, has engaged in certain acts of misconduct harmful to the Company. If it is determined that one of these acts has been committed by the recipient, no options or stock appreciation rights can be exercised by the participant and the restricted stock or restricted stock unit awards previously granted to the participant will be terminated. In addition, if the Board of Directors determines that an executive officer has engaged in an act of embezzlement, fraud, or breach of fiduciary duty that contributed to an obligation to restate the Company's financial statements, the executive officer will be required to repay proceeds from the sale of equity awards within the 12-month period following the first public issuance or filing with the SEC of the financial statements required to be restated.
Anti-Hedging/Anti-Pledging Policy
The Company has adopted an insider trading policy which incorporates anti-hedging and anti-pledging provisions. Consequently, no employee, executive officer or director may enter into a hedge or pledge of the Company's common stock.

17



Change In Control and Severance Agreements
The Company has Change in Control severance agreements in place for all of the named executive officers. The Committee believes that these agreements could be an important factor in maintaining stability of the management team at a time when there is uncertainty about their continued employment by the Company. The terms of the Change in Control severance agreements for these executive officers were established by the Committee to provide what it believed at the time to be reasonable payments and benefits in the event of termination of employment following a change in control of the Company.
The Change in Control agreements for Messrs. DeBakker and Oldham remain in effect for 24 months following the effective date change of the change in control with severance amount in cash equal to 24 month’s base salary, a lump-sum payment equal to 200% of target bonus and arrangement for 24 month’s medical and dental insurance for the executive and his dependents which are substantially similar to insurance in place immediately prior to the change in control.
The agreements for the other executives, with the exception of Mr. Grady, remain in effect for 24 months following the effective date change of the change in control with severance amount in cash equal to 12 month’s base salary, a lump-sum payment equal to 100% of target bonus and arrangement for 12 month’s medical and dental insurance for the executive and his dependents which are substantially similar to insurance in place immediately prior to the change in control.
These agreements do not include gross-up provisions in the event the change in control payment triggers excise tax. The terms of Mr. Grady’s Change in Control agreement are described in the section on CEO Compensation.
All Change of Control agreements contain a “double trigger” provision that provides payments and benefits only in the event that: (i) ESI is involved in a change of control transaction; and (ii) the executive officer's employment is terminated (or constructively terminated) in connection with the change of control (or, in the case of Mr. Grady, he retires not less than 60 days after the change in control).
See “Potential Payments upon Termination or Change in Control” in this proxy statement for more information regarding these agreements.
Deferred Compensation Plan
Executives can generally elect to defer receipt of up to 50% of their base salary and 100% of their cash incentive compensation and restricted stock grants under the Deferred Compensation Plan. Cash amounts credited to the deferred compensation plan will earn a rate of return based on investment funds selected by the participants from a prescribed menu of investment options. Generally, deferred amounts will be paid in a lump sum upon the date six months after termination of employment, except in the case of retirement, in which case the deferred amounts will be paid in a lump sum or in annual installments for five or 10 years, as elected by the executive. The Company sets aside deferred cash amounts in a grantor trust to cover the Company's obligation to pay deferred compensation.
Directors, executive officers and other eligible employees may defer payment of RSUs granted to them by the Company. Issuance of shares of common stock is under the same terms as cash amounts.
The deferred compensation plan is offered to executives to allow them to defer more compensation than they otherwise would be permitted to defer under a tax-qualified retirement plan, such as the Company's 401(k) retirement plan. The Company offers the deferred compensation plan as a supplement to the 401(k) plan where employee contributions are limited and as a competitive practice to enable it to attract and retain top talent.
Other Benefits
The Company's executive officers are eligible to participate in the 401(k) retirement plan, employee stock purchase plan and health and welfare plans on the same basis as other employees. During fiscal year 2016 the Company’s policy was to match 50% of the first 6% of employee contributions. The Company has not provided perquisites to its executive officers, other than to Mr. Grady.
Deductibility of Compensation
It is the Company's policy to make reasonable efforts to cause executive compensation to be eligible for deductibility under Section 162(m) of the Internal Revenue Code. Under Section 162(m), the federal income tax deductibility of compensation paid to the Company's chief executive officer and to each of its three other most highly compensated executive officers other than its chief financial officer may be limited to the extent that such compensation exceeds $1.0 million in any taxable year. Under Section 162(m), the Company may deduct compensation in excess of $1.0 million if it qualifies as “performance-based compensation,” as defined in Section 162(m).

18



It is possible that non-qualifying compensation paid to the Company's executives, such as salary and TRSUs, may exceed $1.0 million in a taxable year and therefore limit the deductibility by the Company of a portion of such compensation. The Company believes that all of the stock options, SARs and PRSUs granted to its executives under its shareholder approved plans should qualify under Section 162(m) as performance-based compensation. The Committee may, from time to time, award compensation that will not be deductible for purposes of Section 162(m) if determined to be in the best interests of the Company and its stockholders.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid to the following officers for services provided to the Company, as well as the aggregate grant date fair value of all equity awards granted in fiscal years 2016, 2015 and 2014:
The Company’s chief executive officer;
The Company’s chief financial officer;
The two other individuals who were serving as executive officers of the Company during fiscal year 2016;
Kerry Mustoe, who was serving as an executive officer during fiscal 2016 but retired prior to the end of the fiscal year.
All the below individuals, except Kerry Mustoe who retired during the third quarter of fiscal 2016, are referred to hereafter as the “named executive officers.”
SUMMARY COMPENSATION TABLE
Name and Principal Position
 
Fiscal
Year
(1)
 
Salary
 
Bonus
 
Stock
Awards
(2)
 
 
Option
Awards
(3)
 
Non-Equity
Incentive Plan
Compensation
(4)
 
All Other
Compensation
(5)
 
Total
Edward C. Grady
 
2016
 
$
590,000

 
$

 
$
957,100

(6)
 
$
66,470

 
$
189,171

 
$
73,462

(16
)
$
1,876,203

President and Chief Executive Officer

 
2015
 
$
590,000

 
$

 
$
1,185,200

(7)
 
$
759,010

 
$
79,650

 
$
45,632

 
$
2,659,492

 
2014
 
$
60,512

 
$

 
$

 
 
$
187,881

 
$

 
$

 
$
248,393

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul Oldham
 
2016
 
$
350,000

 
$

 
$
271,060

(6)
 
$
242,760

 
$
78,554

 
$
8,186

 
$
950,560

Senior Vice President Administration, Chief Financial Officer and Corporate Secretary
 
2015
 
$
348,333

 
$

 
$
401,463

(8)
 
$
91,251

 
$
32,917

 
$
26,115

 
$
900,079

2014
 
$
338,333

 
$

 
$
249,075

(9)
 
$

 
$


$
28,489

 
$
615,897

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Robert DeBakker
 
2016
 
$
290,000

 
$

 
$
175,350

(6)
 
$
144,500

 
$
55,789

 
$
8,145

 
$
673,784

Senior Vice President of Worldwide Operations
 
2015
 
$
288,000

 
$

 
$
265,813

(10)
 
$
50,695

 
$
23,328

 
$
18,054

 
$
645,890

2014
 
$
277,167

 
$

 
$
166,050

(11)
 
$

 
$

 
$
18,427

 
$
461,644

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bing-Fai Wong
 
2016
 
$
273,000

 
$

 
$
140,280

(6)
 
$
115,600

 
$
52,519

 
$
8,134

 
$
589,533

Vice President of Customer Operations
 
2015
 
$
271,667

 
$

 
$
195,813

(14)
 
$
50,695

 
$
22,005

 
$
18,833

 
$
559,013

2014
 
$
262,500

 
$

 
$
166,050

(15)
 
$

 
$

 
$
17,217

 
$
445,767

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kerry Mustoe (18)
 
2016
 
$
155,462

 
$

 
$

 
 
$

 
$

 
$
193,285

(17)

$
348,747

Vice President of Finance, Corporate Controller and Chief Accounting Officer
 
2015
 
$
213,833

 
$

 
$
85,325

(12)
 
$
20,278

 
$
17,321

 
$
10,209

 
$
346,966

2014
 
$
207,167

 
$

 
$
55,350

(13)
 
$

 
$

 
$
12,831

 
$
275,348


(1)
The Company’s fiscal year consists of the 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, references in this table to fiscal year 2016 are to the 53 -week period ended April 2, 2016 ; references to fiscal year 2015 are to the 52 -week period ended March 28, 2015 ; and references to fiscal year 2014 are to the 52 -week period ended March 29, 2014 .
(2)
Represents the aggregate grant date fair value of stock awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 “Compensation – Stock Compensation” (ASC Topic 718). Awards are valued at the closing market price of the Company’s common stock on the grant date.
(3)
Represents the aggregate grant date fair value of option and stock appreciation right awards computed in accordance with ASC Topic 718. The fair value of options and stock appreciation rights is estimated using the Black-Scholes option pricing model. The assumptions made in determining the grant date fair value of options and stock appreciation rights under ASC Topic 718 are disclosed in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2016 . In all fiscal years presented, stock appreciation rights were issued in lieu of options and are explained in the Long-Term Incentive Compensation section of the Compensation Discussion and Analysis.

19



(4)
Represents payments under the Company’s annual cash incentive plan.
(5)
Except as otherwise indicated, represents the value of dividend equivalent units issued pursuant to the Company’s restricted stock unit awards and 401(k) retirement plan matching contributions made by the Company. The Company suspended the 401(k) retirement plan match effective March 1, 2009 and reinstated it effective January 1, 2011 on a quarterly basis, subject to Company profitability. In May 2014, the Company reinstated the 401(k) retirement plan match effective July 1, 2014, without regard to profitability.
(6)
Represents the aggregate grant date fair value of time-based restricted stock unit awards. No performance-based restricted stock awards were granted in fiscal 2016.
(7)
Represents the aggregate grant date fair value of time-based restricted stock unit awards of $100,200 and performance-based restricted stock awards of $1,085,000 granted in fiscal year 2015 based on achievement at target. The maximum grant date fair value which may be attained for the performance-based restricted stock awards granted in 2015 is $2,170,000.
(8)
Represents the aggregate grant date fair value of fiscal year 2015 grants of time-based restricted stock unit awards of $226,463, May 2014 performance-based restricted stock awards calculated at 0% attainment, and November 2014 performance-based restricted stock awards of $175,000 calculated at 100% attainment; based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for the performance-based restricted stock awards granted in 2015 is $651,950.
(9)
Represents the aggregate grant date fair value of time-based restricted stock unit awards only; performance-based restricted stock awards granted in fiscal year 2014 are calculated at a 0% attainment rate based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for this award is $498,150.
(10)
Represents the aggregate grant date fair value of fiscal year 2015 grants of time-based restricted stock unit awards of $125,813, May 2014 performance-based restricted stock awards calculated at 0% attainment, and November 2014 performance-based restricted stock awards of $140,000 calculated at 100% attainment; based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for the performance-based restricted stock awards granted in 2015 is $447,750.
(11)
Represents the aggregate grant date fair value of time-based restricted stock unit awards only; performance-based restricted stock awards granted in fiscal year 2014 are calculated at a 0% attainment rate based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for this award is $332,100.
(12)
Represents the aggregate grant date fair value of fiscal year 2015 grants of time-based restricted stock unit awards of $50,325, May 2014 performance-based restricted stock awards calculated at 0% attainment, and November 2014 performance-based restricted stock awards of $35,000 calculated at 100% attainment; based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for the performance-based restricted stock awards granted in 2015 is $137,100.
(13)
Represents the aggregate grant date fair value of time-based restricted stock unit awards only; performance-based restricted stock awards granted in fiscal year 2014 are calculated at a 0% attainment rate based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for this award is $110,700.
(14)
Represents the aggregate grant date fair value of fiscal year 2015 grants of time-based restricted stock unit awards of $125,813, May 2014 performance-based restricted stock awards calculated at 0% attainment, and November 2014 performance-based restricted stock awards of $70,000 calculated at 100% attainment; based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for the performance-based restricted stock awards granted in 2015 is $307,750.
(15)
Represents the aggregate grant date fair value of time-based restricted stock unit awards only; performance-based restricted stock awards granted in fiscal year 2014 are calculated at a 0% attainment rate based on the estimated likelihood of achievement. The maximum grant date fair value which may be attained for this award is $332,100.
(16)
Represents the value of housing plus gross up payments for the associated tax liability in the amount of $71,223 and spousal airfare of $2,239.
(17)
Represents the value 401(k) retirement plan matching contributions made by the Company in the amount of $4,659 and a separation payment amount of $188,626.
(18)
Ms. Mustoe retired on December 18, 2015. The compensation set forth in the table reflects a partial year of service.

20



FISCAL YEAR 2016 GRANTS OF PLAN-BASED AWARDS
The following table contains information concerning fiscal year 2016 incentive opportunities for the named executive officers and the equity awards granted to the named executive officers in fiscal year 2016 .
 
Name
 
Grant
Date
 
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards (1)
 
Estimated Future Payouts
Under Equity Incentive Plan
Awards
 
All
Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
 
 
All Other
Option
Awards:
Number
of
Securities
Underlying
Options
(#)
 
 
Exercise
or Base
Price of
Option
Awards
($/Share)
 
Grant
Date
Fair
Value
($)
(8)
Threshold
($)
 
Target
($)
 
Maximum
($)
 
Threshold
(#)
 
Target
(#)
 
Maximum
(#)
 
Edward C. Grady
 

 
$
2,006

 
$
590,000

 
$
1,180,000

 

 

 

 

 
 

 
 

 

5/14/15

 

 

 

 

 

 

 
170,000

(2)
 
23,000

(6
)
 
$
5.63

 
$
1,023,570

Paul Oldham
 

 
$
833

 
$
245,000

 
$
490,000

 

 

 

 

  
 

 
 

 

5/14/15

 

 

 

 

 

 

 
42,000

(3)
 
84,000

(7
)
 
$
5.63

 
$
479,220

 
2/17/16

 

 

 

 

 

 

 
5,000

(4)
 

 
 
$

 
34,600

Robert DeBakker
 

 
$
592

 
$
174,000

 
$
348,000

 

 

 

 

  
 

 
 

 

5/14/15

 

 

 

 

 

 

 
25,000

(3)
 
50,000

(7
)
 
$
5.63

 
$
285,250

 
2/17/16

 

 

 

 

 

 

 
5,000

(4)
 

 
 
$

 
34,600

Bing-Fai Wong
 

 
$
557

 
$
163,800

 
$
327,600

 

 

 

 

  
 

 
 

 

5/14/15

 

 

 

 

 

 

 
20,000

(3)
 
40,000

(7
)
 
$
5.63

 
$
228,200

 
2/17/16

 

 

 

 

 

 

 
4,000

(5)
 

 
 
$

 
27,680

 

(1)
Represents the incentive for fiscal year 2016 under the Company’s annual executive team bonus plan and estimated payouts at threshold, target and maximum levels of performance. The actual amount earned by each named executive officer for fiscal year 2016 is set forth in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.”
(2)
Represents RSUs granted on May 14, 2015, which vest 50% on the first and second anniversaries of the date of grant, subject to employment criteria.
(3)
Represents RSUs granted on May 14, 2015, which vest one-fourth annually on the first four anniversaries of the date of grant, subject to employment criteria.
(4)
Represents RSUs granted on February 17, 2016, which vest 100% on the first anniversary of the date of grant, subject to employment criteria.
(5)
Represents RSUs granted on February 17, 2016, which vest 50% on the first and second anniversaries of the date of grant, subject to employment criteria.
(6)
Represents SARs granted on May 14, 2015, which vest 50% on the first and second anniversaries of the date of grant, subject to employment criteria.
(7)
Represents SARs granted on May 14, 2015, which vest one-fourth annually on the first four anniversaries of the date of grant, subject to employment criteria.
(8)
Represents the aggregate grant date fair value of stock awards and options computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 “Compensation – Stock Compensation” (ASC Topic 718). Awards are valued at the closing market price of the Company’s common stock on the grant date. The fair value of options and stock appreciation rights is estimated using the Black-Scholes option pricing model. The assumptions made in determining the grant date fair value of options and stock appreciation rights under ASC Topic 718 are disclosed in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2016 . In fiscal 2016, stock appreciation rights were issued in lieu of options and are explained in the Long-Term Incentive Compensation section of the Compensation Discussion and Analysis.



21



OUTSTANDING EQUITY AWARDS AT END OF FISCAL YEAR 2016
The following table sets forth the information concerning outstanding options (which includes stock appreciation rights) and unvested restricted stock units held by the named executive officers at April 2, 2016 .
 
 
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
Unexercised
Unearned Options (#)
 
Option
Exercise
Price  ($)(1)
 
Option
Expiration
Date
 
Number of
Shares or
Units of Stock
That Have
Not Vested (#)
 
Market Value of
Shares  or Units
of Stock That
Have Not
Vested ($)(2)
 
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That Have
Not Vested (#)
 
Equity Incentive
Plan Awards:
Market or Payout
Value of
Unearned Shares,
Units or Other
Rights That Have
Not Vested ($)(2)
Edward C. Grady
 
42,569

(3)
 
21,284

(3)
 
 
$
9.24

 
2/22/2024
 
170,000

(15)
 
$
1,229,100

 
1,567

(22)
 
$
11,328

116,667

(4)
 
233,333

(4)
 
 
$
7.00

 
11/17/2024
 

 
 
$

 

 
 
$


 

23,000

(5)


$
5.63


5/13/2025


 

$



 

$

Paul Oldham
 
80,000

(6)
 

 
 
 
$
18.11

 
1/6/2018
 
23,978

(16)
 
$
173,361

 
11,626

(23)
 
$
84,052

15,000

(7)
 

 
 
 
$
15.78

 
5/14/2018
 
17,438

(17)
 
$
126,077

 
253

(24)
 
$
1,827

90,000

(8)
 

 
 
 
$
7.26

 
5/13/2019
 
7,750

(18)
 
$
56,034

 

 
 
$

17,000

(9)
 

 
 
 
$
13.84

 
5/12/2020
 
42,000

(19)
 
$
303,660

 

   
 
$

18,000

(10)
 

 
 
 
$
18.02

 
5/11/2021
 
5,000

(20)
 
$
36,150

 

 
 
$

11,250

(11)
 
33,750

(11)
 
 
$
6.71

 
5/14/2024
 

 
 
$

 

 
 
$


 
 
84,000

(12)
 
 
$
5.63

 
5/13/2025
 

 
 
$

 

 
 
$

Robert DeBakker
 
35,000

(13)
 

 
 
 
$
19.20

 
5/24/2016
 
15,985

(16)
 
$
115,572

 
6,459

(23)
 
$
46,695

14,000

(14)
 

 
 
 
$
22.03

 
7/24/2017
 
9,688

(17)
 
$
70,042

 
202

(24)
 
$
1,462

12,000

(7)
 

 
 
 
$
15.78

 
5/14/2018
 
4,305

(18)
 
$
31,125

 

 
 
$

50,000

(8)
 

 
 
 
$
7.26

 
5/13/2019
 
25,000

(19)
 
$
180,750

 

 
 
$

11,000

(9)
 

 
 
 
$
13.84

 
5/12/2020
 
5,000

(20)
 
$
36,150

 

 
 
$

8,000

(10)
 

 
 
 
$
18.02

 
5/11/2021
 

 
 
$

 

 
 
$

6,250

(11)
 
18,750

(11)
 
 
$
6.71

 
5/14/2024
 

 
 
$

 

 
 
$


 
 
50,000

(12)
 
 
$
5.63

 
5/13/2025
 

 
 
$

 

 
 
$

Bing-Fai Wong
 
8,667

(13)
 

 
 
 
$
19.20

 
5/24/2016
 
15,985

(16)
 
$
115,574

 
6,459

(23)
 
$
46,695

3,250

(7)
 

 
 
 
$
15.78

 
5/14/2018
 
9,688

(17)
 
$
70,042

 
101

(24)
 
$
731

40,000

(8)
 

 
 
 
$
7.26

 
5/13/2019
 
4,305

(18)
 
$
31,125

 

 
 
$

11,000

(9)
 

 
 
 
$
13.84

 
5/12/2020
 
20,000

(19)
 
$
144,600

 

 
 
$

12,000

(10)
 

 
 
 
$
18.02

 
5/11/2021
 
4,000

(21)
 
$
28,920

 

 
 
$

6,250

(11)
 
18,750

(11)
 
 
$
6.71

 
5/14/2024
 

 
 
$

 

 
 
$


 
 
40,000

(12)
 
 
$
5.63

 
5/13/2025
 

 
 
$

 

 
 
$


(1)
The reported option exercise prices reflect an adjustment to outstanding option and SAR grants as provided for under the company's 2004 Stock Incentive Plan resulting from the company's issuance of a special one-time dividend of $2.00 per share, paid on December 27, 2012 to shareholders of record as of the close of business on December 13, 2012.  As approved by the Compensation Committee of the Board of Directors of the Company, the option exercise prices of all outstanding awards were adjusted downward on January 30, 2013 to preserve their value. For options with an exercise price of $11.70 or less, the exercise price was reduced by $0.88. For options with an exercise price greater than $11.70, the exercise price was reduced by $0.80.  
(2)
Based on closing stock price on April 2, 2016 of $7.23 . PRSUs are shown at the minimum attainable thresholds; see each respective footnote for threshold discussions.
(3)
Stock-settled stock appreciation right granted on February 23, 2014 and becomes exercisable for one third of the shares on each of the first three anniversaries of the grant date, subject to employment criteria.
(4)
Stock-settled stock appreciation right granted on November 18, 2014 and becomes exercisable for one-third of the shares annually on the 18th of May starting in 2015 through 2017, subject to employment criteria.

22



(5)
Stock-settled stock appreciation right granted on May 14, 2015 and becomes exercisable for one-half of the shares annually on the 14th of May starting in 2016 through 2017, subject to employment criteria.
(6)
Option granted on January 7, 2008 and became exercisable for 25% of the shares on each of the first four anniversaries of the grant date.
(7)
Option granted on May 15, 2008 and became exercisable for 25% of the shares on each of the first four anniversaries of the grant date.
(8)
SARs granted on May 14, 2009 and became exercisable for 25% of the shares on each of the first four anniversaries of the grant date, subject to employment criteria.
(9)
SARs granted on May 13, 2010 and became exercisable for 25% of the shares on each of the first four anniversaries of the grant date, subject to employment criteria.
(10)
SARs granted on May 12, 2011 and became exercisable for 25% of the shares on each of the first four anniversaries of the grant date, subject to employment criteria.
(11)
SARs granted on May 15, 2014 and becomes exercisable for 25% of the shares on each of the first four anniversaries of the grant date, subject to employment criteria.
(12)
SARs granted on May 14, 2015 and becomes exercisable for 25% of the shares on each of the first four anniversaries of the grant date, subject to employment criteria.
(13)
Option granted on May 24, 2006 and became 100% vested on May 26, 2006. The shares underlying the option were subject to sale restrictions that lapsed as to one-third of the shares on each of the first three anniversaries of the grant date.
(14)
Option granted on July 25, 2007 and became exercisable for 25% of the shares on each of the first four anniversaries of the grant date.
(15)
RSUs granted on May 14, 2015 and vest 50% on each of the first and second anniversaries of the date of grant, subject to employment criteria.
(16)
RSUs granted on May 9, 2013 and vest 100% on May 9, 2016, subject to employment criteria. The number of unvested shares includes dividend equivalent RSUs issued on the Company’s dividend payment dates pursuant to the terms of the Company’s RSUs.
(17)
RSUs granted on May 15, 2014 and vest one-fourth of the shares on each of the first four anniversaries of the grant date, subject to employment criteria. The number of unvested shares includes dividend equivalent RSUs issued on the Company’s dividend payment dates pursuant to the terms of the Company’s RSUs.
(18)
RSUs granted on May 15, 2014 and vest one-third of the shares on each of the first three anniversaries of the grant date, subject to employment criteria. The number of unvested shares includes dividend equivalent RSUs issued on the Company’s dividend payment dates pursuant to the terms of the Company’s RSUs.
(19)
RSUs granted on May 14, 2015 and vest 25% annually on each of the first four anniversaries of the date of grant, subject to employment criteria.
(20)
RSUs granted on February 17, 2016 and vest 100% on the first anniversary of the date of grant, subject to employment criteria.
(21)
RSUs granted on February 17, 2016 and vest 50% on the first two anniversaries of the date of grant, subject to employment criteria.
(22)
PRSUs granted on November 18th, 2014, subject to employment criteria and based on two performance goals. Vesting of one-half of the PRSUs is based on the Company's revenues in fiscal 2017 and one-half vest based on the Company's non-GAAP operational income before taxes ("OIBT") as a percentage of revenue in fiscal 2017. Of the PRSUs vesting based on Company's revenue goal, vesting starts at revenues of $225 million with vesting linear up to revenues of $275 million, at which level 100% vesting occurs. Additional shares vest linearly based on revenues between $275 million and $385 million, at which level the maximum vesting of 200% occurs. Of the PRSUs vesting based on Company's OIBT as a percentage of revenue, vesting starts on OIBT of 2% with vesting linear up to OIBT of 6%, at which level 100% vesting occurs. Additional shares vest linearly based on OIBT between 6% and 10%, at which level the maximum vesting of 200% occurs. No shares shall vest under either performance measure unless the minimum vesting threshold has been attained for both performance measures.
(23)
PRSUs granted on May 15th, 2014, subject to employment criteria. Vesting under these awards is based on return on net assets ("RONA") performance goal, which is calculated as non-GAAP operating income for a given fiscal year (which excludes stock compensation expense, purchase accounting and other one-time charges, but includes charges related to inventory) divided by the average of the net assets (other than cash and assets acquired in acquisitions by ESI after the date of grant) at the end of each quarter in the fiscal year. Vesting of one-third of the PRSUs is based on the Company's RONA in each of the fiscal years 2015 through 2017. Of the PRSUs vesting based on fiscal 2015 RONA, 50% vest on RONA equal to 0%, 100% vest on RONA equal to 3% and 200% maximum vest on RONA equal to 4%. There is no vesting below the 50% vesting threshold. Of the PRSUs vesting based on fiscal 2016 RONA, 50% vest on RONA equal to 10%, 100% vest on RONA equal to 18% and 200% maximum vest on RONA equal to 21%. Of the PRSUs vesting based on fiscal 2017 RONA, 50% vest on RONA equal to 20%, 100% vest on RONA equal to 35% and 200% maximum vest on RONA equal to 42%. Vesting is linear for achievement between the 50% and 100% vesting levels and between the 100% and 200% vesting levels.
(24)
PRSUs granted on November 18, 2014, subject to employment criteria and vest based on the Company's revenues in fiscal 2017. Vesting starts at revenues of $225 million with vesting linear up to revenues of $275 million, at which level 100% vesting occurs. Additional shares vest linearly based on revenues between $275 million and $385 million, at which level the maximum vesting of 200% occurs. No shares vest unless OIBT in fiscal 2017 is at least 2%.

23



OPTION EXERCISES AND STOCK VESTED IN FISCAL YEAR 2016
The following table sets forth information with respect to options that were exercised and stock awards that vested with respect to the named executive officers in fiscal year 2016 .
 
 
Option Awards
 
Stock Awards
Name
 
Number of
Shares
Acquired
on Exercise
(#)
 
Value Realized
on Exercise
($)
 
Number of
Shares
Acquired
on Vesting
(#)
 
Value
Realized
($)
Edward C. Grady
 

 

 
 

 
 
$

Paul Oldham
 

 

 
 
36,106

 
 
$
200,986

Robert DeBakker
 

 

 
 
22,567

 
 
$
125,561

Bing-Fai Wong
 

 

 
 
22,698

 
 
$
126,294

 
FISCAL YEAR 2016 NON-QUALIFIED DEFERRED COMPENSATION
 
Name
 
Executive
Contributions
in Fiscal Year 2016
 
Registrant
Contributions
in Fiscal Year 2016
 
Aggregate
Earnings in Fiscal Year 2016
 
Aggregate
Withdrawals/
Distributions
 
Aggregate
Balance at
3/31/16
($)
 
($)
 
($) (1)
 
($)
 
($)
Edward C. Grady
 
$
430,368

 

 
$
70,732

 
 

 
$
921,074

(2)
Paul Oldham
 

 

 

 
 

 

  
Robert DeBakker
 

 

 

 
 

 

  
Kerry Mustoe (3)
 
$
43,217

 

 
$
(3,951
)
 
 

 
$
408,757

(2)
Bing-Fai Wong
 
$
55,243

 

 
$
8,186

 
 

 
$
483,970

(2)
(1)
These amounts are not included in the Summary Compensation Table for fiscal year 2016 because plan earnings were not preferential or above market.
(2)
Aggregate balance includes amounts reported as part of non-equity incentive plan compensation in the Summary Compensation Table for previous fiscal years.
(3)
Ms. Mustoe retired from her position on December 18, 2015. Contributions will be distributed per the plan provisions for retirement.
Under the Company’s nonqualified deferred compensation plan, executives can generally elect to defer receipt of up to 50% of their salary and 100% of their bonuses. Cash amounts credited to the deferred compensation plan will earn a rate of return based on investment funds selected by the participants from a prescribed menu of investment options. Generally, deferred amounts will be paid in a lump sum upon termination, except in the case of retirement, in which case the deferred amounts will be paid in a lump sum or in annual installments for up to ten years, as elected by the executive. Officers and other eligible employees may also defer payment of restricted stock units granted to them by the Company. Payment will be in shares of Company common stock under the same terms as cash amounts. The Company has set aside amounts in a grantor trust to cover the Company’s obligation to pay deferred compensation.
EQUITY COMPENSATION PLAN INFORMATION
Set forth in the table below is certain information regarding the number of shares of common stock that was subject to outstanding stock options (which includes stock appreciation rights) or other compensation plan grants and awards at April 2, 2016 .
 
Plan Category
 
Number of
Securities to be
Issued upon Exercise
of Outstanding
Options, Warrants
and Rights
 
Weighted-average
Exercise Price of
Outstanding
Options, Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (excluding
securities reflected in
column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
 
3,638,391

(1)(2)
 
$
8.72

 
1,460,624

(3)
Equity compensation plans not approved by security holders
 
100,000

(4)
 
$
18.67

 

  
Total
 
3,738,391

  
 
$
8.99

 
1,460,624

  

24



 
(1)
Consists of restricted stock unit grants, options and stock appreciation rights outstanding under the 2004 Stock Incentive Plan.
(2)
Includes 1,482,791 restricted stock units which will vest only if specific performance or service measures are met.
(3)
Includes 622,276 shares available for issuance under the 1990 Employee Stock Purchase Plan.
(4)
Consists of stock options awarded as inducement grants to Paul Oldham at the time of his hire in 2008 and options outstanding under the 2000 Stock Option Plan.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Severance and Change in Control Compensation
The Company has entered into agreements and maintains plans that will require the Company to provide compensation to certain named executive officers of the Company in the event of a termination of employment under various circumstances.
At April 2, 2016, the Company was party to change in control severance agreements with Edward C. Grady, Robert DeBakker, Paul Oldham and Bing-Fai Wong. Under the terms of these agreements, the officer is entitled to change in control benefits if he is terminated by the Company other than for cause, disability or retirement or if he terminates employment for good reason or, in the case of Mr. Grady, he retires not less than 60 days after the change in control. “Cause” generally includes willful and continued failure to perform duties, the conviction of guilty or entering of a no contest plea to a felony that is materially injurious to the Company and the commission of an act that constitutes gross negligence or gross misconduct. “Good reason” generally includes a diminution of position or responsibilities, a reduction in base salary, bonus or incentive opportunity and a requirement to be based more than 50 miles from the principal office at which the executive was based immediately prior to the change in control.
Under these agreements, a “change in control” includes the following:
Any merger or other reorganization of the Company where the holders of the outstanding voting securities immediately prior to the merger or reorganization do not continue to hold at least 50% of voting securities after the merger or reorganization;
The sale of substantially all of the assets or the liquidation or dissolution of the Company;
The nomination and election in a two-year period of a majority of directors by persons other than the incumbent directors, unless each new director elected during the two-year period was nominated or elected by two-thirds of the incumbent directors then in office and voting; and
The acquisition by any person of 50% or more of the Company’s outstanding voting securities.
The Company amended and restated the change in control severance agreements with Messrs. DeBakker and Oldham after the end of fiscal 2015 and extended the agreements to other members of the executive staff, including the other named executive officers other than Mr. Grady. The primary effect of the new agreements for Mssrs. Oldham and DeBakker was to increase the payments for base salary and bonus from 12 to 24 months and 100% to 200%, respectively, and to eliminate the 280G gross-ups.
The table below sets forth the estimated benefits payable to each named executive officer under the following scenarios: (i) change in control of the Company on April 2, 2016 , with (a) no termination of employment and (b) original awards or replacement awards continuing to vest per the original terms; (ii) change in control of the Company on April 2, 2016 , and the named executive officer’s employment is involuntarily terminated by the Company without cause or terminated by the named executive officer for good reason on April 2, 2016 ; and (iii) no change in control of the Company, and the named executive officer’s employment is involuntarily terminated by the Company without cause or terminated by the named executive officer for good reason on April 2, 2016 .

25



 
 
Compensation
 
Benefits and
Perquisites
 
280G 
Gross-up
Payment
 
Total
Name
 
Base Salary
 
Cash
Bonus Plan
 
Stock Options
Unvested/
Accelerated (1)
 
Restricted
Stock Units
Unvested/
Accelerated
 
Post-termination
Health Benefits
 
1. Change in control – no employment termination and replacement award issued or original award continues vesting
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul Oldham (2)
 
$

 
$
245,000

 
$

 
$

 
$

 
$

 
$
245,000

Robert DeBakker (2)
 
$

 
$
174,000

 
$

 
$

 
$

 
$

 
$
174,000

Bing-Fai Wong (2)
 
$

 
$
163,800

 
$

 
$

 
$

 
$

 
$
163,800

Edward C. Grady (2)
 
$

 
$
590,000

 
$

 
$

 
$

 
$

 
$
590,000

2. Change in control – involuntary termination without cause or termination with good reason
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul Oldham (2)
 
$
700,000

 
$
490,000

 
$

 
$
1,046,087

 
$
31,462

 
$

 
$
2,267,549

Robert DeBakker (2)
 
$
580,000

 
$
348,000

 
$

 
$
673,194

 
$
31,462

 
$

 
$
1,632,656

Bing-Fai Wong (2)
 
$
273,000

 
$
163,800

 
$

 
$
556,733

 
$
15,731

 
$

 
$
1,009,264

Edward C. Grady (2)
 
$
1,180,000

 
$
590,000

 
$

 
$
2,361,865

 
$
5,611

 
$

 
$
4,137,476

3. No change in control – involuntary termination without cause or termination with good reason
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paul Oldham (2)
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Robert DeBakker (2)
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Bing-Fai Wong (2)
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Edward C. Grady (2)
 
$

 
$

 
$

 
$

 
$

 
$

 
$

(1)
This column records the value of accelerated stock options, which includes stock appreciation rights.

(2)
Named Executive Officers with Change in Control Agreements
a.
Base Salary: Upon involuntary termination without cause or termination for good reason by the executive within 24 months of a change in control (12 months in the case of Mr. Grady), payment of two times the annual base salary at the rate in effect immediately prior to the termination (one times in the case of Mr. Wong), with one-half (one-quarter in the case of Mr. Grady) payable in six monthly installments and the balance paid in a lump sum six months after the date of termination.
b.
Cash Bonus: Upon a change in control while executive is employed, lump sum payment of one times the greater of the target bonus or the performance against bonus criteria is due within 30 days of a change in control. Upon involuntary termination without cause or termination for good reason by the executive within 24 months of a change in control (in the case of Mr. Grady 12 months and includes retirement no less than 60 days following the change in control), payment of two times (one times in the case of Messrs. Grady and Wong) the annual target cash bonus is due 6 months after termination. Amounts in the table are based on target amounts.
c.
Equity-based Awards: Amounts in the table are based on the closing stock price on April 2, 2016 of $7.23 and the number of stock options or restricted stock units for which vesting is accelerated.
i.
Stock Options (includes stock appreciation rights)
1.
Upon a change in control with no termination, all options will continue to vest per the original terms unless the Board of Directors elects to accelerate vesting.
2.
Upon involuntary termination without cause or termination by the executive for good reason within 24 months (12 months in the case of Mr. Grady) following a change in control, all options will immediately vest.
3.
Upon involuntary termination without cause or termination by the executive for good reason, if no change in control has occurred, the option may be exercised only to the extent that it is vested at termination.

26



ii.
Restricted Stock Unit Awards
1.
Upon a change in control with no termination, all awards will continue to vest per the original terms unless the Board of Directors elects to accelerate vesting.
2.
Upon involuntary termination without cause or termination by the executive for good reason within 24 months following a change in control, all awards will immediately vest. Performance-based restricted stock units will be immediately adjusted based upon deemed attainment of target performance or actual performance, if greater, and will immediately vest. Deemed attainment of 100% was used for calculations in this table.
3.
Upon involuntary termination without cause or termination by the executive for good reason, if no change in control has occurred, awards will be cancelled to the extent they are unvested at termination. Upon retirement in accordance with the Company’s retirement policy and if no change of control has occurred, all awards will immediately vest by a pro rata percentage. Retirement provisions are not used for calculation in this table.
d.
Other Benefits: Upon involuntary termination without cause or termination for good reason by the executive within 24 months of a change in control (12 months in the case of Mr. Grady) 24 months of health and dental insurance will be provided to the executive and his covered dependents (12 months in the case of Messrs. Grady and Wong).
e.
Tax Gross-Up: These agreements do not include any gross-up provisions in the event the change in control payment triggers excise tax.
f.
Double trigger: All Change of Control agreements contain a "double trigger" provision that provides payments and benefits only in the event that: (i) ESI is involved in a change of control transaction; and (ii) the executive officer's employment is terminated (or constructively terminated) in connection with the change of control (or, in the case of Mr. Grady, he retires not less than 60 days after the change in control).

Other Benefits Triggered upon Termination due to Death or Disability
At fiscal year-end 2016 , the named executive officers held outstanding options (including stock appreciation rights) and unvested restricted stock units as set forth in the Outstanding Equity Awards table above. The stock option and stock appreciation rights agreements governing all options and stock appreciation rights provide that if an optionee’s employment terminates because of death or total disability, the option may be exercised at any time before the expiration date of the award or the date 12 months after the date of termination, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option at the date of termination. Restricted stock unit agreements provide for prorated acceleration of the award if the executive ceases to be an employee by reason of death or total disability.
The following table shows the values of the restricted stock units, stock options and stock appreciation rights that would have accelerated vesting if the named executive officer’s employment had terminated as of April 2, 2016 due to death or disability.
 
Named Executive Officer
 
Death or Disability (1)
 
Edward Grady
 
$
1,015,576

 
Paul Oldham
 
$
525,225

 
Robert DeBakker
 
$
333,679

 
Bing-Fai Wong
 
$
291,860

 
 
(1)
Amounts in this column represent the number of restricted stock unit shares with accelerated vesting, multiplied by the closing market price of the Company’s common stock on April 2, 2016 of $7.23 .
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed it with management. Based on its review and discussion with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal period ended April 2, 2016 and the Company’s proxy statement for the 2016 annual meeting.
By the Compensation Committee:
Frederick A. Ball, Chairman
John Medica
Richard H. Wills

27



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consisted of directors Frederick A. Ball (Chairman), Richard H. Wills and John Medica at the end of the last completed fiscal year. No Compensation Committee member is or has been an employee of the Company or has any other material relationship with the Company.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, internal control and financial reporting practices of the Company. A current copy of the Audit Committee Charter is available on the Company’s website at www.esi.com.
The Audit Committee oversees the Company’s accounting and financial reporting processes on behalf of the Board of Directors and oversees the audits of the Company’s consolidated financial statements and internal control over financial reporting. Management has the primary responsibility for the financial statements and the reporting processes including the system of internal controls.
The Audit Committee has the sole authority to engage and dismiss the Company’s independent auditing firm. In latter half of fiscal 2015, representatives of Deloitte & Touche, LLP (“Deloitte”) approached management and expressed Deloitte’s interest in becoming the Company’s independent auditor. Members of management and Deloitte subsequently met several times to discuss Deloitte’s expertise and approach to conducting audits. Management kept the Audit Committee informed of the discussions with Deloitte. The Audit Committee met with representatives of Deloitte in May 2015, where Deloitte made a presentation regarding the firm, the proposed audit team and its approach to conducting audits. Based on this presentation and discussions with the Deloitte representatives and management, the Audit Committee decided to conduct a competitive process between Deloitte and KPMG LLP, the Company’s existing independent auditor. As the culmination of this process, in August 2015 representatives of each firm met with the Audit Committee, both with and without members of management present. After these meetings, the Audit Committee decided to change the Company’s independent auditor from KPMG LLP to Deloitte. KPMG LLP had been the Company’s auditor for around 15 years and rotation of auditors was a factor considered in the decision to change to Deloitte.
The Audit Committee reviews each of the Company’s quarterly and annual reports, including Management’s Discussion and Analysis of Financial Condition and Results of Operations. As part of this review, the Audit Committee discusses the reports with the Company’s management and considers the audit reports prepared by the independent registered public accounting firm about the Company’s annual report, as well as related matters such as the quality of the Company’s accounting principles, alternative methods of accounting under Generally Accepted Accounting Principles and the preferences of the independent registered public accounting firm in this regard, the Company’s critical accounting policies and the clarity and completeness of the Company’s financial and other disclosures.
The Audit Committee reviewed management’s report on internal control over financial reporting, required under Section 404 of the Sarbanes-Oxley Act of 2002 and related rules. As part of this review, the Audit Committee reviewed the bases for management’s conclusions and the report of the independent registered public accounting firm on internal control over financial reporting. Throughout the fiscal year ended April 2, 2016, the Audit Committee reviewed management’s plan for documenting and testing controls, particularly the plan to remediate the material weaknesses identified in fiscal 2015, and the results of testing, any deficiencies discovered and the planned or actual remediation of the deficiencies. Based on this review, the Audit Committee agrees with management's assessment that the material weaknesses identified in fiscal 2015 were remediated as of April 2, 2016.
The Audit Committee discussed with the Company’s independent auditors the overall scope and plans for their audit. The Audit Committee meets with the independent auditors, with and without management present, to discuss the results of their examination, their evaluation of the Company’s internal and disclosure controls and the overall quality of the Company’s financial reporting.
In connection with the Company’s audit of the consolidated financial statements and internal control over financial reporting for the fiscal year ended April 2, 2016 , the Audit Committee (1) reviewed and discussed the audited financial statements with management; (2) discussed with the independent auditors the matters required to be discussed by Auditing Standard No. 16 (Communications with Audit Committee) and Rule 2-07 of Regulation S-X, as adopted by the Public Company Accounting Oversight Board (PCAOB); and (3) received the written disclosures and the letter from the independent auditors required by applicable requirements of the PCAOB regarding the independent auditors' communications with the Audit Committee concerning independence and discussed with the independent auditors the independent auditors’ independence.

28



Based upon these reviews and discussions, the Audit Committee has recommended to the Board of Directors, and the Board of Directors has approved, that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2, 2016 for filing with the Securities and Exchange Commission.
By the Audit Committee:
Raymond A. Link, Chairman
Laurence E. Cramer
Robert R. Walker

PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees billed or accrued to the Company for the audit and other services provided in fiscal year 2016 by Deloitte & Touche LLP and fiscal year 2015 by KPMG LLP, the Company’s principal accounting firms in 2016 and 2015, respectively.
 
 
 
2016
 
2015
Audit Fees (1)
 
$
722,597

 
$
1,127,000

Tax Fees (2)
 
$
21,953

 
$
15,000

Totals
 
$
744,550

 
$
1,142,000

 
(1)
Audit Fees represent fees for professional services performed in connection with the audit of the Company’s financial statements, including reviews of interim financial statements included in Form 10-Q and registration statements, and the audit of the Company’s internal control over financial reporting.
(2)
Tax Fees represent fees billed for tax compliance, tax advice and tax planning.
All services to be provided by Deloitte & Touche LLP are required to be approved by the Audit Committee in advance. The audit services are approved annually. These services include, but are not limited to, the annual financial statement audit, the annual audit of internal control over financial reporting, reviews of consolidated quarterly condensed financial statements as reported on Form 10-Q and review of registration statements filed by the Company. With respect to services other than audit services, at least annually, the independent auditor submits to the Audit Committee for its approval the anticipated engagements for the ensuing year, either at the time the Audit Committee reviews and approves the annual audit engagement, or at a time specifically scheduled for reviewing such other services. Quarterly, and in conjunction with the Audit Committee’s regularly scheduled meetings, the independent auditor presents to the Audit Committee for pre-approval any proposed engagements not previously reviewed and approved. In the event that an audit or non-audit service requires approval before the next regularly scheduled meeting of the Audit Committee, the auditor must contact the Chairman of the Audit Committee to obtain such approval. The approval must be reported to the Audit Committee at its next regularly scheduled meeting.

PROPOSAL 2: APPROVAL OF AMENDMENT TO 2004 STOCK INCENTIVE PLAN
The Board of Directors Recommends a Vote “For” This Proposal

The Company is asking the shareholders to approve an amendment to the 2004 Stock Incentive Plan (the “Plan”). The material terms of the Plan are described below, and a complete copy of the Plan is attached to this Proxy Statement as Appendix A.
Our overall compensation objective is to compensate our executives and other employees in a manner that attracts and retains talented executives; motivates executives to execute long-term business strategies while achieving near-term financial targets; and aligns executive performance with the Company's short-term and long-term goals for delivering shareholder value.
To achieve these objectives, we historically have provided a significant portion of our key employees’ total compensation in the form of equity awards through our equity incentive programs, the value of which depends on our stock performance. Our goal is for equity awards to continue to represent a significant portion of our employees’ total compensation. We believe this approach helps to encourage long-term focus and commitment from our employees and provides for alignment with shareholder interests. Equity awards are also an important retention tool for key employees as awards generally are subject to vesting over an extended period of time subject to continued service with the Company.
Reserving Shares Available for Granting Equity Awards is Important for Meeting our Future Compensation Needs.
We believe we must continue to use equity awards to help attract, retain and motivate employees to continue to grow our business and ultimately increase shareholder value as we compete for a limited pool of talented people and face challenges in

29



hiring and retaining such talent. A significant portion of the compensation for our senior officers is in the form of equity compensation. In addition, approximately 457 of our regular, full-time employees are eligible to receive equity awards as of April 2, 2016. If the proposed amendment is approved, we expect that the share reserve increase will allow us to continue to grant stock-based compensation at levels we deem appropriate for approximately the next 3 years, depending on facts and circumstances, and we would not expect to have to restructure our existing compensation programs for reasons that are not directly related to the achievement of our business objectives. To remain competitive without stock-based compensation arrangements, it would likely be necessary to replace components of compensation previously awarded in equity with cash compensation. We do not believe increasing cash compensation to make up for a shortfall in equity compensation would be practical or advisable, primarily because the Company believes that equity awards provide a more effective compensation strategy than cash alone for aligning employees’ and stockholders’ interests. In addition, any significant increase in cash compensation in lieu of equity awards could substantially increase our operating expenses and reduce our cash flow from operations, which could adversely affect our business results and could adversely affect our business strategy, including using cash flow for research and development of innovative new products, and improvements in the quality and performance of existing products.
We Manage Our Equity Incentive Program Carefully.
We manage our long-term stockholder dilution by limiting the number of equity awards granted for each of our fiscal years and granting what we believe to be the appropriate number of equity awards needed to attract, reward and retain employees.
Outstanding Awards
The following table shows information regarding all outstanding options and unvested restricted stock units, as well as all available shares, under all of the Company's equity plans as of the record date of June 15, 2016.
Outstanding Awards for All Plans
Outstanding Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (in years)
Unvested Time-based Restricted Stock Units Outstanding
Unvested Performance-based Restricted Stock Units Outstanding
Number of Shares available for Grant under the 2004 Stock Incentive Plan
1,964,732

$
9.30

5.56

1,209,309

595,987

337,328

Grants and earned amounts for each award type for the past three years are summarized in the table below:
Historical Equity Grants (total Company)
Fiscal Year
Options & SARs Granted
Granted PRSUs
Earned PRSUs
Granted TRSUs
Earned TRSUs
2016
467,000



737,200