UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
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April 28, 2011

 

Dear Stockholder:

 

You are cordially invited to attend the 2011 Annual Meeting of Stockholders of athenahealth, Inc. to be held on Thursday, June 9, 2011, at 5:00 p.m. Eastern Time, at our headquarters at 400 North Beacon Street, Watertown, Massachusetts 02472. Directions to our headquarters can be found on the last page of the Proxy Statement.

 

Pursuant to the Securities and Exchange Commission rules that allow issuers to furnish proxy materials to stockholders over the Internet, we are posting the proxy materials on the Internet and delivering a notice of the Internet availability of the proxy materials. This delivery process will allow us to provide stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of the Annual Meeting. On or about April 29, 2011, we will begin mailing to our stockholders a Notice of Internet Availability containing instructions on how to access or request a copy of our Proxy Statement for the 2011 Annual Meeting of Stockholders and our Annual Report on Form 10-K for the year ended December 31, 2010.

 

The Notice of 2011 Annual Meeting of Stockholders and the Proxy Statement contain details of the business to be conducted at the Annual Meeting.

 

Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. Therefore, I urge you to promptly vote by submitting your proxy via the Internet at the address listed on the proxy card or by signing, dating, and returning the enclosed proxy card in the enclosed envelope. If you decide to attend the Annual Meeting, you will be able to vote in person, even if you have previously submitted your proxy.

 

On behalf of the Board of Directors, I would like to express our appreciation for your continued interest in the affairs of athenahealth, Inc. I look forward to greeting as many of our stockholders as possible at the Annual Meeting.

 

Sincerely,

 

 

athenahealth, Inc.
311 Arsenal Street
Watertown, MA 02472

 

NOTICE OF 2011 ANNUAL MEETING OF STOCKHOLDERS

 

Notice is hereby given that the 2011 Annual Meeting of Stockholders of athenahealth, Inc. will be held on Thursday, June 9, 2011, at 5:00 p.m. Eastern Time, at 400 North Beacon Street, Watertown, Massachusetts 02472. The purpose of the meeting is the following:

 

1. to elect three (3) directors, Jonathan Bush, Brandon H. Hull, and William Winkenwerder, Jr., to serve as Class I directors for a term of three (3) years and until their successors are duly elected and qualified, subject to their earlier resignation or removal;

 

2. to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011;

 

3. to approve an amendment and restatement of the 2007 Stock Option and Incentive Plan;

 

4. to hold an advisory vote to approve executive compensation;

 

5. to hold an advisory vote on the frequency of the advisory vote to approve executive compensation; and

 

6. to transact such other business as may properly come before the meeting or at any and all adjournments or postponements thereof.

 

The proposal for the election of directors relates solely to the election of Class I directors nominated by the Board of Directors and does not include any other matters relating to the election of directors, including, without limitation, the election of directors nominated by any stockholder of the Company.

 

Only athenahealth, Inc. stockholders of record at the close of business on April 13, 2011, will be entitled to vote at the meeting and any adjournment or postponement thereof.

 

Your vote is important. Whether or not you are able to attend the meeting in person, it is important that your shares be represented. To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the meeting.

 

By Order of the Board of Directors,

 

Jonathan Bush

Chief Executive Officer, President, and

Chairman of the Board of Directors

 

Watertown, Massachusetts

April 28, 2011

 

TABLE OF CONTENTS

 

 

ATHENAHEALTH, INC.
PROXY STATEMENT

FOR THE 2011 ANNUAL MEETING OF STOCKHOLDERS

 

Our Board of Directors (the “Board of Directors”) has made this Proxy Statement and related materials available to you on the Internet, or at your request has delivered printed versions to you by mail, in connection with the Board of Directors’ solicitation of proxies for our 2011 Annual Meeting of Stockholders (the “Annual Meeting”), and any adjournment of the Annual Meeting. If you requested printed versions of these materials by mail, they will also include a proxy card for the Annual Meeting.

 

Pursuant to rules adopted by the Securities and Exchange Commission (“SEC”), we are providing access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) to our stockholders of record and beneficial owners as of the record date identified below. The mailing of the Notice to our stockholders is scheduled to begin on or before April 29, 2011. All stockholders will be able to access the proxy materials and our Annual Report on Form 10-K for the year ended December 31, 2010, on a website referred to in the Notice, as well as request printed or electronic copies of the proxy materials and that Annual Report. Instructions on how to access the proxy materials over the Internet or to request printed or electronic copies may be found in the Notice. Stockholders may also request to receive proxy materials and our Annual Report on Form 10-K in printed form by mail or electronically by e-mail on an ongoing basis.

 

In this Proxy Statement, the terms “Company,” “we,” “us,” and “our” refer to athenahealth, Inc. The mailing address of our principal executive offices is athenahealth, Inc., 311 Arsenal Street, Watertown, MA 02472.

 

As of the close of business on April 13, 2011, the record date for determination of stockholders entitled to vote at the Annual Meeting, there were outstanding 34,870,078 shares of common stock of the Company, par value $0.01 per share (“Common Stock”), all of which are entitled to vote with respect to all matters to be acted upon at the Annual Meeting. Each stockholder of record is entitled to one vote for each share of Common Stock held by such stockholder. No shares of preferred stock of the Company were outstanding as of April 13, 2011.

 

The Company’s By-laws provide that a majority of the shares entitled to vote, present in person or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting.

 

Under the General Corporation Law of the State of Delaware, shares that are voted “abstain” or “withheld” and broker “non-votes” are counted as present and entitled to vote and are, therefore, included for purposes of determining whether a quorum is present at the Annual Meeting. However, broker “non-votes” are not deemed to be “votes cast.” As a result, unlike abstentions or withheld votes, broker “non-votes” are not included in the tabulation of the voting results on proposals requiring approval of a majority of the votes cast and, therefore, do not have the effect of votes in opposition to such proposals. A broker “non-vote” occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner.

 

If your shares are held in “street name” by a brokerage firm, your brokerage firm is required to vote your shares according to your instructions. If you do not give instructions to your brokerage firm, the brokerage firm will still be able to vote your shares with respect to certain “discretionary” items, but will not be allowed to vote your shares with respect to “non-discretionary” items. Proposals 1, 3, 4, and 5 are “non-discretionary” items. If you do not instruct your broker how to vote with respect to those proposals, your broker may not

vote for those proposals, and those votes will be counted as broker “non-votes.” Proposal 2 is considered to be a discretionary item, and your brokerage firm will be able to vote on this proposal even if it does not receive instructions from you.

 

In Person  If you are a stockholder of record, you may vote in person at the meeting. We will give you a ballot when you arrive. If you hold your shares through a bank or broker and wish to vote in person at the meeting, you must obtain a valid proxy from the firm that holds your shares.

 

By Proxy  If you do not wish to vote in person or will not be attending the meeting, you may vote by proxy. You can vote by proxy over the Internet by following the instructions provided in the Notice, or, if you requested printed copies of the proxy materials by mail, you can vote by mailing your proxy as described in the proxy materials. You may also authorize another person or persons to act for you as proxy in a writing, signed by you or your authorized representative, specifying the details of those proxies’ authority. The original writing must be given to each of the named proxies, although it may be sent to them by electronic transmission if, from that transmission, it can be determined that the transmission was authorized by you. If you complete and submit your proxy before the meeting, the persons named as proxies will vote the shares represented by your proxy in accordance with your instructions. If you submit a proxy without giving voting instructions, your shares will be voted in the manner recommended by the Board of Directors on all matters presented in this Proxy Statement, and as the persons named as proxies may determine in their discretion with respect to any other matters properly presented at the meeting.

 

If any other matters are properly presented for consideration at the Annual Meeting, including, among other things, consideration of a motion to adjourn the Annual Meeting to another time or place (including, without limitation, for the purpose of soliciting additional proxies), the persons named in the enclosed proxy card and acting thereunder will have discretion to vote on those matters in accordance with their best judgment. We do not currently anticipate that any other matters will be raised at the Annual Meeting.

 

You may revoke your proxy by (1) following the instructions on the Notice and entering a new vote by mail or over the Internet before the Annual Meeting or (2) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not in and of itself revoke a proxy). Any written notice of revocation or subsequent proxy card must be received by the Secretary of the Company prior to the taking of the vote at the Annual Meeting. Such written notice of revocation or subsequent proxy card should be hand delivered to the Secretary of the Company or sent to the Company’s principal executive offices, athenahealth, Inc., 311 Arsenal Street, Watertown, MA 02472, Attention: Corporate Secretary.

 

If a broker, bank, or other nominee holds your shares, you must contact them in order to find out how to change your vote.

 

athenahealth, Inc. is making this solicitation and will pay the entire cost of preparing and distributing the Notice and these proxy materials and soliciting votes. If you choose to access the proxy materials or vote over the Internet, you are responsible for any Internet access charges that you may incur. Our officers and employees may, without compensation other than their regular compensation, solicit proxies through further mailings, personal conversations, facsimile transmissions, e-mails, or otherwise. We have hired Broadridge Investor Communication Solutions, Inc. to assist us in the distribution of proxy materials and the solicitation of votes described above. Proxy solicitation expenses that we will pay include those for preparation, mailing, returning, and tabulating the proxies. We have also retained Georgeson Inc., a proxy solicitation firm, to assist in the solicitation of proxies for a fee of approximately $8,500, plus customary costs and expenses for these services.

 

Stockholder proposals intended to be presented at the next annual meeting of stockholders of the Company must satisfy the requirements set forth in the advance notice provision under the Company’s By-laws. To be timely for our next annual meeting of stockholders, any such proposal must be delivered in writing to the Secretary of the Company at our principal executive offices between the close of business on February 10, 2012, and March 12, 2012. If the date of the next annual meeting of the stockholders is scheduled to take place before May 10, 2012, or after August 8, 2012, notice by the stockholder must be delivered no earlier than the close of business on the 120th day prior to such annual meeting and no later than the close of business on the later of (1) the 90th day prior to such annual meeting or (2) the 10th day following the day on which public announcement of the date of such meeting is first made.

 

In addition, any stockholder proposal intended to be included in the Company’s proxy statement for the next annual meeting of stockholders of the Company must also satisfy the SEC regulations under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and be received not later than December 30, 2011. If the date of the annual meeting is moved by more than 30 days from the date contemplated at the time of the previous year’s proxy statement, then notice must be received within a reasonable time before the Company begins to print and send its proxy materials. If that happens, the Company will publicly announce the deadline for submitting a proposal in a press release or in a document filed with the SEC.

 

The following table sets forth certain information regarding beneficial ownership of Common Stock as of April 13, 2011, for:

 

 

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as noted by footnote, and subject to community property laws where applicable, we believe based on the information provided to us that the persons and entities named in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.

 

The table lists applicable percentage ownership based on 34,870,078 shares of Common Stock outstanding as of April 13, 2011. The number of shares beneficially owned includes shares of Common Stock that each person has the right to acquire within 60 days of April 13, 2011, including upon the exercise of stock options or the vesting of restricted stock units (“RSUs”). These stock options and RSUs shall be deemed to be outstanding for the purpose of computing the percentage of outstanding shares of Common Stock owned by

such person but shall not be deemed to be outstanding for the purpose of computing the percentage of outstanding shares of Common Stock owned by any other person.

 

 

 

 

The following table identifies our directors, executive officers, and key employees and sets forth the ages of and the positions with the Company currently held by each such person.

 

 

Set forth below are the biographies of each director, executive officer, and key employee, as well as a discussion of the particular experience, qualifications, attributes, and skills that led our Board of Directors to conclude that each person nominated to serve or currently serving on our Board of Directors should serve as a director. In addition to the information presented below, we believe that each director meets the minimum qualifications established by our nominating and corporate governance committee.

Jonathan Bush is our Chief Executive Officer, President, and Chairman of the Board of Directors. Mr. Bush co-founded athenahealth, Inc. in 1997 and has been a director since our inception. Prior to joining the Company, Mr. Bush served as an EMT for the City of New Orleans, was trained as a medic in the U.S. Army, and worked as a management consultant with Booz Allen & Hamilton. Mr. Bush obtained a Bachelor of Arts in the College of Social Studies from Wesleyan University and an M.B.A. from Harvard Business School. As a founder of our Company, Mr. Bush has extensive knowledge of all aspects of our business, including our day-to-day operations. His history with the Company, combined with his business and leadership skills, makes him particularly well suited to serve as Chairman of the Board of Directors.

 

Richard N. Foster has served as a member of our Board of Directors since 2005. Mr. Foster is the Managing Partner of Investment and Advisory Services, LLC and Millbrook Management Group. Prior to forming Millbrook Management Group in 2004, Mr. Foster served as a Director of McKinsey & Company, Inc. for thirty years, where he was a founder and Co-Managing Director of McKinsey’s private equity practice. He is a member of the Board of Directors of Trust Company of the West, Innosight, LLC, the Board of Memorial Sloan Kettering Institute, the Dean’s Advisory Committee of the Yale School of Medicine, the W. M. Keck Foundation, the Council for Aid to Education, the Council on Foreign Relations, and the President’s Circle of the National Academies. Mr. Foster is a fellow of the American Academy of Arts and Sciences. Mr. Foster received his Bachelor of Science, Master of Science, and Ph.D. in Engineering and Applied Science from Yale University where he is a Senior Faculty Fellow. Mr. Foster’s experience as an advisor to health care and technology companies, other directorships, and his knowledge and expertise in technological change led our Board of Directors to conclude that he should serve as a director.

 

Brandon H. Hull has served as a member of our Board of Directors since 1999. Since October 1997, Mr. Hull has served as General Partner of Cardinal Partners, a venture capital firm that he co-founded that specializes in health care and life-sciences investments. From 1991 to 1997, Mr. Hull served as principal of the Edison Venture Fund. Mr. Hull serves on the board of directors of Awarepoint Corporation, CodeRyte, Inc., FluidNet Corporation, MDX Medical, Inc., and Replication Medical, Inc. Mr. Hull obtained his Bachelor of Arts from Wheaton College and his M.B.A. from The Wharton School at the University of Pennsylvania. Mr. Hull’s experience with health care services, health care information systems, and medical products and devices at Cardinal Partners, and on the boards of numerous health care and medical technology companies, led our Board of Directors to conclude that he should be nominated to serve as a director.

 

Dev Ittycheria has served as a member of our Board of Directors since July 2010. Mr. Ittycheria served as the Senior Vice President, President of the Enterprise Service Management of BMC Software, Inc. from November 2008 to February 2010 and as Senior Vice President, Strategy and Corporate Development from April 2008 to October 2008. Prior to working at BMC, Mr. Ittycheria was co-founder, President, Chief Executive Officer, and a director of BladeLogic, Inc. from August 2001 to April 2008, which was acquired by BMC in April 2008. He also serves as a director of Bazaarvoice, Inc. Mr. Ittycheria received a Bachelor of Science in Electrical Engineering from Rutgers University. Mr. Ittycheria’s experience in building high-growth technology businesses that excel at acquiring customers, delivering financial results, and creating long-term sustainable value, together with his leadership ability, led our Board of Directors to conclude that he should serve as a director.

 

John A. Kane has served as a member of our Board of Directors since 2007. Mr. Kane served as Senior Vice President, Finance and Administration, Chief Financial Officer, and Treasurer of IDX Systems Corporation from May 2001 until it was acquired by GE Healthcare in 2006, and as the Vice President, Finance and Administration, Chief Financial Officer, and Treasurer of IDX from October 1984, when he joined IDX, until 2001. While at IDX, Mr. Kane guided the company through more than a dozen acquisitions and at various times managed the finance, facilities, legal, human resources, and information systems functions for the company. Previous to his employment with IDX, Mr. Kane worked as an audit manager at Ernst & Young LLP, in Boston. Mr. Kane serves as a director of Merchants Bancshares, Inc., Spheris Inc., and several private organizations. Since his retirement from IDX in 2006, Mr. Kane has not been employed on a full-time basis, and his principal occupations have consisted of the directorships mentioned in the preceding sentence. He earned a Bachelor of Science and Master of Accountancy from Brigham Young University. Mr. Kane’s experience auditing financial statements at Ernst & Young LLP, directorships with other public companies, and

experience as chief financial officer of a health care software technology company led our Board of Directors to conclude that he should serve as a director. Our Board of Directors chose Mr. Kane to serve as a director and chairman of the audit committee because of his financial and accounting skills and experience related to auditing financial statements.

 

Ruben J. King-Shaw, Jr. has served as a member of our Board of Directors since 2003 and was named Lead Director in 2007. Mr. King-Shaw is the Chairman, Managing Partner, and Chief Investment Officer of Mansa Equity Partners, Inc., which he founded in 2005. He is currently a member of Medicare’s Program Advisory and Oversight Commission which advises the Obama administration on effective value-based procurement strategies for health care reform. From January 2003 to August 2003, Mr. King-Shaw served as Senior Advisor to the Secretary of the Department of the Treasury. From July 2001 to April 2003, Mr. King-Shaw served as Deputy Administrator and Chief Operating Officer of the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS). From January 1999 to July 2001, Mr. King-Shaw served as Secretary of the Florida Agency for Health Care Administration. Before that, Mr. King-Shaw was the Chief Operating Officer of Neighborhood Health Partnership, Inc. and the Executive Director of the Jackson Memorial Health Plan. Mr. King-Shaw serves on numerous boards of directors, including APS Healthcare, iHealth Technologies, Inc., and Life House Health Systems, Inc. He also served as a director of Wellcare Health Plans, Inc. Mr. King-Shaw is Chairman of the Compliance Committee and a Member of the Executive Committee at Steward Health LLC. Mr. King-Shaw obtained a Bachelor of Science in Industrial and Labor Relations from Cornell University, a Master in Health Services Administration from Florida International University, and a Master of International Business from the Chapman Graduate School of Business and the Center for International Studies in Madrid, Spain. Mr. King-Shaw’s experience in health policy, economics, and finance at CMS, directorships with other public companies, experience as an advisor to government agencies and health care services companies, and knowledge of the health care insurance industry led our Board of Directors to conclude that he should serve as a director.

 

James L. Mann has served as a member of our Board of Directors since 2006. Mr. Mann has served as Chairman of the Board of Directors of SunGard Data Systems Inc. from 1987 to 2005 and as Director from 1983 to 1986 and from 2006 to the present. Mr. Mann served as SunGard’s Chief Executive Officer from 1986 to 2002, President from 1986 to 2000, and Chief Operating Officer from 1983 to 1985. Since 2005, Mr. Mann has been employed by SunGard in an advisory capacity. Mr. Mann previously served as President and COO of Bradford National Corp. Mr. Mann obtained a Bachelor of Science in Business Administration from Wichita State University. Mr. Mann’s experience as chief executive officer and chief operating officer of SunGard, including his skills in leading a company through rapid growth, acquisitions, and developing corporate strategy led our Board of Directors to conclude that he should serve as a director.

 

David E. Robinson has served as a member of our Board of Directors since January 2011. He served as our Executive Vice President and Chief Operating Officer from February 2009 to July 2010 and as an executive advisor from July 2010 to December 2010. Prior to joining the Company, Mr. Robinson served as the Executive Vice President of SunGard Data Systems Inc., a global leader in software and processing solutions for financial services, higher education, and the public sector, which position he held from 2002 to 2004. Mr. Robinson served as Senior Vice President of SunGard from 2000 to 2002, as a Group CEO of SunGard Investment Systems from 1997 to 2000, and as President of SunGard Investment Systems from 1993 to 1997. Mr. Robinson holds an M.B.A. from the University of Chicago, a Masters in Chemical Engineering from the University of Rochester, and a Bachelor of Science in Chemical Engineering from Carnegie Mellon University. Mr. Robinson’s experience as our Chief Operating Officer and leading technology organizations led our Board of Directors to conclude that he should serve as a director.

 

William Winkenwerder, Jr. M.D. has served as a member of our Board of Directors since December 2009. Dr. Winkenwerder serves as chairman and chief executive officer of The Winkenwerder Company, LLC, a health care consulting firm that he founded in 2007. He also serves as a director of Logistics Health Incorporated, Third Stream Bioscience, Inc., and CapGemini Government Solutions LLC. Dr. Winkenwerder was the Assistant Secretary of Defense for Health Affairs in the U.S. Department of Defense from 2001 to 2007. At the Department of Defense, Dr. Winkenwerder was the leader of the Military Health System, with a $40 billion annual budget, and the principal medical advisor to the Secretary of Defense. During his tenure, he

led groundbreaking advances in battlefield medicine and implementation of the world’s largest electronic health record system (AHLTA). Prior to his government service, Dr. Winkenwerder worked as a senior health executive and practicing physician for more than twenty years. Dr. Winkenwerder received his Bachelor of Science from Davidson College, M.D. from the University of North Carolina, and M.B.A. from the University of Pennsylvania. Dr. Winkenwerder’s skills as a practicing physician, private industry executive, and government health policy leader, and his experience at the Department of Defense as the leader of the military health system and principal medical advisor to the Secretary of Defense, led our Board of Directors to conclude that he should be nominated to serve as a director.

 

Timothy M. Adams has served as our Senior Vice President and Chief Financial Officer since January 2010. Prior to joining the Company he served as Chief Investment Officer at Constitution Medical Investors, Inc., a private investment firm focused on health care-sector-related acquisitions and investments, as well as Senior Vice President of Corporate Strategy for Keystone Dental, Inc., a provider of dental health products and solutions. From November 2007 to April 2008, he served as the Chief Financial Officer, Senior Vice President, Treasurer, and Assistant Secretary of Orthofix International N.V., a diversified orthopedic products company. From 2004 to 2007, Mr. Adams served as Chief Financial Officer and Treasurer of Cytyc Corporation, a global medical device and diagnostics health company. He worked for seven years in the audit practice at Price Waterhouse and is a Certified Public Accountant. Mr. Adams obtained his Bachelor of Science from Murray State University and his M.B.A. from Boston University.

 

Robert L. Cosinuke has served as our Senior Vice President and Chief Marketing Officer since December 2007. Mr. Cosinuke was a co-founder of Digitas, LLC in 1991. Digitas is a leading interactive and database marketing advertising agency and was acquired by Publicis Group SA in February of 2007. From 1991 to 2006, Mr. Cosinuke was employed by Digitas, most recently as President of Digitas, Boston. He also served as President of Global Capabilities, Digitas. Mr. Cosinuke has a Bachelor of Arts from Haverford College and an M.B.A. from Harvard Business School.

 

Derek Hedges has served as our Senior Vice President of Business Development and Product Strategy since January 2010. He served as our Vice President of Enterprise Sales from January 2009 to January 2010, Regional Vice President of Sales from May 2007 to January 2009, Vice President of Channel Development from January 2007 to May 2007, and Director of Channel Development from January 2005 to January 2007. Prior to joining the Company, Mr. Hedges was the Vice President of Product Management for McKesson Corporation. Mr. Hedges obtained a Bachelor of Arts from Boston College and an M.B.A. from the University of Michigan.

 

Stephen N. Kahane, M.D., M.S. has served as President of our Enterprise Services Group since February 2011. Dr. Kahane’s career spans more than 30 years across companies that have delivered health care IT and automation solutions for physician practices, hospitals, and integrated delivery networks. Prior to joining the Company, Dr. Kahane was Chief Executive Officer of AMICAS, Inc., an image and information management solutions company. Dr. Kahane’s experience also includes roles as Chief Executive Officer of VitalWorks, Chief Executive Officer of Datamedic, and Medical Director and System Development Director of Information at Johns Hopkins Medical Institution. Dr. Kahane holds an M.S. in Computer Science from Johns Hopkins and an M.D. from Emory University.

 

Leslie Brunner has served as our Senior Vice President of People and Process since April 2008. She served as the Senior Vice President of Client Operations from 2006 to April 2008, Interim Chief Operating Officer from 2005 to 2006, Vice President of Revenue Cycle Operations Innovation from 2003 to 2005, Vice President of Product Management from 2002 to 2003, Senior Vice President of Service Delivery 2000 to 2002, and Regional Vice President from 1998 to 2000. Prior to joining the Company, Ms. Brunner held various roles in integrated delivery systems operations at Lovelace Health Systems. Ms. Brunner obtained a Bachelors of Arts from Colorado College and a Masters in Health Administration from Washington University.

 

Daniel H. Orenstein has served as our Senior Vice President, General Counsel, and Secretary since July 2010. He served as Vice President, General Counsel, and Secretary from July 2008 to July 2010, Deputy General Counsel from 2006 to June 2008, and Chief Integrity Officer from 2005 to 2006. Prior to joining the Company, he practiced in the areas of corporate, intellectual property, and health care law with law firms in

Boston and Washington, D.C. He currently serves as Vice Chair of the Health Information and Technology Practice Group of the American Health Lawyers Association. Mr. Orenstein obtained a Bachelor of Arts from Columbia University and a J.D. from the Georgetown University Law Center.

 

Ed Park has served as our Executive Vice President and Chief Operating Officer since July 2010. He served as our Chief Technology Officer from March 2007 to June 2010 and as Chief Software Architect from 1998 to March 2007. Mr. Park is a member of the Advanced Interoperability Workgroup of the Certification Commission for Healthcare Information Technology and serves on the boards of Castlight Health, Inc. and Healthpoint Services Pvt Ltd. Prior to joining the Company, Mr. Park was a consultant for Viant, Inc. Mr. Park obtained a Bachelor of Arts magna cum laude from Harvard College in Computer Science.

 

Our Board of Directors has adopted a written policy that sets forth the policies and procedures to review and approve transactions, contracts, or other legal or business arrangements with directors, director nominees, executive officers, holders of more than five percent of our voting securities, and the immediate family members of any of these persons, each of which we refer to as a “related person.” Our Board of Directors determined that our audit committee should administer the policy, since the audit committee also acts as our qualified legal compliance committee and as such oversees our regulatory compliance programs and procedures. Any amendments, modifications or supplements to the policy are subject to final approval by our Board of Directors, upon recommendation of our audit committee.

 

Our policy requires that we create a list of related persons and all entities in which a related person is an employee, acts as a director or executive officer, or holds more than five percent of ownership interest, each such entity we refer to as a “related person affiliate.” The list is updated at least annually and is maintained by our Chief Financial Officer. The list is made available, at the direction of our Chief Financial Officer, to appropriate regulatory, marketing, and operations (including finance) employees and executives who are involved or familiar with the transactions, contracts, or other legal or business arrangements that the Company has entered into or proposes to enter into from time to time with third parties. These personnel then cross-check the parties involved in any such transactions against the related person transaction list. If it is determined that we have entered into or are proposing to enter into any transaction or arrangement (including any modification or addition to an existing contract or arrangement) with a related person or related person affiliate, our Chief Financial Officer is notified.

 

Once notified, our Chief Financial Officer, together with legal counsel, will review the appropriate NASDAQ rules, SEC rules, our corporate governance guidelines and any other applicable rules and determine whether the contemplated transaction or arrangement requires the review or approval of the Board of Directors or any committee thereof. For example, under applicable NASDAQ Marketplace Rules, transactions between us and such persons in excess of $120,000 must be reviewed by our audit committee or another independent body of our Board of Directors. In addition, our compensation committee charter and corporate governance guidelines require that compensation arrangements with our executive officers be approved by our compensation committee. No transaction or arrangement with a related person or related person affiliate may be entered into unless the Chief Financial Officer has either (i) specifically confirmed that no further review or approval as described above is necessary or (ii) specifically confirmed that all requisite reviews and approvals necessary to enter into that transaction or arrangement have been obtained.

 

Our policy is intended to indentify related person transactions prior to their consummation. However, if for any reason we enter into a transaction or arrangement without recognizing that such transaction or arrangement constituted a related party transaction, our Chief Financial Officer is notified. The procedure described above is then followed in order to determine whether (i) further review and ratification is necessary as described above or (ii) all requisite reviews and approvals necessary to enter into such transaction or arrangement have been obtained.

If our Chief Financial Officer determines that our Board of Directors or an independent committee thereof is required to review or approve (or ratify) a transaction as described above, that transaction will be presented to the Board of Directors or an appropriate committee, as the case may be, for review and approval. In the absence of any specific legal requirement that such transaction be reviewed or approved by the Board of Directors or a specific committee, it is expected that in most circumstances the transaction will be submitted to our audit committee.

 

In considering any related person transactions, our directors consider the facts and circumstances regarding such transaction, including, among other things, the amounts involved, the relationship of the related person with the Company and the terms that would be available in a similar transaction with an unaffiliated third party. The directors also consider their fiduciary duties, the Company’s obligations under applicable securities law, including disclosure obligations and director independence rules, and other applicable law in evaluating any related person transaction.

 

Based on a review of the transactions and arrangements between the Company and any related person or related person affiliate, the Company has determined that it was not a party to any transaction or arrangement in which any related person or related person affiliate has a direct or indirect material interest during the year ended December 31, 2010.

 

Section 16(a) of the Exchange Act requires the Company’s officers and directors and persons who beneficially own more than 10% of the outstanding Common Stock (collectively, “Reporting Persons”) to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on our review of such reports received or written representations from certain Reporting Persons during fiscal year ended December 31, 2010, the Company believes that all Reporting Persons complied with all Section 16(a) reporting requirements except Messrs. Hull, Mann, and Park failed to file timely Forms 4 with the SEC with respect to one transaction; and Mr. King-Shaw failed to file timely Forms 4 with the SEC with respect to two transactions.

 

The Board of Directors has determined that each of the directors, except for Mr. Bush as Chief Executive Officer and Mr. Robinson as a former executive officer, has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is “independent” within the meaning of the Company’s director independence standards and the director independence standards of NASDAQ and the SEC. Furthermore, the Board of Directors has determined that each member of each of the committees of the Board of Directors is independent within the meaning of the Company’s, NASDAQ’s, and the SEC’s applicable committee independence standards, including Rule 10a-3(b)(1) under the Exchange Act. In making that determination, the Board of Directors considered all relevant facts and circumstances, including (but not limited to) the director’s commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships. In addition, at least a majority of the members of the Board of Directors meet the independence standards of the NASDAQ Marketplace Rules.

 

At least annually, the Board of Directors evaluates all relationships between the Company and each director in light of relevant facts and circumstances for the purposes of determining whether a material relationship exists that might signal a potential conflict of interest or otherwise interfere with such director’s ability to satisfy his or her responsibilities as an independent director. Based on this evaluation, the Board of Directors makes an annual determination of whether each director is independent within the meaning of the Company’s, NASDAQ’s, and the SEC’s independence standards.

 

We have adopted a code of ethics, which we call our Code of Conduct, that applies to all of our employees, officers, and directors, including those officers responsible for financial reporting. The current version of the Code of Conduct is available in the corporate governance section of the Company’s website at http://investors.athenahealth.com/. A copy of the Code of Conduct may also be obtained, free of charge, from the Company upon a request directed to: athenahealth, Inc., 311 Arsenal Street, Watertown, MA 02472, Attention: General Counsel. The Company intends to disclose any amendment or waiver of a provision of the Code of Conduct that applies to its principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions, by posting such information on its website (available at http://www.athenahealth.com) or in our public filings with the SEC.

 

The Board of Directors has adopted corporate governance guidelines to assist and guide its members in the exercise of its responsibilities. These guidelines should be interpreted in accordance with any requirements imposed by applicable federal or state law or regulation, NASDAQ, and the Certificate of Incorporation and By-laws of the Company. The Company’s corporate governance guidelines are available in the corporate governance section of the Company’s website at http://investors.athenahealth.com/. Although these corporate governance guidelines have been approved by the Board of Directors, it is expected that these guidelines will evolve over time as customary practice and legal requirements change. In particular, guidelines that encompass legal, regulatory, or exchange requirements as they currently exist will be deemed to be modified as and to the extent that such legal, regulatory, or exchange requirements are modified. In addition, the guidelines may also be amended by the Board of Directors at any time as it deems appropriate.

 

In 2011, the Board of Directors revised the Company’s Corporate Governance Guidelines by adopting a majority voting policy. This policy requires that any director nominee in an uncontested election be elected by a majority of the votes cast in that election. If a director nominee in such an election does not receive a greater number of votes “for” his or her election than votes “withheld” from such election, that director must promptly submit his or her resignation to the Board of Directors. The nominating and corporate governance committee will then consider all relevant facts and circumstances and recommend to the Board of Directors the action to be taken in regard to such resignation. No later than 90 days following the final tabulation of the stockholders’ vote in that election, the Board of Directors must act on the submitted resignation and the recommendation of the nominating and corporate governance committee and disclose its decision regarding whether to accept the nominee’s resignation (or the reasons for rejecting the resignation, if applicable), as well as the decision-making process followed, in a Form 8-K furnished to the SEC.

 

The Board of Directors meets on a regularly scheduled basis during the year to review significant developments affecting us and to act on matters requiring their approval. It also holds special meetings when an important matter requires action between scheduled meetings. Members of senior management regularly attend meetings to report on and discuss their areas of responsibility. During fiscal 2010, the Board of Directors held eight meetings and acted by unanimous written consent once. The Board of Directors has three standing committees:

 

 

Each of the incumbent directors of our Board of Directors attended at least 75% of the aggregate of all meetings of our Board of Directors and all meetings of committees of our Board of Directors upon which they

served (during the periods that they served) during 2010. The Board of Directors held at least two executive sessions of the independent directors during 2010. Executive sessions do not include employee directors or directors who do not qualify as independent under NASDAQ and SEC rules. The lead director, Mr. King-Shaw, presides as chair of such executive sessions.

 

It is the Company’s policy that members of our Board of Directors are encouraged to attend annual meetings of the stockholders of the Company. Three directors attended last year’s annual meeting of stockholders.

 

Our By-laws provide that the Board of Directors may delegate responsibility to committees. The Board of Directors has three standing committees: an audit committee, a compensation committee, and a nominating and corporate governance committee. The Board of Directors has also adopted a written charter for each of the three standing committees. Each committee charter is available in the corporate governance section of the Company’s website at http://investors.athenahealth.com.

 

The table below shows the composition of the standing committees of the Board of Directors.

 

 

Audit Committee

 

Messrs. Hull, Kane, King-Shaw, and Winkenwerder currently serve on the audit committee. Mr. Kane is the chairman of our audit committee. The Board of Directors has also determined that each member of the audit committee is independent within the meaning of the Company’s and NASDAQ’s director independence standards and the SEC’s heightened director independence standards for audit committee members, including Rule 10A-3(b)(1) under the Exchange Act. The Company has determined that each of the members of the audit committee is financially sophisticated and is able to read and understand consolidated financial statements and that Mr. Kane is an “audit committee financial expert” as defined in the Exchange Act. Mr. Kane qualifies as an “audit committee financial expert” due to his experience auditing financial statements, directorships with other public companies, and experience as a chief financial officer as further described above in the section entitled “Directors, Executive Officers, and Key Employees.” The audit committee’s responsibilities include:

 

 

 

Compensation Committee

 

Messrs. Foster, Ittycheria, and Mann currently serve on the compensation committee. Mr. Mann is the chairman of our compensation committee. The Board of Directors has determined that each member of the compensation committee is independent within the meaning of the Company’s and NASDAQ’s director independence standards. In addition, each member of the compensation committee is an “outside director” as defined in Section 162(m) of the Internal Revenue Code and a “non-employee” director as defined under Section 16 of the Exchange Act. The compensation committee’s responsibilities include:

 

 

The compensation committee may delegate its authority to one or more subcommittees or to one member of the compensation committee. The compensation committee has the authority to engage independent advisors to assist it in carrying out its responsibilities and the sole authority to approve any such advisor’s fees and other retention terms. For a description of the compensation committee’s processes and procedures for the consideration and determination of executive compensation, please see the section entitled “Compensation Discussion and Analysis” below.

 

Nominating and Corporate Governance Committee

 

Messrs. Foster, Ittycheria, and Mann currently serve on the nominating and corporate governance committee. Mr. Foster is the chairman of our nominating and corporate governance committee. The Board of Directors has determined that each member of the nominating and corporate governance committee is independent within the meaning of the Company’s, NASDAQ’s, and the SEC’s director independence standards. The nominating and corporate governance committee’s responsibilities include:

 

 

 

The Board of Directors has adopted a policy governing director nominations which is available on the corporate governance section of our website at http://investors.athenahealth.com/. The process for identifying and evaluating nominees for the Board of Directors, including nominees recommended by security holders, is as follows: the nominating and corporate governance committee will: (1) solicit recommendations; (2) review and evaluate the qualifications of any proposed director candidate and conduct inquiries it deems appropriate; (3) evaluate all proposed director candidates in the same manner; (4) consider any proposed director candidate who is deemed qualified in light of the minimum qualifications; and (5) consider, in addition to the minimum qualifications, all facts and circumstances that it deems appropriate or advisable, including, among other things, the skills of the proposed director candidate, his or her depth and breadth of professional experience or other background characteristics, his or her independence, and the needs of our Board of Directors.

 

In 2010, we used a third-party search firm to assist in identifying, screening, retaining, and successfully on-boarding new members to our Board of Directors. Our nominating and corporate governance committee provided the third-party search firm with certain capabilities and competencies that the Board of Directors sought in potential nominees. The search firm met with directors and senior management to refine a comprehensive search strategy and help guide the recruitment of nominees. Based on this information, the search firm prepared a list of candidates and the nominating and corporate governance reviewed and evaluated the list, meeting with candidates, as needed, and subsequently making recommendations to the Board of Directors.

 

Minimum Qualifications

 

The nominating and corporate governance committee will consider the following, and any other qualifications, skills, and attributes it deems appropriate, when recommending candidates to be nominated for election as directors and for appointment to any committee of the Board of Directors. Each nominee shall:

 

 

In identifying and evaluating proposed director candidates, the nominating and corporate governance committee may consider, in addition to the minimum qualifications and other criteria for Board of Directors membership approved by the Board of Directors from time to time, whether, if elected, the nominee assists in achieving a mix of board members that represents a diversity of background and experience. Although we do not have a policy with regard to the consideration of diversity in identifying director nominees, a diversity of background and experience is one of the factors the nominating and corporate governance committee considers in recommending potential nominees to our Board of Directors.

Stockholder Recommendations

 

Stockholders may submit recommendations for director candidates to the nominating and corporate governance committee by sending the individual’s name and qualifications to the Secretary of the Company at: athenahealth, Inc., 311 Arsenal Street, Watertown, MA 02472. The Secretary of the Company will forward all such recommendations to the nominating and corporate governance committee. The nominating and corporate governance committee will evaluate any candidates recommended by stockholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of candidates proposed by directors or management.

 

The Board of Directors provides to every security holder the ability to communicate with the Board of Directors, as a whole, and with individual directors on the Board of Directors through an established process for security holder communications. For a security holder communication directed to the Board of Directors as a whole, security holders may send such communication to the attention of the Chairman of the Board of Directors via U.S. Mail or Expedited Delivery Service to: c/o athenahealth, Inc., 311 Arsenal Street, Watertown, MA 02472, Attn: Chairman of the Board of Directors.

 

For a security holder communication directed to an individual director in his or her capacity as a member of the Board of Directors, security holders may send such communication to the attention of the individual director via U.S. Mail or Expedited Delivery Service to: c/o athenahealth, Inc., 311 Arsenal Street, Watertown, MA 02472, Attn: Ruben J. King-Shaw, Jr.

 

The Company will forward by U.S. Mail any such security holder communication to each director, and the Chairman of the Board of Directors in his or her capacity as a representative of the Board of Directors, to whom such security holder communication is addressed to the address specified by each such director and the Chairman of the Board of Directors, unless there are safety or security concerns that mitigate against further transmission.

 

We combine the role of Chief Executive Officer and Chairman of the Board of Directors. The Board of Directors elects a lead director to preside as chair of the executive sessions of independent directors, among other responsibilities. In determining our board leadership structure, the Board of Directors considers many factors, including the specific needs of the business and what is in the best interests of the Company’s stockholders. Our Chief Executive Officer and Chairman of the Board of Directors, Jonathan Bush, is responsible for setting the strategic direction for the Company and the day-to-day leadership and performance of the Company. The responsibilities of our lead director, Ruben J. King-Shaw, Jr., are to:

 

 

 

The Board of Directors believes this leadership structure — a combined Chairman of the Board of Directors and Chief Executive Officer, a lead director, and committees led by independent directors — is the most appropriate for the Company at this time.

 

Our Board of Directors oversees the Company’s risk management process. Management is responsible for the day-to-day risk management. We conduct an annual assessment of the adequacy and effectiveness of the Company’s processes for controlling its activities and managing its risk, and categorize the relevant risks identifying contributing and mitigating factors.

 

While the Board of Directors oversees risk management, the Board of Directors delegates the majority of the administration of its risk oversight function to the audit committee. The annual risk assessment is presented to the audit committee, and it determines whether our processes require modification or enhancement. The chief audit officer, who reports directly to the audit committee, leads the internal audit department that helps evaluate and improve the effectiveness of risk management in conjunction with the Company’s legal department. The audit committee reviews with management significant business and financial risks and exposures and the Company’s guidelines, policies and measures for assessing and managing these risks and exposures. These risks may be reviewed at regularly scheduled meetings or at special meetings depending on the timing and magnitude of the risk. Management may consult with the audit committee or the chairman of the audit committee to discuss modifications or enhancements to the Company’s risk management processes. The Company complements the internal audit department with a strong compliance function and a compliance committee. The audit committee oversees the compliance committee, which assesses legal and regulatory risks that we face, and assists the Board of Directors in its oversight of our compliance program.

 

The Board of Directors monitors and manages operational and competitive risks through management updates at the regularly scheduled board meetings. Management provides periodic updates on business units and on the long-term goals and mission of the Company. The board agenda is tailored to address significant developments that may present risks, such as new government regulations.

 

The compensation committee reviews the Company’s compensation programs to determine whether they are appropriate, properly coordinated and achieve their intended purpose, including furthering the Company’s strategic plans and objectives. This review includes understanding the risk introduced by the compensation programs, as discussed in more detail below.

 

The nominating and corporate governance committee oversees the risks associated with the Company’s governance through assessing the adequacy of our code of conduct and corporate governance guidelines, and by its succession planning process.

 

Our compensation committee reviews and evaluates potential risks related to our compensation policies and practices for employees. The components of compensation are generally the same for all employees: base salary, short-term cash incentive awards, and for some employees long-term incentive awards. We benchmark our compensation at all levels of the Company based on external and internal market surveys. Base pay, cash incentive awards, and long-term incentive awards are targeted for above the market median for solid performers who achieve pre-defined performance objectives and at the 75th percentile or above for superior achievement in excess of these pre-defined objectives.

 

Base Pay is designed to provide steady income regardless of pre-defined performance metrics or our stock’s performance which allows employees to be compensated without heavy reliance on appreciation of our stock’s value or business results beyond their control.

Cash Incentive Awards are based on pre-defined performance objectives. For executives these awards are based on the corporate scorecard or financial metrics discussed below, and for non-executives these awards are based on individual goals associated with their division set by each employee and the employee’s manager. The overall bonus pool is funded based on corporate scorecard results, and the funding is increased or decreased based on the Company’s performance against the corporate scorecard. Setting individual and corporate performance metrics for cash incentive awards helps align employees’ goals with our business plan. Goals and performance metrics can be adjusted annually to address areas of particular concern and risks to the Company.

 

Long-Term Incentive Awards align our employees’ interests with stockholders, help attract new employees, and motivate and retain current employees for future performance. Typically long-term incentive awards vest over four years.

 

We structure our compensation to address Company-wide risk. This is accomplished in part by tying compensation to our scorecards and individual-specific goals. Scorecards and employee’s goals can be adjusted annually to address risks identified in the annual risk assessment. We also use a mix of different compensation elements to balance short-term versus long-term awards to align compensation with our business strategy and stockholders’ interests. In 2011, management presented potential risks and mitigating factors related to our compensation practices, which the compensation committee reviewed. We believe the combination of base pay, cash incentive awards tied to performance objectives, and long-term incentive awards with four year vesting periods is balanced and serves to motivate our employees to accomplish our business plan without creating risks that are reasonably likely to have a material adverse effect on the Company.

 

This section discusses the compensation of our named executive officers, or NEOs. Our NEOs include the (i) chief executive officer (“CEO”); (ii) chief financial officer; (iii) three most highly compensated executive officers other than the CEO and chief financial officer who were serving as executive officers as of December 31, 2010; and (iv) individual who would have been among the three most highly compensated executive officers but for the fact that the individual was not serving as an executive officer as of December 31, 2010. For 2010, our NEOs are:

 

Jonathan Bush		CEO, President, and Chairman of the Board of Directors
Timothy M. Adams		Senior Vice President and Chief Financial Officer
Robert L. Cosinuke		Senior Vice President and Chief Marketing Officer
Derek Hedges		Senior Vice President of Business Development and Product Strategy
Ed Park		Executive Vice President and Chief Operating Officer
David E. Robinson		Former Executive Vice President and Chief Operating Officer

 

The approach we have taken to executive compensation has been an adaptive process that continues to evolve with our growth. Recommendations regarding executive compensation, comprised of base salary, a short-term incentive plan, and a long-term incentive plan, have had increasing levels of rigor applied. In recent years, we have increased the use of benchmarking and market surveys to assist with executive compensation recommendations. Within the surveys, our executives’ jobs have been benchmarked against selected peer companies, targeting specific competitive objectives. We measured total cash compensation (base salary plus short-term incentive award) against the total cash compensation for that particular position in the survey. This empirical approach enabled the base salary and total cash compensation recommendations for this year to rely less on subjective determinations and more on clearly defined competitive ranges. For 2010, the compensation committee aimed to pay executives at or above the 65th percentile of the benchmarking data for total cash compensation. In order to provide additional incentive to attract, retain, and motivate superior performers, the

compensation committee aimed to pay executives, who received a high individual performance rating in the prior year, at or above the 75th percentile for total cash compensation. In the past we used stock options solely as our long-term incentive compensation. Beginning in 2010, we decided to offer executives the choice of receiving their long-term incentive awards in the form of stock options, RSUs, or a combination of both. We believe by giving executives the choice there will be a higher level of buy-in to the process of determining their compensation, which is designed as a recruitment and retention tool. As we have relied on stock options in the past, executives can now manage their equity portfolio through choosing to receive RSUs, continuing to receive stock options, or a mix. Long-term incentive awards are set based on a number of qualitative factors, including the executive’s level of responsibility, the competitive market for the executive’s position, the executive’s potential contributions to our growth, and the professional effectiveness and capabilities of the executive. We expect to benchmark executive compensation on an annual basis moving forward to ensure that we remain appropriately positioned in a changing marketplace.

 

We have designed our executive compensation program to:

 

 

Our business model is based on our ability to establish long-term relationships with clients and to maintain our strong mission, client focus, entrepreneurial spirit, and team orientation. We have sought to create an executive compensation package that balances short-term versus long-term components, cash versus equity elements, and fixed versus contingent payments in ways that we believe are most appropriate to motivate executives and reward them for achieving the following goals:

 

 

We believe that having a compensation program designed to align executives’ interests to achieve business results and to reinforce accountability is the cornerstone to successfully implementing and achieving our strategic plan. In determining the compensation of our executives, we are guided by the following key principles:

 

 

 

Our executive compensation structure not only aims to be competitive in our industry, but also to be fair relative to the compensation paid to other professionals within our organization, our short-term and long-term performance, and the value we deliver to our stockholders. We seek to maintain a performance-oriented culture and a compensation approach that rewards our executives when we achieve our goals and objectives, while putting at risk an appropriate portion of their compensation against the possibility that our goals and objectives may not be achieved.

 

We use a variety of compensation elements to achieve our compensation philosophy and objectives, including base salary, cash incentive awards, and long-term stock-based compensation. Our compensation committee determines the amount of each element to award to executives, although we continue to rely, in part, upon the advice and recommendations of our CEO, particularly with respect to those executives that report directly to him. The compensation committee uses market surveys and compensation consultant reports to assess the competitiveness of our compensation practices with comparable companies.

 

In general, our compensation committee seeks to attract, retain and motivate superior performers, but recognizes that, in the absence of superior performance in a particular year, compensation at the outer end of industry norms may not be necessary or appropriate. Our compensation committee seeks to construct a compensation structure that is fair relative to compensation paid at similarly situated companies, but skewed slightly higher than industry norms so as to attract highly qualified personnel in a competitive employment environment.

 

In the beginning of 2009, our compensation committee reviewed compensation data from an initial peer group that included six companies: Cybersource Corporation; NaviSite, Inc.; NetSuite, Inc.; Omniture, Inc.; Quality Systems, Inc.; and the Ultimate Software Group, Inc (the “Initial Peer Group”). Later in 2009, our compensation committee retained Pearl Meyers & Partners, LLC (“PM&P”), a compensation consultant, to review the Initial Peer Group and recommend modifications, understand our competitive position for board compensation, and provide additional analysis, competitive data, and advice as requested. Based on the recommendation of PM&P, the compensation committee expanded our peer group to include the following health care and equipment services, software and services, and internet application software companies (the “Updated Peer Group”).

 

 

PM&P conducted an assessment using the Updated Peer Group for our CEO’s compensation and director compensation. The other NEOs compensation levels were set outside of the PM&P engagement and before we had compensation data for their counterpart positions in the Updated Peer Group. We expect to use a peer group similar to the Updated Peer Group for benchmarking compensation for all of the named executive

officers in 2011. Other than as described above, we did not retain PM&P to perform any other services during the fiscal year ended December 31, 2010.

 

For competitive benchmarking purposes, the positions of our NEOs (except for our CEO) were compared to their counterpart positions in the Initial Peer Group and in the market surveys. We used the Updated Peer Group for benchmarking our CEO’s compensation. The compensation levels for comparable positions in the applicable peer group or in the survey data were examined for guidance in determining total cash compensation (i.e., base salary plus cash incentive awards for achievement of pre-defined performance objectives).

 

In fiscal 2010, the compensation committee aimed to pay the NEOs (i) at or above the market median for base salary and (ii) at or above the 65^th percentile of the benchmarking data for total cash compensation. In order to provide additional incentive to attract, retain, and motivate superior performers, the compensation committee aimed to pay the NEOs, who received a high individual performance rating in the prior year, at or above the 75th percentile for total cash compensation. For NEOs other than our CEO, the pre-defined performance objectives for cash incentive awards were based on the corporate scorecard metrics, and, in the case of our CEO, in the form of specified financial targets (each as described in more detail below).

 

Our executive compensation program currently consists of three components:

 

 

Our compensation philosophies with respect to each of these elements, including the basis for the compensation awarded to each of our NEOs, are discussed below. In addition, although each element of compensation described below is considered separately, the compensation committee takes into account the aggregate compensation package for each individual in its determination of each individual component of that package. The compensation committee’s philosophy is to put significant weight on those aspects of compensation tied to performance, such as annual cash incentives based on measurable performance objectives and long-term incentives in the form of stock options, RSUs, or a combination of both.

 

The compensation committee deemed it appropriate to increase the salaries of Messrs. Bush, Cosinuke, Hedges and Park to set salaries that met or exceeded the market median based on the benchmarking data. Mr. Adams joined the Company in 2010 and his salary was determined on the basis of his skills, qualifications, responsibilities, and experience. Although Mr. Robinson’s base salary was slightly below the market median, his salary remained unchanged as the compensation committee took into account his large initial hire stock option grant. The following table sets forth base salaries of the NEOs for 2009 and 2010 and the percentage increase in the salary for each NEO:

 

 

 

We believe that cash incentive awards should be tied to financial and operational performance. Our executive cash incentive plan has two parts, one for our CEO (“CEO Plan”) and another for the senior leadership team (“SLT Plan”). The compensation committee annually determines the goals that serve as the basis for incentive compensation under the CEO Plan. For the SLT Plan, the CEO develops the underlying annual goals, which are then submitted to the compensation committee for approval. For fiscal 2010, the CEO Plan goal was a specified financial target for the Company’s financial performance and the SLT Plan goals were set forth in the corporate scorecard, which includes metrics relating to the Company’s financial performance, estimated bookings, client satisfaction, service operations performance, and retention of the Company’s employees.

 

CEO Plan

 

For 2010, our CEO’s cash incentive award was based on the net income of the Company for the fiscal year ending December 31, 2010, excluding taxes, stock-based compensation expense, and the loss on the interest rate derivative contract (“Net Income Before Taxes”). This goal was based on the compensation committee’s interest in linking Mr. Bush’s annual cash incentive compensation directly to our profitability. The compensation committee set lower and upper ranges of Net Income Before Taxes with incremental cash incentives and an inter range percent for achievement of a Net Income Before Taxes in each range, as follows.

 

 

Based on a Net Income Before Taxes achievement of $37.8 million in the fiscal year ended December 31, 2010, the compensation committee determined that Mr. Bush receive a cash incentive award of $523,000. Net Income Before Taxes is based on the net income reported in the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 18, 2011. Net Income Before Taxes is calculated as net income, excluding the income tax provision, stock-based compensation expense, and loss on the interest rate derivative contract. This resulted in Mr. Bush receiving total cash compensation at the 80th percentile of the Updated Peer Group benchmarking data.

 

SLT Plan

 

For 2010, cash incentive awards for Messrs. Adams, Cosinuke, Hedges, Park and Robinson were tied to achievement of the Company’s goals and objectives as set forth in the corporate scorecard. Although Mr. Robinson resigned from his position as Executive Vice President and Chief Operating Officer as of July 1, 2010, he continued to serve as an employee through the end of 2010 and was eligible for a cash incentive award based on the Company’s performance against corporate scorecard for the full year. The compensation committee set a bonus target amount for each of these executives that was equal to a specified percentage of their base salary, as set forth below. These percentages were based on such person’s qualitative performance appraisal rating as determined by the CEO based on performance during the prior fiscal year. The target percentage was adjustable up or down based on our performance as measured against the corporate scorecard.

The bonus percentage earned was adjusted (upward or downward, as applicable) by 2% for every 1% of variance from the corporate scorecard target. The annual performance bonus for the first three quarters was based on a year-to-date corporate scorecard value and the annual performance bonus for the fourth quarter was based on the annual corporate scorecard values, when those values are calculated.

 

Our 2010 corporate scorecard was comprised of ten specific stability, client performance, client satisfaction, financial, and growth metrics as set forth below, and each metric was assigned a different percentage value of the overall scorecard value. These categories of performance metrics were designed to capture all of the important operational and financial aspects of the organization and can be broken down as follows:

 

 

For the 2010 corporate scorecard, as of the end of the fourth quarter, the weighted stability metric was 124.8% of target, the weighted client performance metrics were 95.2% of target, the client satisfaction metric was 101.8% of target, the financial metrics were 97.3% of target, and the growth metric was 92.4% of target. Overall, the 2010 corporate scorecard was 99.0% of target.

 

Our 2010 corporate scorecard contained two financial metrics: Adjusted Total Revenue and Adjusted Operating Income. Our Adjusted Total Revenue and Adjusted Operating Income targets and results for the fiscal year ended December 31, 2010, are summarized below.

 

 

 

 

The above-referenced performance targets should not be interpreted as a prediction of how we will perform in future periods. As described above, the purpose of these targets was to establish a method for determining the payment of cash based incentive compensation. You are cautioned not to rely on these performance goals as a prediction of our future performance.

Since the components of the corporate scorecard, other than the financial metrics that are discussed above, contain highly sensitive data such as service operation results and targeted bookings, we do not disclose all of our specific performance measures and targets, because we believe that such disclosure would result in serious competitive harm. We set the targets for the bookings metric at a high level because we are a growth-oriented company and rely on bookings to help drive our growth. Additionally, the value associated at the time of booking was an estimate of the revenue that we expected to receive from new clients which, in turn, was based on an estimate of what the clients’ total collections would be for new clients using our services. The number was an estimate based on an estimate, which means it was inherently volatile and cannot be used to predict actual revenue. We believe the targets within the corporate scorecard were designed to be challenging but attainable if we had what we considered to be a successful year. We have used similarly devised targets in the corporate scorecard for the past three years and the results against those applicable targets were 106.0% for the year 2008, 105.6% for the year 2009, and 99.0% for the year 2010. The elements included in the corporate scorecard have changed over time as we gain experience using them, and are likely to be adjusted in the future as well.

 

As described above, in 2010 the bonus percentage earned was adjusted by 2% for every 1% of variance from the corporate scorecard target. Since the corporate scorecard was 1% below target, the target bonus percentage for the NEOs (except for our CEO) was decreased by 2%. The following table sets forth information concerning the cash incentive awards earned by the following NEOs:

 

 

Our long-term compensation program has historically consisted solely of stock options. In February 2010, the compensation committee reviewed the practice of using stock options as the sole form of long-term incentive compensation, in light of our overall business strategy, existing market-competitive best practices, and other factors, and decided to give executives the option of choosing stock options, RSUs, or a combination of both. This design gives executives a stake in the process of determining their long-term incentive compensation, and provides them with incentive to execute their responsibilities in such a way as to generate long-term benefit to us and our stockholders. Giving executives the choice of different forms of equity awards is intended as a recruitment and retention tool to attract, retain, and motivate highly qualified executives. Our compensation committee wanted executives to have the option of evaluating their overall risk tolerance based on their own financial portfolio. Through possession of stock options and RSUs, our executives participate in the long-term results of their efforts, whether by appreciation of our company’s value or the impact of business setbacks, either company-specific or industry-based. Additionally, stock options and RSUs provide a means of promoting the retention of our executive officers, in that they are in almost all cases subject to vesting over an extended period of time. Stock options and RSUs provide executives with a significant and long-term interest in our success. By only rewarding the creation of stockholder value, we believe that stock options and RSUs provide our NEOs with an effective risk and reward profile. Stock options and RSUs are granted periodically and are subject to vesting based on the executive’s continued employment.

 

For 2010 long-term stock based compensation, we reviewed types of long term incentives and proposed appropriate changes that aligned with our business goals and supported retention and attraction of key talent. Given our stock’s appreciation in value since our initial public offering, competitive practices, and the current number of unvested options remaining for each of our NEOs, our compensation committee wanted to provide our NEOs with the choice to receive stock options, RSUs, or a mix. Based on the financial characteristics of

RSUs, which do not require that the recipient purchase the shares as would a stock option and therefore return some value to the recipient if our stock price falls below the price at which such shares were awarded, the compensation committee initially decided that if a NEO elects to receive RSUs, the number of shares covered by the RSU portion of the long-term incentive award is reduced by 60% of the number of shares that would be covered by that portion if it consisted of stock options. In July 2010, the compensation committee established that each share represented by a RSU shall be deemed to equal the issuance of two stock option shares. Typically stock options and RSUs vest evenly over four years.

 

The number of long-term incentive awards granted to our NEOs is determined by the compensation committee in its discretion. Grants have not been formula-based, but instead have historically been granted taking into account a mixture of the following qualitative factors: the executive’s level of responsibility; the competitive market for the executive’s position; the executive’s potential contribution to our growth; and the subjective assessment of the professional effectiveness and capabilities of the executive as determined by our CEO for our NEOs other than our CEO and by our compensation committee for our CEO. Although the specific number of long-term incentive awards is not attributable to any specific factor, we have placed the most emphasis in determining the number of awards on trends in the competitive market for the executive’s position and the executive’s potential contribution to our success.

 

Additionally, larger awards have typically been made to the NEOs that have areas of responsibility and function that are more likely to build long-term stockholder value as determined by how directly linked their areas of responsibility and function are to the growth of the Company. Relative to other NEOs, larger awards are typically made to Mr. Bush in light of his responsibility and function.

 

In 2010, the compensation committee authorized grants of stock options and RSUs to our NEOs, as follows:

 

 

On January 26, 2010, our compensation approved grants of 90,000 stock options and 40,000 RSUs to Mr. Adams. The compensation committee approved Mr. Adams’ award in connection with his hiring, taking into account the recommendation of our CEO which was based on his subjective assessment that such an award was necessary to remain competitive with other prospective employers. The awards were granted as of February 1, 2010. The stock option has an exercise price per share equal to the closing market price per share of Common Stock on the NASDAQ Global Select Market on February 1, 2010, of $40.90.

 

On March 30, 2010, our compensation committee approved grants of 154,000 stock options to Mr. Bush; 6,250 stock options and 7,500 RSUs to Mr. Cosinuke; 8,700 stock options and 8,120 RSUs to Mr. Hedges; 10,000 RSUs to Mr. Park; and 25,000 stock options to Mr. Robinson. The compensation committee approved awards for Messrs. Cosinuke, Hedges, Park, and Robinson as part of the 2009 annual performance review, taking into account the recommendations of our CEO, which were based upon his subjective assessment of the professional effectiveness and capabilities of these executives, the nature and scope of their areas of responsibility, and the number of unvested equity awards remaining to each individual. Mr. Hedges received 1,200 stock options and 1,120 RSUs as part of the 2009 annual performance review and 7,500 stock options and 7,000 RSUs for his promotion to Senior Vice President of Business Development and Product Strategy. The compensation committee approved Mr. Bush’s award based upon the compensation committee’s subjective assessment of his performance in 2009. All of the awards were granted as of April 1, 2010. The stock options have an exercise price per share equal to the closing market price per share of Common Stock on the NASDAQ Global Select Market on April 1, 2010, of $36.78.

On July 29, 2010, our compensation committee approved grants of 10,000 stock options and 20,000 RSUs to Mr. Park. The compensation committee approved Mr. Park’s awards in connection with his promotion to Executive Vice President and Chief Operating Officer, taking into account the recommendation of our CEO which was based on his subjective assessment of the broadened scope of Mr. Park’s areas of responsibility. The awards were granted as of August 2, 2010. The stock option has an exercise price per share equal to the closing market price per share of Common Stock on the NASDAQ Global Select Market on August 2, 2010, of $26.91.

 

On March 23, 2011, our compensation committee approved the following long-term incentive awards.

 

 

The compensation committee approved awards for Messrs. Adams, Cosinuke, Hedges, and Park as part of the 2010 annual performance review, taking into account the recommendations of our CEO, which were based upon his subjective assessment of the professional effectiveness and capabilities of these executives, the nature and scope of their areas of responsibility, and the number of unvested equity awards remaining to each individual. The compensation committee approved Mr. Bush’s award based upon the compensation committee’s subjective assessment of his performance in 2010. All of the awards were granted as of April 1, 2011. The stock options have an exercise price per share equal to the closing market price per share of Common Stock on the NASDAQ Global Select Market on April 1, 2011, of $44.90.

 

We have granted stock options as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), subject to the volume limitations contained in the Internal Revenue Code, and we may, in the future, grant non-qualified stock options. Generally, for stock options that do not qualify as incentive stock options, we are entitled to a tax deduction in the year in which the stock options are exercised equal to the spread between the exercise price and the fair value of the stock for which the stock option was exercised. The holders of the non-qualified stock options are generally taxed on this same amount in the year of exercise. For stock options that qualify as incentive stock options, we do not receive a tax deduction, and the holder of the stock option may receive more favorable tax treatment than he or she would receive for a non-qualified stock option. We may choose to grant incentive stock options in order to provide these potential tax benefits to our executives and because of the limited expected benefits to our company of the potential tax deductions as a result of our historical net losses.

 

Our equity award grant policy formalizes our process for granting equity-based awards to officers and employees. Under our equity award grant policy, all grants must be approved by our compensation committee or CEO. All stock options will be awarded at fair value and calculated based on our closing market price on the grant date. Under our equity award grant policy, equity awards will only be granted on the first business day of any month, as follows:

 

 

Our compensation committee has delegated authority to our CEO to make equity grants of (i) stock options exercisable for up to 50,000 shares, (ii) RSUs exercisable for up to 25,000 shares, or (iii) a combination of stock options and RSUs exercisable for up to 50,000 shares (for purposes of calculating the

number of RSUs permitted in connection with any such combination, each RSU is deemed to be the equivalent of two stock options), to employees but not to non-employees or Section 16 officers. All grants of equity to Section 16 officers or non-employees or grants of 50,000 stock options or 25,000 RSUs or a combination of stock options and RSUs exercisable for up to 50,000 shares or more require approval of the compensation committee.

 

We provide the following benefits to our executives on the same basis as the benefits provided to all employees:

 

 

These benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.

 

We provide a matching contribution to each employee, including our executive officers, who participate in our 401(k) plan. This matching policy provides a match of one-third of contributions up to 6% of eligible compensation.

 

Jonathan Bush.  We are party to an employment agreement with Jonathan Bush for the position of CEO. The agreement provides for at-will employment and a base annual salary subject to annual review. Mr. Bush currently receives a base salary of $475,000. Mr. Bush is eligible to participate in our employee benefit plans, to the extent that he is eligible for those plans, on the same terms as other similarly situated executive officers of the Company. He is also eligible for a bonus as described above.

 

Timothy M. Adams.  We are party to an employment agreement with Timothy M. Adams for the position of Chief Financial Officer. The agreement provides for at-will employment, a $50,000 signing bonus, and for a base annual salary subject to annual review. Mr. Adams currently receives a base salary of $321,300. Mr. Adams is eligible to participate in our employee benefit plans, to the extent that he is eligible for those plans, on the same terms as other similarly situated executive officers of the Company and is eligible for a bonus as described above.

 

Robert L. Cosinuke.  We are party to an employment agreement with Robert L. Cosinuke for the position of Chief Marketing Officer. The agreement provides for at-will employment and for a base annual salary subject to annual review. Mr. Cosinuke currently receives a base salary of $300,000. Mr. Cosinuke is eligible to participate in our employee benefit plans, to the extent that he is eligible for those plans, on the same terms as other similarly situated executive officers of the Company and is eligible for a bonus as described above.

 

Derek Hedges.  We are party to an employment agreement with Derek Hedges for the position of Senior Vice President of Business Development and Product Strategy. The agreement provides for at-will employment and for a base annual salary subject to annual review. Mr. Hedges currently receives a base salary of $229,500. Mr. Hedges is eligible to participate in our employee benefit plans, to the extent that he is eligible for those plans, on the same terms as other similarly situated executive officers of the Company and is eligible for a bonus as described above.

 

Ed Park.  We are party to an employment agreement with Ed Park for the position of Chief Operating Officer. The agreement provides for at-will employment and for a base annual salary subject to annual review. Mr. Park currently receives a base salary of $300,000. Mr. Park is eligible to participate in our employee

benefit plans, to the extent that he is eligible for those plans, on the same terms as other similarly situated executive officers of the Company and is eligible for a bonus as described above.

 

David E. Robinson.  We were party to an employment agreement with David E. Robinson for the position of Chief Operating Officer. Mr. Robinson resigned from his position as Chief Operating Officer effective as of July 1, 2010, and he continued to serve as an employee until December 31, 2010. Mr. Robinson’s employment agreement provided for an annual housing allowance not to exceed $84,000, payable monthly. Mr. Robinson was elected to serve on the Board of Directors effective as of January 1, 2011.

 

During 2010, Messrs. Foster, Ittycheria and Mann and Ms. Lamont served as members of our compensation committee. No member of the compensation committee was an employee or officer of the Company during 2010, a former officer of the Company, or had any other relationship with us requiring disclosure herein.

 

During the last fiscal year, none of our executive officers served as: (1) a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our compensation committee; (2) a director of another entity, one of whose executive officers served on our compensation committee; or (3) a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our Board of Directors.

 

The information contained in this report shall not be deemed to be (1) “soliciting material,” (2) “filed” with the SEC, (3) subject to Regulations 14A or 14C of the Exchange Act, or (4) subject to the liabilities of Section 18 of the Exchange Act. This report shall not be deemed incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”), except to the extent that the Company specifically incorporates it by reference into such filing.

 

We, the compensation committee of the Board of Directors of athenahealth, Inc., have reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on such review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement for the fiscal year ending December 31, 2010.

 

THE COMPENSATION COMMITTEE

 

James L. Mann (Chair)
Richard N. Foster
Dev Ittycheria

 

The following table sets forth information concerning the compensation of the NEOs for the fiscal years ended December 31, 2010, 2009, and 2008.

 

Summary Compensation Table(1)

 

 

 

 

 

 

 

The following table sets forth information concerning plan-based awards granted to the NEOs during the fiscal year ended December 31, 2010.

 

Grants of Plan-Based Awards — 2010(1)

 

 

 

 

The following table sets forth information concerning unexercised options; stock that has not vested; and equity incentive plan awards for each NEO outstanding as of December 31, 2010.

 

Outstanding Equity Awards at Fiscal Year-End — 2010(1)