Kansas City Southern (NYSE:KSU) Files An 8-K Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

Item5.02 Departure of Directors or Certain Officers; Election of
Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers.

On February17, 2017, the Compensation Committee (the Committee)
of the Board of Directors of Kansas City Southern (the Company)
approved a one-time cash payment to Dave Starling, the Companys
former President and Chief Executive Officer and current
director. In 2015, the Board developed a plan to ensure a smooth
CEO transition from Mr.Dave Starling to Mr.Patrick Ottensmeyer. A
key component of that plan was the creation of a compensation
package designed to retain and focus Mr.Starlings efforts on the
transitiona set of tasks important to the Company while often
challenging to a departing chief executive officer. The
transition package was divided into three tranches of
10,000shares of restricted stock. The last 10,000share tranche
was scheduled to vest in February 2017. The Company didnt meet
the financial performance target established for this last
tranche, and therefore this last 10,000shares were forfeited. The
Committee, however, is confident that Mr. Starling fulfilled his
obligations and helped the Company avoid any disruption in the
change in leadership, and therefore awarded a one-time cash bonus
payment to Mr.Starling in the amount of $850,000 in February
2017, which is the final payment under this compensation package.
Mr.Starlings term on the Board will end at the 2017 Annual
Meeting of Stockholders, and to the Companys Bylaws, he is not
eligible to stand for re-election.

Short and Long Term Incentive Programs

On February17, 2017, the Committee approved the Companys 2017
Long-Term Incentive Program (the 2017 LTI Program) and the 2017
Annual Incentive Plan (the 2017 AIP), in which the Companys
officers participate.

2017 LTI Program

The 2017 LTI Program consists of performance share awards (50%),
non-qualified stock options (25%) and restricted stock (25%). All
awards under the 2017 LTI Program were granted on February17,
2017, and are governed by the Companys 2008 Stock Option and
Performance Award Plan.

The performance period for the performance shares is the three
year period 2017 through 2019. Participants may earn between 0%
and 200% of the performance shares awarded under the 2017 LTI
Program by meeting or exceeding the Return on Invested Capital
(ROIC) and Operating Ratio (OR) performance criteria set for the
2017 LTI Program. The Committee set three-year performance goals
for the 2017 LTI Program on February17, 2017.

The payout percentage based on the ROIC and OR performance
metrics is then subject to adjustment up or down based on a
comparison of the average of the Companys annual revenue growth
during the performance period against the average of the annual
growth rate of the other North American Class1 railroads,
provided, however, that the final payout percentage may not
exceed 200% of the performance shares. For purposes of
determining revenue growth for the Company and for all other
North American ClassI railroads, revenue includes (a)total
revenue for the most recently reported twelve-month period,
including fuel surcharge revenue, (b)adjustments for foreign
exchange impacts as disclosed in publicly available information,
and (c)adjustments for business combinations, acquisitions or
dispositions as disclosed in publicly available information.

Performance shares earned under the 2017 LTI Program become
vested and will be paid out on the later of (i)February28, 2020,
or (ii)the date the Compensation Committee certifies the
performance results.

The performance metrics for the performance shares awarded under
the 2017 LTI Program are return on invested capital (ROIC) and
consolidated operating ratio (OR), weighted 75% and 25%,
respectively. ROIC is defined as the quotient of the Companys net
operating profit after taxes (NOPAT) for the applicable
performance period divided by the Companys invested capital where
(i)NOPAT is the sum of the Companys net income, interest expense
and interest on the present value of the Companys operating
leases (all preceding items tax effected), with further
adjustments to eliminate the after-tax effects of (a)adjustments
included in Adjusted Diluted Earnings Per Share as reported by
the Company, (b)fluctuations in the value of the Mexican peso
against the U.S. dollar from the average exchange rates assumed
in the Companys 2017 long range plan, (c)impacts to fuel
surcharge revenue, fuel expense and Mexican fuel excise tax
credit for changes in fuel-related indices from the indices
assumed in the Companys 2017 long range plan, (d)changes in
statutory income tax rates and laws enacted after January1, 2017
on the Companys income tax expense (e)business combinations or
acquisitions, (f)changes in accounting principles, and (g)as
approved by the Compensation Committee, other transactions or
events that were not contemplated at the time performance targets
were established by the Compensation Committee; and (ii)invested
capital is the sum of the Companys average equity balance,
average debt balance and the present value of the Companys
operating leases, with further adjustments to eliminate the
average invested capital impacts of (a)changes in accounting
principles, (b)business combinations or acquisitions, and (c)as
approved by the Compensation Committee, other transactions or
events that were not contemplated at the time performance targets
were established by the Compensation Committee.

Under the 2017 LTI Program, OR is defined as the Companys
Adjusted Operating Ratio as reported in the Companys earnings
releases, with any necessary adjustments to eliminate the effects
of (a)fluctuations in the value of the Mexican peso against the
U.S. dollar from the average exchange rates assumed in the
Companys 2017 long range plan, (b)impacts to fuel surcharge
revenue, fuel expense and Mexican fuel excise tax credit for
changes in fuel-related indices from the indices assumed in the
Companys 2017 long range plan, (c)business combinations or
acquisitions, (d)changes in accounting principles, and (e)as
approved by the Compensation Committee, other transactions or
events that were not contemplated at the time performance targets
were established by the Compensation Committee.

The shares of restricted stock awarded under the 2017 LTI Program
vest on February28, 2020.

The non-qualified stock options become vested and exercisable in
equal installments on February17, 2018, February17, 2019 and
February17, 2020, respectively. The stock options must be
exercised in all events no later than ten years from the date of
grant. The exercise price of the stock options is equal to the
fair market value of the Companys common stock on the date of
grant.

The above description is qualified in its entirety by the form of
2017 LTI Program award agreement attached to this Current Report
on Form8-K as
Exhibit10.1.

2017
AIP

The Committee
amended and restated the Kansas City Southern Annual Incentive
Plan, a copy of which is attached to this Current Report on Form
8-K as
Exhibit10.2

The 2017 AIP is payable in
cash following certification by the Committee that the 2017
annual performance target is met. The performance target for the
2017 AIP is based on achieving an operating ratio and operating
cash flow within a specified range. The definition of operating
ratio for purposes of the 2017 AIP is identical to the definition
of operating ratio in the 2017 LTI Program. Operating cash flow
is defined as the Companys Adjusted Operating Income before
depreciation and amortization and after accrued capital
expenditures (all preceding items as reported in the Companys
earnings releases and related materials), with any necessary
adjustments to eliminate the effects of (a)fluctuations in the
value of the Mexican peso against the U.S. dollar from the
average exchange rates assumed in the Companys 2017 long range
plan, (b)impacts to fuel surcharge revenue, fuel expense and
Mexican fuel excise tax credit for changes in fuel-related
indices from the indices assumed in the Companys 2017 long range
plan, (c)business combinations or acquisitions, (d)changes in
accounting principles, and (e)as approved by the Compensation
Committee, other transactions or events that were not
contemplated at the time performance targets were established by
the Compensation Committee.The payout is then subject to
adjustment based on the Companys revenue growth compared to the
other North American ClassI railroads. The calculation of revenue
for the 2017 AIP and 2017 LTI Program are the same.