UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

Energy Recovery, Inc.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Energy Recovery, Inc.

Notice of 2016 Annual Meeting of Stockholders

To Be Held On June 23, 2016

Dear Stockholders,

The 2016 Annual Meeting of Stockholders of Energy Recovery, Inc., a Delaware corporation (the “Company” or “Energy Recovery”), will be held on Thursday, June 23, 2016, at 10:00 a.m. Pacific Daylight Time. The 2016 Annual Meeting will take place at the Company’s headquarters, located at 1717 Doolittle Drive, San Leandro, CA 94577.

The purpose of the meeting is:

These items of business are more fully described in the attached Proxy Statement, which accompanies this Notice.

Only stockholders who owned stock at the close of business on April 25, 2016 may attend and vote at the meeting or any postponement or adjournment of the meeting.

Whether or not you expect to attend the 2016 Annual Meeting of stockholders in person, we urge you to vote as promptly as possible to ensure your representation and the presence of a quorum at the 2016 Annual Meeting.

At the meeting, we will also report on our 2015 business results and other matters of potential interest to our stockholders.

By Order of the Board of Directors,

/s/ Joel Gay

Joel Gay

President, Chief Executive Officer, and Director

San Leandro, California

April 26, 2016

Stockholders of record can vote their shares by using the Internet or the telephone. Instructions for using these convenient services are set forth on the notice of availability over the Internet of the proxy materials.

If you vote your proxy and then decide to attend the annual meeting to vote your shares in person, you may still do so. Your proxy is revocable in accordance with the procedures described in the Proxy Statement.

ENERGY RECOVERY, INC.

PROXY STATEMENT

FOR THE 2016 ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 23, 2016

This proxy statement (“Proxy Statement”) is furnished in connection with the solicitation of proxies by the Board of Directors of Energy Recovery, Inc. for use at the 2016 Annual Meeting of Stockholders to be held on Thursday, June 23, 2016 at 10:00 a.m. Pacific Daylight Time. The 2016 Annual Meeting will take place at the Company’s headquarters, located at 1717 Doolittle Drive, San Leandro, CA 94577. The telephone number at that location is (510) 746-7370.

The Company is furnishing proxy materials to many of its stockholders on the Internet rather than mailing printed copies of those materials to each stockholder. If you received a notice of availability over the Internet of the proxy materials (“Notice”) by mail, you will not receive a printed copy of the proxy materials unless you request one. Instead, the Notice will instruct you as to how you may access and review the proxy materials on the Internet. If you received a Notice by mail and would like to receive a printed copy of the proxy materials, please follow the instructions included in the Notice. The Notice is being sent to stockholders of record as of April 25, 2016 on or about May 11, 2016. Proxy materials, which include the Notice of the 2016 Annual Meeting of Stockholders, this Proxy Statement, and the Annual Report to Stockholders for the year ended December 31, 2015, which includes financial statements and other information with respect to the Company (the “Annual Report”), are first being made available to stockholders of record as of April 25, 2016, on or about May 11, 2016. Additional copies of the Annual Report may be obtained by writing to the Company at the address noted above.

INFORMATION ABOUT THE MEETING

All holders of shares of common stock of record at the close of business on April 25, 2016, (the “Record Date”) are entitled to notice of and to vote at the 2016 Annual Meeting and all adjournments or postponements thereof. At the meeting, our stockholders will vote on:

If you are a record holder of our common shares as of the Record Date, you can vote as follows:

To ensure that your vote is counted, please submit your vote by June 22, 2016.

If your shares are held for you in an account with a broker or other nominee, you will receive voting instructions from your nominee rather than a proxy card. To vote, please follow the voting instructions sent by your broker or other nominee. If you return your voting instructions timely, your broker or other nominee will then include your vote in the appropriate proxy card held by the record holder. If your shares are held in the name of a broker or other nominee, you cannot vote in person at the 2016 Annual Meeting unless you first obtain a legal proxy from your nominee and present it at the 2016 Annual Meeting.

On each matter to be voted upon, you have one vote for each share of common stock you own as of the Record Date.

If you are the record holder of your shares, you can withdraw or revoke your proxy at any time before the final vote at our 2016 Annual Meeting by:

If you return a signed and dated proxy card without marking any voting selections, your shares will be voted “FOR” our director nominees and “FOR” the other proposals made in this Proxy Statement. If any other matter is properly presented at the meeting, the Company representative authorized to vote on your behalf as your proxy will vote your shares using his or her best judgment.

The Company will bear the costs of soliciting proxies, including the costs for the preparation, assembly, printing, and mailing of the Proxy Statement and related proxy materials. In addition, the Company will reimburse brokerage firms and other nominees representing beneficial owners of shares for their expenses in forwarding solicitation materials to beneficial owners of those shares. We have retained Alliance Advisors as our proxy solicitors, and proxies may be solicited by a representative of that firm. For its services, we will pay Alliance Advisors a fee of $5,000, plus reasonable expenses. Proxies may also be solicited by certain of the Company’s directors, officers, and regular employees, without additional compensation, either personally, by telephone, facsimile, or mail.

Only stockholders of record at the close of business on April 25, 2016, the Record Date, will be entitled to notice of, and to vote at, our 2016 Annual Meeting. On the Record Date, the Company had 52,222,871 shares of common stock outstanding.

We do not know of any business to be considered at the meeting other than the proposals described in this Proxy Statement; however, the proxy holders (who are the management representatives named on the proxy card) may vote using their discretion with respect to any other matters properly presented for a vote at the meeting.

A “quorum” of stockholders must be present for us to hold a valid meeting of stockholders. Stockholders representing a majority (more than 50%) of the voting power of our outstanding common stock as of the Record Date, present in person or represented by proxy, constitute a quorum for the transaction of business at the 2016 Annual Meeting.

Your shares will be counted towards the quorum only if you submit a valid proxy or if you vote in person at the meeting. Stockholders who submit signed and dated proxies without specifying their votes and broker “non-votes” described below will be counted towards the quorum requirement. If there is no quorum, the chairperson of the meeting or a majority of the votes present at the meeting may adjourn the meeting to another date.

If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered a “record holder” of those shares. If you are a record holder, you will receive a Notice on how you may access and review the proxy materials on the Internet.

If your shares are held in a stock brokerage account, by a bank, or by another nominee, those shares are registered with American Stock Transfer & Trust Company in the “street name” of the brokerage account, bank, or other nominee, and you are considered the “beneficial owner” of those shares. If you are a beneficial owner, your broker or other nominee will send you a form of voting instructions along with instructions on how to access proxy materials.

As a beneficial owner, you have the right to direct your broker, bank, or other nominee on how to vote your shares by using the voting instruction form included in the mailing or by following the instructions on the voting instruction card for voting via the Internet or telephone.

If there are multiple beneficial owners in the same household, your broker or other nominee may send only one set of voting instructions or copy of the proxy materials to your household. If you are receiving multiple copies of these materials and would like to receive a single copy in the future, please contact your broker, bank, or other nominee to request a single copy in the future.

All shares of common stock represented by valid proxies will be voted in accordance with their instructions. In the absence of instructions, proxies will be voted “FOR” Proposals 1, 2, 3, and 4.

Brokers, banks, and other nominees may submit a proxy card for shares of common stock that they hold for a beneficial owner, but may decline to vote on certain items because they have not received instructions from the beneficial owner. These are called “Broker Non-Votes” and are not included in the tabulation of the voting results for the election of directors or for purposes of determining the number of votes cast with respect to a particular proposal. Consequently, Broker Non-Votes do not have an effect on the vote.

Brokers have the discretion to vote such shares for which they have not received voting instructions from the beneficial owners on routine matters but not on non-routine matters. The only routine matter up for vote this year is the ratification of the independent registered public accounting firm (Proposal No. 2).

A broker is prohibited from voting on a non-routine matter unless the broker receives specific voting instructions from the beneficial owner of the shares. The election of directors (Proposal No. 1), the approval of the 2016 Incentive Plan (Proposal No. 3), and the advisory vote on executive compensation for 2015 (Proposal No. 4) are non-routine matters, and your broker cannot vote your shares on these proposals unless you have timely returned applicable voting instructions to your broker.

Abstentions have no effect on the outcome of voting for Proposal No. 1, election of directors. Abstentions are treated as shares present or represented and voting regarding Proposals No. 2, No. 3, and No. 4, so abstentions have the same effect as negative votes on those proposals.

The votes of stockholders attending the 2016 Annual Meeting and voting in person will be counted or tabulated by an independent inspector of election. For our meeting, a representative of Broadridge Investor Communications Solutions, Inc. will tabulate votes cast by proxy and in person.

A Notice will be mailed or emailed with instructions on how to access proxy materials via the Internet. This proxy statement, the 2015 Annual Report, and related proxy materials for the 2016 Annual Meeting of Stockholders to be Held on June 23, 2016 will also be available electronically at http://ir.energyrecovery.com.

If you have previously chosen to receive the proxy materials via the Internet, you will be receiving an e-mail on or about May 11, 2016 with information on how to access stockholder information and instructions for voting over the Internet. Stockholders of record may vote via the Internet until 11:59 p.m. Eastern Daylight Time on June 22, 2016.

If your shares are registered in the name of a brokerage firm and you have not elected to receive proxy materials over the Internet, you may still be eligible to vote shares electronically over the Internet. Many brokerage firms participate in programs that provide eligible stockholders who receive a paper copy of the Proxy Statement and Annual Report the opportunity to vote via the Internet. If your brokerage firm participates in such a program, a form from the broker will provide voting instructions.

Stockholders can elect to view future Proxy Statements and Annual Reports over the Internet instead of receiving paper copies. Stockholders of record wishing to receive future stockholder materials electronically can elect this option by following the instructions provided when voting over the Internet at www.proxyvote.com.

Upon electing to view future Proxy Statements and Annual Reports over the Internet, you will receive an e-mail notification next year with instructions containing the Internet address of those materials. The choice to view future Proxy Statements and Annual Reports over the Internet will remain in effect until you contact your broker or the Company to rescind the instructions. Internet access does not have to be elected each year.

Stockholders who elected to receive this Proxy Statement electronically over the Internet and who would now like to receive a paper copy of this Proxy Statement so that they may submit a paper proxy in lieu of an electronic proxy should contact either their broker or the Company.

PROPOSALs to be voted on at the meeting

Proposal NO. 1

ELECTION OF DIRECTORS

As set by the Board of Directors under the Bylaws of the Company, the authorized number of directors of the Company will be eight as of the date of the 2016 Annual Meeting.

The Nominating and Corporate Governance Committee of the Board of Directors has recommended, and the Board of Directors has nominated, the nominees listed below for election as Class II directors at the 2016 Annual Meeting. If elected, each newly elected director will serve until the 2019 Annual Meeting of Stockholders, until each director’s successor is duly elected and qualified, or until the director’s earlier removal or resignation.

Each of the nominees are currently directors of the Company and each of the nominees named below has consented, if elected as a director of the Company, to serve until his term expires.

In the event that any nominee of the Company is unable or declines to serve as a director at the time of the 2016 Annual Meeting, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in such a manner as will assure the election of as many of the nominees listed below as possible. In such event, the specific nominees to be voted for will be determined by the proxy holders. The Board has no reason to believe that any of the persons named below will be unable or unwilling to serve as a director, if elected. Each of the two nominees for director who receives the greatest number of votes will be elected.

Set forth below are the names, ages, and certain biographical information relating to the Class II director nominees as of April 30, 2016.

Arve Hanstveit has served as a member of our Board of Directors since 1995. Between August 1997 and November 2010, Mr. Hanstveit served as Partner and Vice President of ABG Sundal Collier, a Scandinavian investment bank, where he was responsible for advising U.S. institutional investors on equity investments in Nordic companies. Prior to joining ABG Sundal Collier, Mr. Hanstveit worked as a securities analyst and as a portfolio manager for TIAA-Cref, a large U.S. institutional investor. From February 2007 to January 2010, Mr. Hanstveit served on the Board of Directors of Kezzler AS, a privately held Norwegian company, which delivers secure track and trace solutions. He is also a member of the Norwegian American Chamber of Commerce and the New York Angels, an independent consortium of individual accredited angel investors that provide equity capital for early-stage companies in the New York City area. Mr. Hanstveit holds a B.A. in Business from the Norwegian School of Management and an M.B.A. from the University of Wisconsin, Madison. The Board selected Mr. Hanstveit as a Director because of his early investment in the Company, his years of experience as a portfolio manager and securities analyst, his detailed understanding of global financial markets, and his extensive knowledge of the Company, its products, and markets.

Hans Peter Michelet joined the Board of Directors in August 1995 and was appointed Chairman of the Board in September 2004 and Executive Chairman in March 2008. From January 2005 to November 2007, Mr. Michelet served as our Interim Chief Financial Officer. Before joining our Board, Mr. Michelet was a senior manager with Delphi Asset Management, an asset management firm based in Norway and served as Chief Executive Officer of Fiba Nordic Securities, a Scandinavian investment bank. He also held management positions with Finanshuset and Storebrand Insurance Corporation. Mr. Michelet has been a member of the Board of Directors of SynchroNet Logistics Inc., a maritime technology service provider since June 2000 and a Director of Profunda AS, a commercial salmon farm. Mr. Michelet serves on the Board of IRIS Forskningsinvest AS as well as being the Chairman of the Board of Active Club Solutions Inc. Mr. Michelet holds a B.A. in Finance from the University of Oregon. The Board selected Mr. Michelet as a Director and its Chairman because of his experience as an investor and entrepreneur, his senior management experience in multi-cultural financial institutions, his strong organizational and leadership skills, and his knowledge of company operations and markets.

THE BOARD RECOMMENDS A VOTE “FOR” THE ELECTION OF THE NOMINEES NAMED ABOVE.

PROPOSAL NO. 2

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

BDO USA, LLP has been appointed by the Audit Committee to continue as the Company’s independent registered public accounting firm for the year ending December 31, 2016. Although the Company is not required to seek stockholder approval for its selection of independent registered public accounting firm, the Board believes that the practice constitutes sound corporate governance. If the appointment is not ratified, the Audit Committee will investigate the reasons for stockholder rejection and will reconsider its selection of independent registered public accounting firm.

A representative of BDO USA, LLP is expected to be present at the 2016 Annual Meeting. The representative will have an opportunity to make a statement and to respond to any questions.

Principal Accountant Fees and Services

The following table summarizes total fees that BDO USA, LLP, our independent registered public accounting firm, billed to us for its work in connection with fiscal years ended December 31, 2015 and 2014.

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

The Audit Committee pre-approves audit, audit-related, tax, and non-audit services provided by our independent registered public accounting firm, BDO USA, LLP and will not approve services that are impermissible under applicable laws and regulations. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision of that member to pre-approve specific services must be reported to the full Audit Committee at its next scheduled meeting.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION
OF THE APPOINTMENT OF BDO USA, LLP AS THE COMPANY’S
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR
THE YEAR ENDING DECEMBER 31, 2016

PROPOSAL NO. 3

APPROVAL OF THE ENERGY RECOVERY, INC.

2016 INCENTIVE PLAN

The Board of Directors is asking our stockholders to approve the Energy Recovery, Inc. 2016 Incentive Plan (the “2016 Plan”). The 2016 Plan was approved by the Board of Directors on April 25, 2016 and will become effective upon receipt of stockholder approval at the Annual Meeting. The 2016 Plan will replace our Amended and Restated 2008 Equity Incentive Plan (the “2008 Equity Incentive Plan”), which was originally approved by stockholders in 2008 and subsequently approved by stockholders as amended and restated in 2012.

Background and Reasons for the Proposal

The Board of Directors believes that equity awards under the 2008 Equity Incentive Plan have contributed to strengthening the incentive of participating employees to achieve the objectives of the Company and its stockholders by encouraging employees to acquire a greater proprietary interest in the Company. The Board believes that the number of shares of common stock currently available under the 2008 Equity Incentive Plan is insufficient to meet our current and future equity compensation needs. Stockholder approval of the 2016 Plan is intended to ensure that we have sufficient shares available to attract and retain employees and to further our growth and development. For a discussion of equity awards as components of our executive compensation program, please refer to the “Compensation Discussion and Analysis” section below.

In setting the number of shares authorized for issuance under the 2016 Plan, the Compensation Committee and the Board of Directors considered a number of factors, including the number of outstanding equity awards, the number of shares available for grant under the 2008 Equity Incentive Plan, our historical granting practices, and the level of potential dilution that will result from adoption of the 2016 Plan.

In fiscal years 2013 to 2015, the Company used 5,635,771 of the shares authorized under the 2008 Equity Incentive Plan to make equity awards. The approximate annual “run rate” for fiscal years 2013 to 2015 was on average 3.6% per year, based on the number of shares subject to all equity awards granted under the 2008 Equity Incentive Plan during each of the three fiscal year periods divided by the average number of shares of common stock outstanding as reported in the Form 10-Ks for each of the three fiscal year periods.

Based on 52,215,481 shares outstanding as of March 31, 2016, if all 7,637,010 shares subject to outstanding awards under existing equity plans and all 677,076 shares available for future awards under the 2008 Equity Incentive Plan are ultimately issued, the stockholder dilution would be 13.7%. If all 3,830,000 shares authorized by the 2016 Plan are also ultimately issued, the stockholder dilution would be 18.9%. On the effective date of the 2016 Plan, all shares previously available for future awards under the 2008 Equity Incentive Plan as of that date will become available for issuance under the 2016 Plan, and no further awards will be made under the 2008 Equity Incentive Plan.

Based on a review of the Company’s historical practice, the recent trading price of our common stock, and advice from the Compensation Committee’s independent compensation consultant, Compensia, the Compensation Committee and the Board of Directors currently believe that the amounts authorized for issuance under the 2016 Plan will be sufficient to cover awards for up to three years. Our future share usage will depend on a number of factors, including the number of participants in the 2016 Plan, the price per share of our common stock, any changes to our compensation strategy, changes in business practices or industry standards, changes in the compensation practices of our competitors, changes in compensation practices in the market generally, and the methodology used to establish the equity award mix.

The closing sale price of a share of our common stock on the NASDAQ Global Select Market on March 31, 2016 was $10.34 per share.

Highlights of the 2016 Plan and Key Governance Provisions

The 2016 Plan includes several features that are consistent with the interests of our stockholders and sound corporate governance practices, including the following:

Summary of the 2016 Plan

The following description is a summary of some of the key provisions of the 2016 Plan, and it is qualified in its entirety by reference to the full text of the 2016 Plan, which is attached to this proxy statement as Appendix A.

Purposes of the 2016 Plan

The 2016 Plan is intended to promote our long-term success and the creation of stockholder value by encouraging employees, officers, directors, consultants, agents, advisors, and independent contractors to focus on critical long-range objectives; encouraging the attraction and retention of employees, officers, directors, consultants, agents, advisors, and independent contractors with exceptional qualifications; and linking employees, officers, directors, consultants, agents, advisors, and independent contractors directly to stockholder interests through increased stock ownership.

Administration

The 2016 Plan will be administered by the Board of Directors or the Board’s Compensation Committee, which must be composed of directors who meet the independence requirements of NASDAQ and at least two or more of whom are “non-employee directors” within the meaning of Rule 16b-3(b)(3) under the Exchange Act, and “outside directors” within the meaning of Section 162(m) of the Code. The Board may delegate concurrent administration of the 2016 Plan to different committees consisting of one or more members of the Board in accordance with the 2016 Plan’s terms. In addition, the Board or the Compensation Committee may delegate granting authority to one or more officers of the Company in accordance with the 2016 Plan’s terms. References to the “Committee” in this summary description are, as applicable, to the Board or the Compensation Committee, or other committees or officers authorized to administer the 2016 Plan.

The Committee is authorized to select the individuals to be granted awards, the types of awards to be granted, the number of shares to be subject to awards, and the other terms, conditions, and provisions of such awards, as well as to interpret and administer the 2016 Plan and any award or agreement entered into under the 2016 Plan.

Eligibility

Awards may be granted under the 2016 Plan to employees, officers, directors, consultants, agents, advisors, and independent contractors of the Company and its related companies selected by the Committee. As of March 31, 2016, approximately120 people were eligible to receive grants under the 2016 Plan.

Number of Shares Authorized

Subject to adjustment as provided in the 2016 Plan, the number of shares of common stock initially authorized for issuance under the 2016 Plan is:

Of the various categories of awards available for issuance under the 2016 Plan, the number of shares of common stock that may be issued upon the exercise of incentive stock options, subject to adjustment as provided in the 2016 Plan, is limited to 3,830,000 shares.

The shares of common stock issuable under the 2016 Plan will consist of authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares.

Limitations on Director Awards

The aggregate amount of compensation granted during any fiscal year of the Company to any director who is not an employee of the Company, including any equity awards and any cash retainers or fees, may not exceed $500,000.

Share Counting

If any award lapses, expires, terminates, or is canceled prior to the issuance of shares or if shares are issued under the 2016 Plan and thereafter are forfeited to the Company, the shares subject to such awards and the forfeited shares shall again be available for issuance under the 2016 Plan. The following shares will not become available for issuance under the 2016 Plan:

Awards granted in assumption of or in substitution for awards previously granted by an acquired company will not reduce the number of shares authorized for issuance under the 2016 Plan.

Types of Awards

The 2016 Plan permits the granting of any or all of the following types of awards:

Stock Options.    Stock options entitle the holder to purchase a specified number of shares of common stock at a specified price, which is called the exercise price, subject to the terms and conditions of the stock option grant. The Committee may grant either incentive stock options, which must comply with Section 422 of the Code, or nonqualified stock options. The Committee sets exercise prices and terms, except that stock options must be granted with an exercise price not less than 100% of the fair market value of our common stock on the date of grant (excluding stock options granted in connection with assuming or substituting stock options in acquisition transactions). Unless the Committee determines otherwise, fair market value means, as of a given date, the closing price of our common stock. At the time of grant, the Committee determines when stock options are exercisable and what the term of the stock options will be, except that the term cannot exceed ten years.

In the event of termination of service with the Company or a related company, a participant will be able to exercise his or her stock option for the period of time and on the terms and conditions determined by the Committee and stated in the stock option agreement.

Stock Appreciation Rights (SARs).    The Committee may grant SARs as a right in tandem with the number of shares underlying stock options granted under the 2016 Plan or as a freestanding award. Upon exercise, SARs entitle the holder to receive payment per share in stock or cash, or in a combination of stock and cash, equal to the excess of the share’s fair market value on the date of exercise over the grant price of the SAR. The grant price of a tandem SAR is equal to the exercise price of the related stock option, and the grant price for a freestanding SAR is determined by the Committee in accordance with the procedures described above for stock options. Exercise of an SAR issued in tandem with a stock option will reduce the number of shares underlying the related stock option to the extent of the SAR exercised. The term of a freestanding SAR cannot be more than ten years, and the term of a tandem SAR cannot exceed the term of the related stock option.

Stock Awards, Restricted Stock, and Stock Units.    The Committee may grant awards of shares of common stock or awards designated in units of common stock. These awards may be made subject to repurchase or forfeiture restrictions at the Committee’s discretion. The restrictions may be based on continuous service with the Company or the achievement of specified performance criteria, as determined by the Committee. Stock units may be paid in stock or cash or a combination of stock and cash, as determined by the Committee.

Performance Awards.    The Committee may grant performance awards in the form of performance shares or performance units. Performance shares are units valued by reference to a designated number of shares of common stock. Performance units are units valued by reference to a designated amount of property other than shares of common stock. Performance shares and performance units may be payable upon the attainment of performance criteria and other terms and conditions as established by the Committee. Performance awards may be payable in stock, cash or other property, or a combination thereof.

Other Stock- or Cash-Based Awards.    The Committee may grant other incentives denominated in shares of common stock or in cash, which may be payable in shares of common stock or cash or a combination of both, subject to the terms of the 2016 Plan and any other terms and conditions determined by the Committee.

No Repricing    Without stockholder approval, the Committee is not authorized to (a) lower the exercise or grant price of an option or SAR after it is granted, except in connection with certain adjustments to our corporate or capital structure permitted by the 2016 Plan, such as stock splits, (b) cancel a stock option or SAR at a time when its exercise or grant price exceeds the fair market value of the underlying stock, in exchange for cash, another stock option or SAR, restricted stock or other equity award, unless the cancellation and exchange occur in connection with a merger, acquisition, spin-off or similar corporate transaction, or (c) take any other action that is treated as a repricing under generally accepted accounting principles.

Performance-Based Compensation Under Section 162(m)

Performance Goals and Criteria.    Under Section 162(m) of the Code, we are generally prohibited from deducting compensation paid to our principal executive officer and our three other most highly compensated executive officers (other than our principal financial officer) in excess of $1 million per person in any year. However, compensation that qualifies as “performance-based” is excluded for purposes of calculating the amount of compensation subject to the $1 million limit. If the 2016 Plan is approved by our stockholders, the Compensation Committee will have the flexibility to grant awards under the 2016 Plan that are intended to qualify as “performance-based” compensation under Section 162(m) of the Code.

For awards intended to qualify as “performance-based” compensation under Section 162(m) of the Code, the performance criteria must be set by the Compensation Committee at the start of each performance period and must be based on one or a combination of two or more of the following performance criteria as reported or calculated by the Company: cash flows (including, but not limited to, operating cash flow, free cash flow or cash flow return on capital); working capital; earnings per share; book value per share; operating income (including or excluding depreciation, amortization, items that are unusual in nature or infrequently occurring or both, restructuring charges, or other expenses); revenues; operating margins; return on assets; return on equity; debt; debt plus equity; market or economic value added; stock price appreciation; total stockholder return; cost control; strategic initiatives; market share; net income; return on invested capital; improvements in capital structure; or customer satisfaction, employee satisfaction, services performance, subscriber, cash management, or asset management metrics.

The performance goals also may be based on the achievement of specified levels of performance for the Company as a whole (or of any affiliate or business unit) under one or more of the performance criteria described above relative to the performance of other corporations.

The Compensation Committee may provide in any award of performance-based compensation that any evaluation of performance may include or exclude any of the following events that occur during a performance period: asset write-downs; litigation or claim judgments or settlements; the effect of changes in tax law or rate on deferred tax liabilities, accounting principles, or other laws or provisions affecting reported results; any reorganization and restructuring programs; items that are unusual in nature or infrequently occurring or both that the Company identifies in its audited financial statements, including notes to the financial statements, or the Management’s Discussion and Analysis section of our periodic reports; acquisitions or divestitures; foreign exchange gains and losses; gains and losses on asset sales; and impairments.

With respect to any award intended to be performance-based compensation, the Compensation Committee must establish and administer the performance criteria in a manner that satisfies the requirements of Section 162(m) of the Code.

Adjustments.   Awards that are intended to qualify as “performance-based” compensation under Section 162(m) of the Code may be adjusted downwards but not upwards. In addition, achievement of the applicable performance goals related to an award may not be waived, except in the case of the participant’s death or disability. Section 162(m) of the Code requires that a qualifying committee certify that performance goals were achieved before the payment of the “performance-based” compensation.

Limitations. Subject to certain adjustment as provided in the 2016 Plan, participants who are granted equity-based awards intended to qualify as “performance-based” compensation may not be granted awards for more than 750,000 shares of common stock in any calendar year. However, additional one-time grants of such awards may be granted for up to 300,000 additional shares to newly hired or newly promoted individuals. The maximum dollar value payable to any participant with respect to performance units or any other awards denominated in cash that are intended to qualify as “performance-based” compensation cannot exceed $7,500,000 in any calendar year.

Effect of Change in Control. Under the 2016 Plan, the Committee may provide for the vesting acceleration of an award upon a change in control of the Company, whether or not the award is assumed by the successor corporation, or upon a termination of a participant’s employment following a change in control. A change in control includes:

Unless the Committee determines otherwise in the instrument evidencing an award or in a written employment, services or other agreement between a participant and the Company or a related company, in the event that we are a party to a merger or consolidation in which options or awards are not continued or assumed or substituted with comparable awards by the surviving corporation, all outstanding options or awards will be subject to the agreement of merger or consolidation, which shall provide for one or more of the following:

Adjustments

If any change is made in the stock subject to the Plan, or subject to any award, without the receipt of consideration by us (through stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend or other change in our corporate or capital structure not involving the receipt of consideration by us), or in the event of an extraordinary cash dividend, then the Committee shall make proportional adjustments to (a) the maximum number and kind of securities available for issuance under the Plan, (b) the maximum number and kind of securities issuable as incentive stock options, (c) the maximum number and kind of securities issuable as “performance-based” compensation under Section 162(m) of the Code and (d) the number and kind of securities subject to any outstanding awards and/or the per share price of such securities.

Term, Termination, and Amendment

Unless earlier terminated by the Board or the Compensation Committee, the 2016 Plan will terminate, and no further awards may be granted, ten years after the date on which it is approved by stockholders. The Board or the Compensation Committee may amend, suspend, or terminate the 2016 Plan at any time, except that, if required by applicable law, regulation, or stock exchange rule, stockholder approval will be required for any amendment, and only the Board may amend the 2016 Plan if stockholder approval of the amendment is required. The amendment, suspension or termination of the 2016 Plan or the amendment of an outstanding award generally may not, without a participant’s consent, materially adversely affect any rights under an outstanding award.

Recoupment of Awards

Awards made under the 2016 Plan are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing rules and regulations regarding the recoupment or clawback of incentive compensation, similar rules and laws in other jurisdictions, and any compensation recoupment or clawback policies we may have in place from time to time.

U. S. Federal Income Tax Considerations

The following is a general summary of the U.S. federal income tax consequences of awards under the 2016 Plan to us and to participants in the 2016 Plan who are citizens or residents of the United States for U.S. federal tax purposes. The summary is based on the Code, applicable Treasury Regulations and administrative and judicial interpretations thereof, each as in effect on the date of this proxy statement and is, therefore, subject to future changes in the law, possibly with retroactive effect. The summary is general in nature and does not purport to be legal or tax advice. Furthermore, the summary does not address issues relating to any U.S. gift or estate tax consequences or the consequences of any state, local, or foreign tax laws.

Nonqualified Stock Options.    A participant generally will not recognize taxable income upon the grant or vesting of a nonqualified stock option with an exercise price at least equal to the fair market value of our common stock on the date of grant and no additional deferral feature. Upon the exercise of a nonqualified stock option, a participant generally will recognize compensation taxable as ordinary income in an amount equal to the difference between the fair market value of the shares underlying the option on the date of exercise and the option exercise price. When a participant sells the shares acquired upon exercise, the participant will have short-term or long-term capital gain or loss, as the case may be, equal to the difference between the amount the participant received from the sale and the tax basis of the shares sold. The tax basis of the shares generally will be equal to the greater of the fair market value of the shares on the exercise date or the option exercise price.

Incentive Stock Options.    A participant generally will not recognize taxable income upon the grant of an incentive stock option. If a participant exercises an incentive stock option during employment as an employee or within three months after his or her employment ends (12 months in the case of permanent and total disability), the participant will not recognize taxable income at the time of exercise for regular U.S. federal income tax purposes (although the participant generally will have taxable income for alternative minimum tax purposes at that time as if the option were a nonqualified stock option). If a participant sells or otherwise disposes of the shares acquired upon exercise of an incentive stock option after the later of (a) one year from the date the participant exercised the option and (b) two years from the grant date of the option, the participant generally will recognize long-term capital gain or loss equal to the difference between the amount the participant received in the disposition and the option exercise price. If a participant sells or otherwise disposes of shares acquired upon exercise of an incentive stock option before these holding period requirements are satisfied, the disposition will constitute a “disqualifying disposition,” and the participant generally will recognize taxable ordinary income in the year of disposition equal to the excess of the fair market value of the shares on the date of exercise over the option exercise price (or, if less, the excess of the amount realized on the disposition of the shares over the option exercise price). The balance of the participant’s gain on a disqualifying disposition, if any, will be taxed as short-term or long-term capital gain, as the case may be.

With respect to both nonqualified stock options and incentive stock options, special rules apply if a participant uses shares of our common stock already held by the participant to pay the exercise price or if the shares received upon exercise of the option are subject to a substantial risk of forfeiture by the participant.

Stock Appreciation Rights.    A participant generally will not recognize taxable income upon the grant or vesting of an SAR with a specified grant price at least equal to the fair market value of our common stock on the date of grant and no additional deferral feature. Upon the exercise of an SAR, a participant generally will recognize compensation taxable as ordinary income in an amount equal to the difference between the fair market value of the shares underlying the SAR on the date of exercise and the specified grant price of the SAR. When a participant sells any shares acquired upon exercise, the participant generally will have short-term or long-term capital gain or loss, as the case may be, equal to the difference between the amount the participant received from the sale and the tax basis of the shares sold. The tax basis of the shares generally will be equal to the greater of the fair market value of the shares on the exercise date or the total base value.

Restricted Stock Awards.    A recipient of a restricted stock award generally will recognize compensation taxable as ordinary income when the shares cease to be subject to restrictions in an amount equal to the excess of the fair market value of the shares on the date the restrictions lapse over the amount, if any, paid by the participant with respect to the shares.

Instead of postponing the federal income tax consequences of a restricted stock award until the restrictions lapse, the participant may elect to recognize compensation taxable as ordinary income in the year of the award in an amount equal to the fair market value of the shares at the time of receipt. This election is made under Section 83(b) of the Code. A Section 83(b) election is made by filing a written notice with the Internal Revenue Service office with which the participant files his or her federal income tax return. The notice must be filed within 30 days of the date of grant of the restricted stock award for which the election is made and must meet certain technical requirements.

The tax treatment of a subsequent disposition of restricted stock will depend upon whether the participant has made a timely and proper Section 83(b) election. If the participant makes a timely and proper Section 83(b) election, when the participant sells the restricted shares, the participant will have short-term or long-term capital gain or loss, as the case may be, equal to the difference between the amount the participant received from the sale and the tax basis of the shares sold. If no Section 83(b) election is made, any disposition after the restrictions lapse generally will result in short-term or long-term capital gain or loss, as the case may be, equal to the difference between the amount the participant received from the sale and the tax basis of the shares sold. The tax basis of the shares generally will be equal to the amount, if any, paid by the participant with respect to the shares, plus the amount of taxable ordinary income recognized by the participant either at the time the restrictions lapsed or at the time of the Section 83(b) election, as the case may be. If the participant forfeits the shares to the Company (e.g., upon the participant’s termination prior to expiration of the restriction period), the participant may not claim a deduction with respect to the income recognized as a result of making a Section 83(b) election.

Restricted Stock Units.    A participant generally will not recognize income at the time a restricted stock unit is granted. When any part of a restricted stock unit is issued or paid, the participant generally will recognize compensation taxable as ordinary income at the time of such issuance or payment in an amount equal to the cash and then fair market value of any shares the participant receives.

Performance Share or Performance Unit Awards.    A participant generally will not recognize income at the time a performance share or performance unit award is granted. When any part of a performance share or performance unit award is issued or paid, the participant generally will recognize compensation taxable as ordinary income at the time of such issuance or payment in an amount equal to the cash and then fair market value of any shares the participant receives.

Other Awards.    The U.S. federal income tax consequences of other awards under the 2016 Plan will depend upon the specific terms of each award.

Tax Consequences to Us.    In the foregoing cases, we generally will be entitled to a deduction at the same time, and in the same amount, as a participant recognizes ordinary income, subject to certain limitations imposed under the Code.

Section 409A of the Code.    We intend that awards granted under the 2016 Plan comply with, or otherwise be exempt from, Section 409A of the Code, but make no representation or warranty to that effect.

Section 162(m) of the Code.    Under Section 162(m) of the Code, we are generally prohibited from deducting compensation paid to our Chief Executive Officer and three other most highly compensated executive officers (other than the Chief Financial Officer) in excess of $1 million per person in any year. Compensation that qualifies as “performance-based” is excluded for purposes of calculating the amount of compensation subject to the $1 million limit. If the 2016 Plan is approved by our stockholders, the Compensation Committee will have the flexibility to grant awards under the 2016 Plan that are intended to qualify as “performance-based” compensation under Section 162(m) of the Code.

Tax Withholding.    We are authorized to deduct or withhold from any award granted or payment due under the 2016 Plan, or require a participant to remit to us, the amount of any withholding taxes due in respect of the award or payment and to take such other action as may be necessary to satisfy all obligations for the payment of applicable withholding taxes. We are not required to issue any shares of our common stock or otherwise settle an award under the 2016 Plan until all tax withholding obligations are satisfied.

Plan Benefits

All awards to employees, officers, and consultants under the 2016 Plan are made at the discretion of the Compensation Committee. Therefore, the benefits and amounts that will be received or allocated to such individuals under the 2016 Plan are not determinable at this time. However, please refer to the description of grants made to our named executive officers in the last fiscal year described in the “Grants of Plan-Based Awards in 2015” table below. Grants made to our non-employee directors in the last fiscal year are described under “Director Compensation” below.

THE BOARD RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE
ENERGY RECOVERY, INC. 2016 INCENTIVE PLAN.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth equity compensation plan information as of December 31, 2015.

PROPOSAL NO. 4

ADVISORY APPROVAL OF THE COMPANY’S EXECUTIVE COMPENSATION

The Compensation Discussion and Analysis beginning on page 25 of this Proxy Statement describes the Company’s executive compensation program and the compensation decisions made by the Compensation Committee for our fiscal year ended December 31, 2015 with respect to the executive officers named in the Summary Compensation Table on page 32. The Board of Directors is asking our stockholders to cast a non-binding advisory vote to approve the following resolution:

“RESOLVED, that the stockholders of Energy Recovery, Inc. approve the compensation of the executive officers named in the Summary Compensation Table for 2015, as disclosed in the Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission (which disclosure includes the Compensation Discussion and Analysis, the compensation tables, and the related footnotes and narratives accompanying the tables).”

The Board is asking our stockholders to vote “FOR” this proposal because it believes that the policies and practices described in the Compensation Discussion and Analysis section are necessary to achieve the Company’s primary objective of the executive compensation program, that of attracting, retaining, and motivating the talent we need to meet and/or exceed the strategic, operational, and financial goals of the Company. Additionally, we want to reward superior performance and align the long term interests of our executives with our stockholders.

Although your vote on this proposal is advisory and non-binding, the Compensation Committee values the views of our stockholders and will take into account the outcome of the vote when considering future compensation decisions for our named executive officers. We are providing this advisory vote pursuant to Section 14A of the Securities Exchange Act of 1934.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL NO. 4

BOARD AND CORPORATE GOVERNANCE MATTERS

Board of Directors

Our Board of Directors (the “Board”) is divided into three classes, with each class serving for a staggered three-year term. As of the date of the 2016 Annual Meeting, the Board consists of:

At each annual meeting of stockholders, a class of directors is elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The term of the Class I directors ends at the annual meeting in 2018. The term of the Class II directors ends at the upcoming annual meeting in June 2016, and the term of the Class II directors elected at that meeting will end at the annual meeting in 2019. The term of the Class III directors ends at the annual meeting in 2017.

Director Independence

Our Board has determined that Mr. Fjell, Mr. Hanstveit, Mr. Lorentzen, Mr. Mao, Mr. Michelet and Mr. Trempont, representing a majority of our directors, are “independent directors” as defined in the listing rules of the NASDAQ Global Market LLC. Consistent with the principles of the NASDAQ listing rules, the Board has also determined that ownership of the Company’s stock by a director is not inconsistent with a determination of independence. Mr. Buehler is not an “independent director” as he was employed by the Company within the past three years.

Relationships Among Directors or Executive Officers

There are no family relationships among any of the directors or executive officers of the Company.

Committees and Meetings of the Board of Directors

During the year ended December 31, 2015, the Board met thirteen times. The Board has three committees: the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. During the year ended December 31, 2015, no director attended fewer than 75% of all the meetings of the Board or its committees on which he or she served after becoming a member. The Company encourages, but does not require, its directors to attend the annual meeting of stockholders. In 2015, all of our Directors attended our annual meeting.

The Audit Committee

The Audit Committee held four meetings in the year ended December 31, 2015. The Audit Committee is responsible for assisting the full Board in fulfilling its oversight responsibilities relating to:

The Board has determined that all members of the Audit Committee are independent directors as defined in the listing rules of NASDAQ. The Board has further determined that Mr. Trempont is an “audit committee financial expert” as defined by SEC rules. The Board has adopted and approved a charter for the Audit Committee, a copy of which can be viewed on the Company’s website at www.energyrecovery.com under the Investor Relations tab.

The Compensation Committee

The Compensation Committee held five meetings in the year ended December 31, 2015. The Compensation Committee is responsible for, among other things:

The Board has determined that all members of the Compensation Committee are independent directors as defined in the listing rules of NASDAQ. The Board has adopted and approved a charter for the Compensation Committee, a copy of which can be viewed on the Company’s website at www.energyrecovery.com under the Investor Relations tab.

The Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee held one meeting in the year ended December 31, 2015. The Nominating and Corporate Governance Committee is responsible for:

The Nominating and Corporate Governance Committee operated under a written charter setting forth the functions and responsibilities of the Committee. A copy of the charter can be viewed on the Company’s website at www.energyrecovery.com under the Investor Relations tab. The Board has determined that all members of the Nominating and Corporate Governance Committee are independent directors as defined in the listing rules of NASDAQ.

The Nominating and Corporate Governance Committee considers and makes recommendations to the Board regarding any stockholder recommendations for candidates to serve on the Board. Our bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board. In order to nominate a candidate for director, a stockholder must give timely notice in writing to our Secretary and otherwise comply with the provisions of our bylaws. To be timely, a stockholder’s notice to our Secretary must be delivered to or mailed and received at our principal executive offices, in the case of an annual meeting, not later than the close of business on the 90^th day, nor earlier than the close of business on the 120^th day, prior to the anniversary date on which we first mailed our proxy statement to stockholders in connection with the immediately preceding annual meeting. If no annual meeting was held in the previous year or the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business the 10^th day following the day on which such notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. In the case of a special meeting of stockholders called for the purpose of electing directors, notice must be delivered to or mailed and received not later than the close of business on the 10^th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever occurs first.

Stockholder nominations must also include the information required by our bylaws. Under the bylaws, information as to each person whom the stockholder proposes to nominate for election as a director must include (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the corporation that are owned beneficially or of record by the person, (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant SEC regulations. The stockholder giving notice must also provide certain other information required under our bylaws.

A stockholder who wishes to nominate a candidate to serve on the Board should carefully review the applicable provisions of our bylaws. Any such nomination must be made in accordance with the procedures outlined in, and include the information required by, the bylaws. The nomination must be addressed to 1717 Doolittle Drive, San Leandro, California 94577 Attn: Secretary. You can obtain a copy of our bylaws by writing to the Secretary at this address.

While the Nominating and Corporate Governance Committee does not have a written policy regarding diversity in identifying nominees for directors, the committee takes diversity into account when looking for best available candidates to serve on the Board. In the past, when new directors have been added to our Board, the Board or Nominating and Corporate Governance Committee has endeavored to select director candidates who have business, scientific, or regulatory specializations; technical skills; or other backgrounds that increased the range of experience and diversity of perspectives within our Board in ways that pertain to our current and future business goals. The Committee also considers diversity in terms of gender, ethnic background, and national origin.

There are no differences in the manner in which the Nominating and Corporate Governance Committee evaluates nominees for director based on whether the nominee is recommended by a stockholder or by the Nominating and Corporate Governance Committee itself.

In reviewing potential candidates for the Board, the Nominating and Corporate Governance Committee considers numerous factors including:

Of greatest importance is the individual’s integrity and ability to bring to the Company experience and knowledge in areas related to the Company’s current and future business. The Board intends to continue using these criteria to evaluate candidates for election to the Board.

Board Leadership Structure and Role in Risk Management

The offices of Chairman and Chief Executive Officer at our company are held by different individuals. Mr. Michelet is currently Chairman of the Board and has served as our Board Chairman since September 2004. Mr. Gay was appointed as President and Chief Executive Officer and as a member of the Board at which point Mr. Rooney, our previous President and Chief Executive Officer, resigned. The Company believes that having the roles of Chief Executive Officer and Chairman of the Board filled by different individuals enhances our internal system of checks and balances and the Board’s oversight role. The practice also enables the Chief Executive Officer to focus on the Company’s operations.

The Board does not have a standing risk management committee, but administers this oversight function directly through the Board as a whole, as well as through its various committees that address risks inherent in their respective areas of oversight. In particular, our Audit Committee has the responsibility to consider and discuss our major financial and enterprise risk exposures and the steps our management has taken to monitor and control these exposures, our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking, and our Nominating and Corporate Governance Committee monitors our governance risk exposures, Board composition, and overall Board performance. The full Board, or the appropriate committee, receives reports on risks facing the Company from our Chief Executive Officer or other members of management to enable it to understand our risk identification, risk management, and risk mitigation strategies. We believe that our Board’s leadership structure supports effective risk management because it allows the independent directors on our committees to exercise oversight over management.

The Board also receives and approves reports on key product development projects, organizational matters, and strategic initiatives. In addition, the Audit Committee periodically considers and approves the Company’s corporate investment policy and practices. The Audit Committee also oversees and reviews related-person transactions.

Compensation Committee Interlocks and Insider Participation

None of our current executive officers serve on the Compensation Committee or the Board of Directors of another entity whose executive officer(s) serve(s) on the Company’s Compensation Committee or Board of Directors.

Communication between Stockholders and Directors

Our Board currently does not have a formal process for stockholders to send communications to the Board. The Company, however, makes every effort to ensure that the views of stockholders are heard by the Board or individual directors and that the Company responds to stockholders on a timely basis. The Board does not recommend that formal communication procedures be adopted at this time because it believes that informal communications are sufficient to convey questions, comments, and observations that could be useful to the Board. Stockholders wishing to formally communicate with the Board may send communications directly to Secretary, Energy Recovery, Inc., 1717 Doolittle Drive, San Leandro, California 94577.

Director Compensation

Directors who are non-employees of the Company received the following fees, unchanged since 2012, for their services on the Board during the year ending December 31, 2015:

Additionally, directors receive:

Our non-employee directors also receive:

On December 31, 2014, the Company issued 27,609 shares of restricted stock to Mr. Trempont in consideration of the significant additional time and effort required by him in his capacity as a director and as Chairman of the Audit Committee and the Nominating and Corporate Governance Committee. The shares became fully vested on March 16, 2015 and are no longer restricted.

In February 2015, we granted options to purchase 44,456 shares of our common stock to each non-employee director, except Mr. Buehler and Mr. Lorentzen who were granted options to purchase 16,449 shares each due to their tenure as members of the Board. All of the options became fully vested in June 2015.

In June 2015, we granted to each continuing non-employee director, options to purchase 53,392 shares of our common stock. The options have a one year vesting period and become fully vested in June 2016.

Director Compensation for the Year Ended December 31, 2015

The table below summarizes the compensation paid to non-employee directors for the year ended December 31, 2015. Mr. Gay, our Chief Executive Officer and also as a director during 2015, is not included in the table below because he received compensation in 2015 only as an employee and did not receive additional compensation for services provided as a director.

Stock Ownership Guidelines

The Company’s Board believes that our non-employee directors and executive officers should own and hold shares of our common stock to further align their interests with the long term interests of stockholders and further promote our commitment to sound corporate governance. Toward this end, in April 2016, the Board adopted guidelines with respect to ownership levels of the Company’s common stock of our CEO, other executive officers, and members of our Board. The guidelines state that our CEO, other executive officers, and each director must beneficially own Common Stock having a value equal to:

The guidelines were established to promote a long-term perspective in managing the company and align the interests of our stockholders, executives, and directors.

For purposes of determining ownership under these guidelines we include shares of common stock actually owned by the covered individual or family members, certain indirect forms of ownership, such as stock held in a grantor trust for the benefit of the covered individual, as well as the net exercise or “spread” value of vested stock options. Unvested options or restricted stock units and the unvested portion of any performance-based restricted stock or other equity-based award are not included. Directors and executive officers generally are required to meet these guidelines within five years of becoming a director or executive officer. Covered individuals are required to hold 25% of the net shares acquired from all equity awards after deducting shares sold to cover the exercise price and/or taxes until the applicable guideline is reached.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of April 25, 2016 for (i) each person who is known by the Company to beneficially own more than 5% of the Company’s common stock, (ii) each of the Company’s directors, (iii) each of the officers appearing in the “Summary Compensation Table” on Page 32 and (iv) all directors and executive officers as a group.

To the Company’s knowledge, except as itemized in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name. The address of each executive officer and director is c/o Energy Recovery, Inc., 1717 Doolittle Drive, San Leandro, CA 94577.

*Less than .1%

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes our executive compensation philosophy and programs, compensation decisions made under those programs, and the factors considered in making those decisions for our “named executive officers,” who, for 2015, were:

Mr. Gay was appointed as President and Chief Executive Officer and as a member of the Board of Directors on April 24, 2015; prior to this appointment, Mr. Gay was our Chief Financial Officer and had previously served in other executive management positions with us. Mr. Rooney resigned from his position as President and Chief Executive Officer upon Mr. Gay’s appointment and transitioned to a consulting role with the Company, which is expected to continue until October 24, 2016. On June 8, 2015, Mr. Gannon was hired and appointed as the Chief Financial Officer of the Company. Mr. Otero resigned as General Counsel, Chief Compliance Officer and Corporate Secretary of Energy Recovery as of March 15, 2016.

The Compensation Committee of the Board of Directors has principal responsibility for establishing, implementing, and monitoring adherence to our compensation philosophy and objectives. The Compensation Committee’s duties include evaluating the performance and advising the Board on the compensation of our Chief Executive Officer, recommending director compensation, and setting the compensation of our other executive officers, as well as performing oversight of our compensation arrangements, plans, policies, and programs for employees in general.

Compensation Philosophy and Objectives

The primary objective of our executive compensation program is to attract, retain, and motivate the talent we need to meet and/or exceed the strategic, operational, and financial goals of the Company. Additionally, we want to reward superior performance and align the long term interests of our executives with our stockholders. The guiding principles of our compensation program involve:

The Compensation Committee annually reviews the executive compensation program to ensure an appropriate alignment between our compensation policies and programs and our business needs and the interests of our stockholders. Our executive compensation programs are reviewed to ensure they achieve a balance between rewarding performance and retaining key people while accommodating a continuing effort to manage the Company’s share utilization rate to minimize the dilutive effects of equity awards to the Company’s stockholders.

A significant part of our executive compensation philosophy policy is designed to link executive compensation to our performance through at-risk compensation opportunities, providing significant reward to executives based on our success. As such, the Compensation Committee believes that our executive officers’ total compensation should be reflective of our Company’s performance. Accordingly, the majority of our executive officers’ compensation is composed of performance-based bonus opportunities and equity awards, which derive their value based on both stock-based performance and Company performance. As a result, much of our executive officers’ target total direct compensation opportunity is “at risk.” There can be no assurance that the grant date fair values reported for these equity awards will be reflective of their actual economic value or that comparable amounts will ever be realized by the executive officers.

Executives at Energy Recovery understand the importance of meeting objectives. In 2015, the Company established four major objectives for the Annual Incentive Plan (“AIP”), our cash-based incentive program for eligible employees. These objectives were: i) successfully “fracking” one oil well with the Company’s VorTeq^TM fracking technology; ii) generating $10.0 million in purchase orders through oil and gas and/or chemical processing; iii) creating a product development road map for the Company’s “PX as a Pump” pressure exchanger technology applications; and iv) developing and launching “PX Prime,” an advancement in the Company’s PX Pressure Exchanger line. Each executive receives an annual performance review which evaluates his or her performance on both a qualitative and quantitative basis. Upon evaluation of the objectives outlined above and in light of other financial metrics and accomplishments, particularly the licensing agreement entered into with Schlumberger Technology Corporation, a subsidiary of Schlumberger Limited, the Compensation Committee funded the AIP at 100% for fiscal 2015. For a more detailed discussion of the AIP, please refer to “Annual Cash Incentive Compensation,” discussed below.

Additionally, under the 2008 Equity Incentive Plan, 100% of our fiscal year 2015 equity awards were in the form of stock options. The approach under our 2008 Equity Incentive Plan awards is intended to align management’s long-term goals with those of stockholders. The stock options provide no value to our executives if our share price does not increase above the exercise price following the date of grant. Restricted stock units, which the Compensation Committee began awarding under the 2008 Equity Incentive Plan for 2016, also serve as a meaningful retention tool even in periods of volatile stock prices and are a component of our compensation program that the committee believes is necessary in order to retain our executive officers and be competitive with compensation packages offered by comparable companies. In addition, the awards vest under the 2008 Equity Incentive Plan over four years, reinforcing the long term focus and the performance dynamic of our executive compensation program. For a more detailed discussion of the 2008 Equity Incentive Plan, please refer to “Equity-Based Incentive Compensation”.

Executive Compensation Process

The Compensation Committee is responsible for establishing and implementing executive compensation policies and programs in a manner consistent with our compensation objectives and principles.

Compensation Committee and Board of Directors. Historically, the Compensation Committee has determined annual compensation and granted annual equity awards at one or more meetings held during the first quarter of the year. However, at various meetings throughout the year, the Compensation Committee also considers matters related to individual compensation, such as compensation for new executive hires, as well as high-level strategic issues, such as the efficacy of the Company’s compensation strategy, potential modifications to that strategy, and new market trends, plans, or approaches to compensation in the Company’s industries.

Role of Executive Officers. The Compensation Committee meets regularly in executive meetings. Our Chief Executive Officer, Chief Financial Officer, and Human Resources department representatives, along with legal counsel as appropriate, work together to design and develop compensation programs for our Compensation Committee’s consideration, recommend changes to existing compensation programs, recommend performance targets to be achieved under those programs, and ultimately to implement the decisions of the Compensation Committee. These individuals also provide information to our independent compensation consultant so that it can perform its duties for the Compensation Committee.

At the beginning of each year, our Chief Executive Officer provides recommendations to the Compensation Committee on the compensation levels of the other named executive officers, as well as his review of each other named executive officer’s performance and contributions during the previous year. When appropriate, members of our of management team, including our Chief Executive Officer, Chief Financial Officer, and Vice President of Human Resources, attend portions of the Compensation Committee meetings to provide information and answer questions. No named executive officer was present or voted in the final determinations regarding the structure or amount of any component of his compensation package.

Our Compensation Committee is responsible for making final decisions on compensation for our executive officers. For all executive officers, as part of its deliberations, the Compensation Committee may review and consider, as appropriate, one or more of the following: (i) analysis of historical Company executive compensation levels and current company-wide compensation levels, (ii) trends in compensation paid to similarly situated executives at our peer companies, (iii) an executive officer’s past performance and expected contribution to future results, (iv) past individual performance, (v) criticality of the executive position, (vi) our Chief Executive Officer’s recommendations based on his direct knowledge of each executive officer’s performance and contributions during the previous year as well as expected contributions in the coming year, and (vii) compensation market data developed by a compensation consultant.

The Compensation Committee has not established any formal policies or guidelines for allocating compensation between current and long-term incentive compensation, or between cash and non-cash compensation other than aiming for base salary of executives at the 50^th percentile of the relevant peer group and total compensation at the 75^th percentile of the relevant peer group. The peer group utilized by the Compensation Committee is discussed below under “Competitive Positioning.” In general, the Compensation Committee emphasizes equity compensation over cash compensation to promote long-term thinking, strategy, and growth. In determining the amount and mix of compensation elements and whether each element provides the correct incentives and rewards for performance consistent with our short and long-term goals and objectives, the Compensation Committee relies on its judgment about each individual rather than adopting a formulaic approach to compensatory decisions.

Independent Compensation Consultant for Compensation Committee

The Compensation Committee has the authority under its charter to engage the services of outside advisors, experts, and others to assist it. Accordingly, the Compensation Committee retained Compensia, a national compensation consulting firm, to advise on matters related to the compensation of its executive officers, including the Chief Executive Officer. Compensia advised the Compensation Committee on best practices to attract, retain, and incentivize our executives, assisted in the design of our compensation plan, and derived the peer group against which the Company’s overall compensation structure and levels are compared. Based on the consideration of the various factors as set forth in the rules of the SEC and the listing standards of the NASDAQ Stock Market, the Compensation Committee has determined that its relationship with Compensia and the work of Compensia on behalf of the Compensation Committee has not raised any conflict of interest.

Consideration of “Say on Pay” Results

We conducted our advisory vote on executive compensation at our annual meeting of stockholders held in 2015. Although this vote was not binding on the Board of Directors or us, we believe that it is important for our stockholders to have an opportunity to express their views regarding our executive compensation as disclosed in our Proxy Statement. The Board and our Compensation Committee value stockholders’ opinions, and, to the extent there is any significant vote against the compensation of our named executive officers, the Compensation Committee will evaluate whether any additional actions including potential changes to pay levels or structures are warranted.

At our 2015 Annual Meeting, 95.3% of the votes cast voted in favor of our “say on pay” proposal which reflected a significant improvement over the 2014 vote. We believe these results demonstrate that our stockholders are aligned with our approach to executive compensation. We will continue to evolve our compensation process and look for ways to enhance our ability to attract, retain, and motivate the talent we need to achieve or exceed our corporate objectives for 2016 and beyond.

We intend to continue to monitor stockholder feedback and expand our efforts to obtain feedback from our stockholders. Our goal in soliciting feedback is to (1) better understand our stockholders’ views on executive compensation, (2) be responsive to our stockholders’ views expressed in a say-on-pay vote, and (3) understand whether potential changes to our compensation programs and governance policies would address concerns expressed by our stockholders. We intend to hold a “say on pay” advisory vote at each annual meeting until we review the results of the next advisory vote on the frequency of future say-on-pay votes, which will occur in 2017.

Competitive Positioning

In 2015, the Compensation Committee began the process of formally reviewing competitive market compensation data and directed its compensation consultant, Compensia, to develop a peer group of companies against which Energy Recovery’s overall compensation may be compared. While we have historically believed that we have a unique footprint that makes such comparisons extremely difficult, based on the advice of our advisors, we are attempting to find meaningful comparisons. Our peer group consists of companies in industrial machinery, clean technology, and broader technology industries that are comparable to us in terms of revenue, market capitalization, headcount, and location, where possible.

As part of this process, the following peer group companies were identified and used by Compensia in its compensation assessment:

Base Salaries of Named Executive Officers

Base salaries are designed to provide our executives with a stable source of income commensurate with their responsibility, experience, and performance.

In 2015, in connection with his promotion to President and Chief Executive Officer, the annual base salary of Mr. Gay was set at $400,000, and, in connection with his hiring as our Chief Financial Officer, the annual base salary of Mr. Gannon was set at $320,000. Additional details of Mr. Gay’s and Mr. Gannon’s compensation packages are discussed under the caption entitled “Employment Arrangements with Named Executive Officers.”

Effective March 15, 2016, Mr. Otero, our General Counsel, Chief Compliance Officer and Corporate Secretary, resigned. In February 2015, his salary had been increased to $255,000 from $246,000. We agreed to pay Mr. Otero certain post-termination benefits. Additional details of these benefits are discussed under the caption entitled “Employment Arrangements with Named Executive Officers.”

In April of 2015, the Company promoted Mr. Nocair Bensalah to Vice President of Operations and increased his salary to $240,000 from $226,000. Mr. Bensalah was formerly the VP of Manufacturing. Mr. Bensalah’s promotion was in recognition of an expansion in the scope of his responsibilities including overseeing the field operations for the VorTeq system.

In February 2015, the annual base salary of our Vice President of Human Resources, Andrew B. Stroud, Jr. was increased to $221,000 from $215,000. Mr. Stroud’s increase was based on his performance and the external market data for his position.

In 2015, the annual base salary of our former Chief Executive Officer, Mr. Thomas S. Rooney, Jr., was $440,000. Mr. Rooney resigned his position in April 2015. Details of Mr. Rooney’s compensation package are discussed under the caption entitled “Employment Arrangements with Named Executive Officers.”

Annual Cash Incentive Compensation

The Annual Incentive Plan, or AIP, is our annual cash incentive plan and is designed to encourage the performance and retention of eligible employees in recognition of individual achievement that contributes to the strategic and financial success of the Company.

The AIP is intended to incentivize short-term performance consistent with Company strategy and achieving key financial metrics. Payments under the AIP to a participant are based on a formula that takes into account both the level of achievement of Company performance goals for the year and the level of achievement of individual performance objectives. The AIP includes the following performance characteristics:

For 2015, the Board of Directors had enumerated objectives for the Chief Executive Officer, and the Chief Executive Officer had specified objectives for the other named executive officers in the context of the Company’s business plan and his own objectives for such officers. These objectives, as noted above, included pre-established minimum oil and gas orders, successfully fracking one well with the VorTeq hydraulic pump system, creating a product development roadmap for “PX as a Pump” applications, and developing PX Prime.

Upon a review of plan objectives and other financial metrics, including the Company’s overall financial performance for 2015, the Compensation Committee recommended that the Board fund the plan at the full 100% allocation ratio level. Further, in light of the transformative nature of the licensing agreement with Schlumberger Technology Corporation, the Compensation Committee determined that a special incentive payment should be paid to those employees responsible for finalizing and executing the agreement. The Compensation Committee determined that the following cash payments would be made under the AIP:

(1) Amounts comprise the special bonus payments received by our named executive officers as authorized by the Compensation Committee following execution of the licensing agreement with Schlumberger Technology Corporation, a subsidiary of Schlumberger Limited. Among other matters, the licensing agreement provides for $125 million in payments paid in stages: a $75 million upfront, exclusive license payment, amortized over the 15-year license term; two separate $25 million payments upon achieving two milestones, to be recognized when achieved; and recurring royalty payments after the product is commercialized throughout the term of the agreement.

Equity-Based Incentive Compensation

We may grant equity-based awards, including stock options and restricted stock units, to eligible named executive officers and other employees pursuant to our 2008 Equity Incentive Plan, which would be replaced by the new 2016 Equity Incentive Plan if that plan is approved by shareholders at the Annual Meeting. As with other elements, the value received through various stock-based awards is included in our annual compensation review process. Each year, we collect and review competitive data from the peer group that includes data with respect to the use of, and value received through, equity incentives. Individual awards are made based on a subjective assessment of individual performance, contributions, and future potential.

In 2015, the Company granted stock options to executives and other key employees to provide long-term incentives to align management with long-term stockholder interest intended to increase stockholder value. Further, stock options are used to remain competitive in regard to retention and recruitment of key talent. The Compensation Committee believes that with management having a stake in the long-term success of the Company, the likelihood of enhancing stockholder value increases.

2015 Equity-Based Incentive Awards

On March 10, 2015, as part of an annual stock option grant program for employees, the Compensation Committee authorized the grant of options to purchase the Company’s common stock to the following named executive officers: Mr. Gay, options to acquire 307,503 shares; Mr. Bensalah, options to acquire 133,456 shares; Mr. Otero, options to acquire 106,396 shares; and Mr. Stroud, options to acquire 105,781 shares. The vesting schedule for these grants provides that 25% of the options vest on the one-year anniversary of the vesting commencement date, and thereafter, 1/36^th of the remaining options vest at the end of each month of active service. Our Compensation Committee determined these grants primarily based on an assessment of (i) our Chief Executive Officer’s recommendations tied to his review of each executive officer’s performance and contributions during the previous year as well as expected contributions in fiscal 2016, (ii) the Compensation Committee’s review of each executive officer’s historical equity compensation levels and retention hold at the Company, and (iii) the Compensation Committee’s review of applicable competitive market compensation data (including our peer practices) and our company-wide compensation levels, including the aggregate equity budget and available share pool for fiscal 2015.

Pursuant to the terms of the letter under which we offered, and Mr. Gannon accepted, employment with us, the Compensation Committee granted to Mr. Gannon options to acquire 200,000 shares of the Company’s common stock on June 8, 2015 and additional options to acquire 100,000 shares on December 8, 2015. For additional details regarding Mr. Gannon’s employment arrangement, please refer to “Employment Arrangements with Named Executive Officers.” The vesting schedule for both of these grants provide that 25% of the options vest on the one-year anniversary of the vesting commencement date, the first date of his employment, and thereafter, 1/36^th of the remaining options vest at the end of each month of active service.

Benefits

In 2015, our named executive officers were eligible to participate in our standard benefits programs on the same basis provided to all of our other U.S. employees, including medical, dental, and vision insurance; short- and long-term disability insurance; and health and dependent care flexible spending accounts. All named executive officers and other executives are also offered special life, long-term disability, and accidental death and dismemberment insurance benefits.

We also maintain a tax-qualified 401(k) plan, which provides for broad-based employee participation in the United States. We do not provide defined benefit pension plans or defined contribution retirement plans to our named executive officers other than the 401(k) plan.

Change in Control Severance Plan

In August 2009, the Company’s Board of Directors adopted a Change in Control Severance Plan for key employees. In March 2012, the Board adopted a revised Change in Control Severance Plan (the “CIC Plan”) for highly paid employees. On December 31, 2012 and on each anniversary thereafter, the CIC Plan will be extended automatically for an additional year unless the Compensation Committee of the Board of Directors delivers written notice, at least six months prior to the end of each such term, to each participant that the CIC Plan will not be extended. Accordingly, the CIC Plan was extended through December 31, 2016. Each of the named executive officers currently serving participates in the CIC Plan described below.

The CIC Plan is summarized below under the caption “Potential Payments Upon Termination or Change of Control” following the compensation tables. Designed as a retention tool, the CIC Plan protects participating executives from economic harm in the event that their employment is actually or constructively terminated after a change in control of the Company. Under this “double trigger” approach, participating executives are eligible for severance and other benefits under the CIC Plan if they are terminated without “Cause” or leave for “Good Reason,” as those terms are defined below, within 18 months after a change in control of the Company.

Severance and Termination Compensation

We do not currently have individual employment agreements with our named executive officers, except for Messrs. Gay and Gannon, in the form of offer letters. The terms of Mr. Gay’s and Mr. Gannon’s employment with the Company include severance-related provisions set forth in their respective offer letters. Severance-related terms for Mr. Gay and Mr. Gannon are summarized in the section entitled “Employment Arrangements with Named Executive Officers”.

Tax Deductibility

Section 162(m) of the Internal Revenue Code (the “Code”) generally disallows a tax deduction to public corporations for compensation in excess of $1 million paid for any fiscal year to certain executive officers. Performance-based compensation is not subject to the $1 million deduction limit if certain requirements are met. Our Compensation Committee may consider the impact of Code Section 162(m) when designing our cash and equity bonus programs, but may elect to provide compensation that is not fully deductible as a result of Code Section 162(m) if it determines that the program is in our best interests. 

Compensation Policies and Practices as They Relate to Risk Management

Our Compensation Committee has reviewed our compensation programs for our employees and believes that our compensation programs are structured in a manner that does not create risks that are reasonably likely to have a material adverse effect on the Company. The Compensation Committee considered, among other factors, the allocation of compensation among annual base salary and long term equity and our performance targets.

Report of the Compensation Committee

This report is not deemed to be soliciting material filed with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into a document filed with the SEC.

The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) set forth above with the Company’s management. Based on the review and discussions, the Compensation Committee recommended to the Company’s Board of Directors that the CD&A be included in this proxy statement.

MEMBERS OF THE COMPENSATION COMMITTEE

Arve Hanstveit, Chairman of the Compensation Committee

Olav Fjell

Ole Peter Lorentzen

Hans Peter Michelet

Dominique Trempont

Summary Compensation Table

The table below summarizes the compensation information with respect to the named executive officers for the applicable fiscal years ending December 31, 2015; December 31, 2014; and December 31, 2013. All amounts are in dollars.

Grants of Plan-Based Awards in 2015

The following table sets forth information concerning non-equity and equity incentive plan awards to the named executive officers during 2015. The non-equity incentive plan consists of the 2015 cash incentive plan described in the “Compensation Discussion and Analysis” section above. The actual amounts realized in accordance with the non-equity incentive plan are reported in the “Summary Compensation Table” under the column entitled “Non-Equity Incentive Compensation.” The Company did not grant any restricted stock awards or units to named executives officers in 2015. The table also depicts information with respect to stock option awards granted by the Company during 2015.

Employment Arrangements with Named Executive Officers

Joel Gay

In April 2015, the Company entered into an employment agreement with Mr. Gay in the form of an Offer of Promotion to President and Chief Executive Officer (“Promotion Letter”). As provided in the Promotion Letter, Mr. Gay is employed for an indefinite period of time, and his annual base salary was set at $400,000.

The Promotion Letter provided Mr. Gay the opportunity to participate in our AIP with eligibility to receive 0%-100% of his annual base salary determined based on achievement toward Company annual financial targets and/or other performance goals as determined by the Board of Directors.

In the event of an involuntary termination other than for Cause, as defined in the Change in Control (“CIC”) Plan, as amended, Mr. Gay will be entitled to the following benefits:

These severance benefits are conditioned on his signing a release in favor of the Company and were reduced by deductions required or permitted by applicable law.

In the event of termination due to a change of control, as defined in the CIC Plan. Mr. Gay will be entitled to the greater of termination benefits under his Promotion Letter, termination benefits under the CIC Plan, or termination benefits under another severance plan then in effect.

Chris Gannon

In May 2015, the Company entered into an employment agreement with Mr. Gannon in the form of an Offer of Employment as Chief Financial Officer (“Offer Letter”). As provided in the Offer Letter, Mr. Gannon is employed for an indefinite period of time, and his annual base salary was set at $320,000.

The Offer Letter provides Mr. Gannon the opportunity to participate in the Company’s AIP under which he is eligible to receive up to 60% of his annual base salary for achievement of certain performance goals, subject to the Company’s meeting its annual financial targets and other goals. For 2015, Mr. Gannon was guaranteed a payment under the Annual Incentive Plan of $192,000, payable in 2016.

Under the Offer Letter, Mr. Gannon was granted a sign-on option to purchase 200,000 shares of the Company’s common stock under the standard terms of the Company’s 2008 Equity Incentive Plan. After six months of employment, Mr. Gannon was also granted an option under the 2008 Equity Incentive Plan to purchase 100,000 shares of the Company’s common stock. The options vest over four years, with 25% of the options vesting on the first anniversary of the vesting commencement date, the date of grant. After the first anniversary, 1/36^th of the options vest each month thereafter.

The Offer Letter also provides that subject to the approval and discretion of the Board of Directors, that each year Mr. Gannon may be granted options to purchase shares of the Company’s common stock with a fair market value targeted at $125,000, based on stock option valuation.

Additionally, the Offer Letter provided Mr. Gannon with a lump sum of $100,000 to move his family to California. If Mr. Gannon chooses to resign with the first twelve months of employment, he agrees to return a pro-rated share of this relocation payment.

In the event of an involuntary termination other than for cause, as defined in the CIC Plan, prior to the second anniversary of Mr. Gannon’s start date, he will be entitled to a lump-sum payment equal to twelve months of annual base salary, using his annual base salary in effect as of the date of the employment termination. If the termination occurs after the second anniversary of Mr. Gannon’s start date, he will be entitled to a lump-sum payment equal to six months of annual base salary, using his annual base salary in effect as of the date of the employment termination.

These severance benefits are conditioned on his signing a release in favor of the Company and will be reduced by deductions required or permitted by applicable law.

Juan Otero

On March 15, 2016, the Company accepted the resignation of Mr. Otero. In consideration of Mr. Otero’s general release and waiver of claims in favor of the Company and its affiliates, the Company agreed to provide him with certain benefits for a period of twelve months, including salary continuation and health benefits, and the vesting of stock-related awards during the twelve-month period, which will be exercisable consistent with the Company’s 2008 Equity Incentive Plan and related award agreements.

Thomas S. Rooney, Jr.

On January 12, 2015, Mr. Rooney announced his intent to resign to allow the Company to facilitate a transition during which the Company would identify and appoint a successor. In connection with the transition, the Company and Mr. Rooney entered into an amendment to his February 14, 2011 offer letter. Under the terms of the amendment, Mr. Rooney resigned as a member of the Board of Directors and its subsidiaries effective January 13, 2015 but continued to serve as Chief Executive Officer until the appointment of Mr. Gay as Chief Executive Officer. The amendment also provided that in addition to the severance payments provided for in his Offer Letter, in exchange for Mr. Rooney remaining as Chief Executive Officer until the appointment of his successor, the Company and Mr. Rooney would enter into a consulting agreement under which Mr. Rooney will receive $8,000 a month for 18 months and his unvested options will continue to vest for the period of consultancy.

Under the terms of his offer letter, in the event of an involuntary termination other than for cause, as defined in the Company’s CIC Plan, Mr. Rooney was entitled to the following severance benefits:

These severance benefits were conditioned on his signing a release in favor of the Company and would be reduced by deductions required or permitted by applicable law.

The Summary Compensation Table includes the amounts paid to Mr. Rooney in connection with his separation from the Company.

Outstanding Equity Awards as of December 31, 2015

The following table presents certain information concerning equity awards held by our named executive officers as of December 31, 2015.