Annual meeting: May 19

Leslie Moonves from CBS was the number one overpaid CEO on our list in our most recently published report. The regression analysis by HIP Investor showed an excess pay of over nearly $42 million in 2015. Moonves was also among the top five in both 2013 and 2014.

That was last year. The proxy published in 2017 shows that Moonves’ pay increased $12 million in one year for a total of $69.55 million in total disclosed pay. An unusually high percentage of this pay was in cash. His 2016 bonus was $32 million, on top of his $3.5 million salary. It is aligned in no way with the interests of shareholders.

I expect that most pension funds and mutual funds holding the stock would vote against the pay package if they could vote.  However, nearly 90% of CBS shares –369,984,335 of Class B Stock – are “non-voting shares.” There are 37,598,604 shares of Class A Common Stock that can vote. However, 79.5% are owned by Sumner Redstone and his family.

Non-voting shares are in the news lately due to the Snapchat IPO and subsequent stock price tumble. After its first earnings reports since IPO was released on May 11, Snapchat’s stock price fell 25%. Of the $2.2 billion in disclosed losses, $2 billion was from expenses related to stock based compensation. As reported by Dow Jones, “Snap’s $2 billion payout surpassed its annual revenue by a wide margin.”

What recourse to Snap’s shareholders have? None, other than hoping there’s a greater fool waiting to buy the stock. They can’t vote directors off the board. They can’t vote on the pay package.

Snapchat and CBS are not the only companies with highly paid CEOs insulated from the will of shareholders. Bloomberg recently came out with a list of the highest paid CEOs of 2016. A quick glance at the list and I realized many were dual-class companies.

In addition to CBS, there are six other companies of the ten that have shares with multiple voting rights and/or non-voting shares. Some (including Gamco & Google) have a similar form to CBS, with certain shares getting 10 votes each. Apple has a tri-class structure. Evercore Partners’ voting structure is so complicated a diagram is required to show the structure Class A units, Class E units, Class G interests, Class H interests and Class I-P units.

What do we make of this fact? The next question I looked into was how the percentage of dual-class companies compares to the larger pool. As far as I can tell, using data from CII, there are 26 dual-class companies in the S&P 500. Just a bit more than 5% of S&P 500 companies have dual class shares, but 70% of the highest pay do.

I wondered if this statistic might have something to do with Dodd-Frank’s provision that allowed shareholders to vote on pay.  What were the stats 10 years ago before the practice was adopted? To find out I quickly found a list of the highest paid CEOs from 2006. I then looked at 2007 proxies for each of these companies – which included familiar names like Lehman Brothers and Countrywide Financial – to see how many had dual class stock. The answer: none.

In the 10 highest paid of 2016, two of the three that did not have dual class voting structures have considerable insider control. At Walmart U.S. e-Commerce CEO Mark Lore received over $236 million in compensation, mostly connected to Walmart’s purchase of which he had founded. If every single non-Walton family shareholder voted against pay this year the extraordinary package would still receive majority support. Elon Musk’s share of Tesla is not as dominant, but he controls over 20% of the vote.

In fact, looking at all ten of the companies, it appears that IBM – with a compensation package I wrote about earlier this spring —  is the only one without either dual class shares or significant insider ownership.  At the vote on pay at the company this spring 46% voted against the pay package, an unusually high percentage.

To me this is a hopeful sign. Advisory votes on pay may be working to hold in check the worst impulses of overpay. We are not anywhere near normal or appropriate CEO pay, but it appears that shareholders are having an effect. Voting is a powerful tool, but it has to be exercised.

Yahoo Executive Bonus Plan

In its 10Q filing on May 9, Yahoo included as an exhibit its 2017 Executive Incentive Plan, signed in March. (Thanks to Michele Leder for posting on this yesterday).

The formula for the bonus – which will be determined at the end of 2017 by the Plan Administrator — will include a company performance factor and an individual performance factor. The company performance factor will use metrics such as: GAAP Revenue, Revenue ex-TAC, Adjusted EBITDA, and TSR.

These seem reasonable. However, skip ahead to the section that defines what happens with a change in control. Specifically, the agreement says that if there’s a change of control “the Company Performance Factor of Section II.B shall cease to apply.”

Instead, the agreement notes, executives (only four are named explicitly in the agreement though others may be added) will received a payment, “equal the Participant’s Target Award for 2017 multiplied by the Participant’s Individual Performance Factor.” There’s a cap, but it is 200% of target.  As far as I can tell, Mayer’s maximum Executive Incentive Plan bonus will equal seven-fifteenths of 3 percent of Yahoo! Inc.’s Adjusted EBITDA.

Yahoo shareholders will vote on June 8 on the sale of Yahoo’s operating business to Verizon Communications. One of the definitions of change in control in the incentive plan is: “the consummation of a sale or disposition . . .  of all or substantially all of the assets of the Company to a Person or Persons in one or a series of related transactions; provided, however, that, for purposes of this paragraph (d), the assets of the Company shall not include the Company’s direct and indirect equity interests in Alibaba Group Holding Limited and Yahoo Japan Corporation.” It seems to me that the Verizon deal fits that definition.

The plan lists as objectives as, “To reward annual financial and individual performance that complements the Company’s longer-term strategic focus.”  The amount of the bonus and the treatment in a change of control suggests otherwise.


Annual meeting:  May 16, 2017

On May 5, Conoco Phillips posted with the SEC an appeal to shareholders, filled with colorful graphs, urging them to read the supplement prior to voting.  Such a filing is an early indications that a company is anticipating a poor vote on its pay package. It isn’t surprising, CEO Ryan Lance has been on our overpaid CEO list for each of the three years since we began publishing the list. Total compensation for 2016 was $19,212,038.

Almost every element of pay at ConocoPhillips significantly higher than peers. Salary for the CEO is $1.7 million, up from $683,758 in 2010, and from $1,258,667 the year he was named CEO. This salary significantly above that of CEOs at companies with a higher market cap, including Microsoft, Johnson & Johnson and Alphabet.

Like many older companies, there is a lucrative pension/retirement package. Lance’s package, one of the 100 largest in the S&P 500, is valued at approximately $30 million.

But while the company supports a pension like the established company it is, it issues stock options like a start-up. For a new company options can reward employees for getting a creation off the ground and are best when used broadly. Options were intended not to reward executives in established company in a cyclical industry. One of the red flags that placed the company on As You Sow’s overpaid list is the excessive use of options over the last eight years. The extreme variation in stock price shows that more than the actions of an individual in the C Suite are driving company value (something companies are eager to note when there’s a cyclical downturn). Lance has options with a strike price of $33 and options with a stock price of $69 dollars.  This means Lance can benefit in a perverse way when the price of oil and the company stock price goes down: options granted in a bad year will have a low strike price. A temporary cyclical decline will likely reverse itself, and then he will have a windfall. Options expiring in 2018 may still be underwater when they expire, but the next tranche of 61,115 shares have an exercise price of $34, well below the current trading level.

Shareholders are also concerned about the large number of metrics used in calculating both short and long term incentives, and offers little disclosure of targets.

Last year the company received a relatively low level of support for its pay package, and the company trumpets the changes it has made since. For example, options have been reduced from 50% to 40% of long term incentive awards. The committee has “eliminated positive discretion by capping individual adjustments for stock options at target.” However, the committee retains broad discretion on many aspects of pay. In fact, the term “discretion” appears 31 times in the proxy statement (though the board has used negative discretion at times).

None of the changes the company has adopted has done much to address the fundamental issue of quantum of pay. While Lance’s pay is somewhat lower than it was two years ago, it remains excessive even by the standards of U.S. CEO pay.

NOTE: At the company’s anual meeting shareholders voted decisively against the pay package:




Annual meeting:  May 24

Why did CEO pay at McDonald’s practically double last year?  The chain faces a fundamental demographic challenge of customer decline. (I see this echoed in my own household: as soon as my kids were past the age of Happy Meals they began to treat the fast food chain with disdain). The short term solutions – selling more restaurants to franchisees, offering breakfast all day long – do nothing to change the fundamental issues faced by the company.

And yet, McDonald’s CEO Steve Easterbrook’s total disclosed compensation grew from $7.4 million in 2015 to $15.4 million in 2016 total compensation. He received a $3 million increase in just his one-year incentive pay,  that totaled $4.5 million for 2016. The remainer of the overall 94 percent increase came from increases in stock awards, options and salary.

In the menu of questionable pay practices McDonalds has some standards: a high calorie salary, super-sized buybacks, and an extra-large order of non-GAAP calculations.

Each of the named executive officers at McDonald’s received a salary increase in 2016. These salaries also help inflate bonuses, since target is based on a percentage of salary. Easterbrook’s salary was increased to $1.3 million, putting considerably higher than the median salary for S&P 500 CEOs.

We’ve discussed buybacks before. The statistics from McDonalds are particularly incredible when compared to company earnings. According to Forbes, McDonalds spent $6 billion more on buybacks ($20.5 billion) from 2014 to 2016 than it earned in income ($14 billion).  These buyback have been funded by debt. The Forbes article provides an excellent introduction to buybacks generally.

As noted above, the major component of the pay increase was the annual incentive. McDonalds is yet another company where bonus is paid based on figures that have do not comply with generally accepted accounting principles (GAAP). The adjusted 11% operating income growth rate is nearly twice the amount reported under standard accounting.

Easterbrook became CEO in 2015 and some of his decisions – notably all-day breakfast – have driven increased traffic. Even those who laud some of his choices are not quite sure he deserves the break he got. As Joe Cahill wrote in Crain’s, “the company shouldn’t shower him with riches for short-term results that don’t necessarily signal sustained recovery.”

For now the CEO is loving his pay package, and shareholders are loving the buyback inflated boost in stock price. But ultimately if customers aren’t loving it the company cannot succeed.

Also of note, in addition to voting on pay, shareholders have the opportunity to vote on an As You Sow proposal encouraging the company to report on the environmental impact of the polystyrene foam cups it continues to use internationally.


Annual Meeting: May 24

Why should anyone expect a CEO who doesn’t acknowledge the basics of climate science to adhere to generally accepted accounting principles?

The pay of Southern Company CEO Thomas Fanning – who recently stated on CNBC that he is unpersuaded that carbon dioxide is a primary contributor to climate change – increased from $11.8 million in 2015 to $15.8 million in 2016. Part of the pay increase was due to what some investors have called the decoupling of pay and performance, recently covered by Russell Gold in the Wall Street Journal.

In a letter filed at the SEC April 24 shareholders opposing the pay package highlighted the ways the compensation package has been inflated by using non-GAAP exclusions. (GAAP stands for Generally Accepted Accounting Principles.) According to that letter, signed by multiple pension funds, “A driver for higher executive compensation levels in both the 2015 and 2016 fiscal years was the Compensation Committee’s decision to use an earnings per share (EPS) figure “adjusted” to exclude the negative earnings impact of the project[s] and certain other items.”

The largest exclusion related to cost overruns and the Kemper Clean Coal plant, initially forecast to cost less than $3 billion, but with delays and overruns continuing to inflate the construction cost, now at nearly $7 billion.  A 2016 New York Times expose, entitled “Piles of Dirty Secrets Behind a Model ‘Clean Coal’ Project” details deliberate concealment of cost overruns and delays and notes that, “Members of Congress have described the project as more boondoggle than boon”

The cost overruns have required the company to take pretax charges against earnings related to Kemper in 15 of the last 16 quarters. What has changed, however, is how these numbers have affected compensation.  In 2013, Southern recorded pre-tax charges of $1.14 billion related to Kemper and no adjustment was made for compensation metric purpose.  In 2015 and 2016,  however, the letter notes, “the Compensation Committee simply used adjusted EPS for all employees, including top executives, insulating them from Kemper’s negative impact on earnings.”

The letter – signed by CalSTRS, Local Authority Pension Fund Forum, Seattle City Employees Retirement System and the Nathan Cummings Foundation –  is impressively detailed and I encourage you to read it in its entirety.  It concludes: “We believe it is important to communicate that shareholders do not support the Compensation Committee using its discretion to shield senior executive pay from the negative impact of projects that are central to Southern’s strategy and failing to exercise its discretion to reduce incentive pay for executives to hold them accountable for strategy execution missteps.” In addition to urging shareholders to vote against pay they encouraged votes against the reelection of compensation committee directors Steven Specker and Dale Klein.

I have written before about the expanding use of the use of non-GAAP earnings.  In addition to making cross-company comparison more challenging, the exclusions may allow executives to make targets that would not otherwise have been achieved, as they did at Southern. Another problem is that systemic problems can be hidden by a mass of individual “non-recurring” costs or other adjustments. They muddy already confusing financial statements.

But muddying things seems standard protocol for many energy executives. When it becomes impossible to deny the climate is changing, the line moves to casting doubt on what is causing the change, raising questions on the veracity of individual statements and studies, and the appropriate response to climate change. Fanning, in his CNBC interview, said that climate change couldn’t be denied but also contended that the climate has been changing for millennia.

Another item caught my eye as I read the proxy: there were multiple peer groups listed. Anytime a company has more than one peer group it deserves particularly careful attention. One group in Southern’s Proxy is used for compensation benchmarking, the others in determining the relative TSR figure that drives bonuses.

The company states that “several of the companies in the 2016 PSP peer group do not meet the size requirement to be included in the compensation peer group (+$6 billion in revenues).”

What does that mean:  for the most part it means the CEO wants to be paid like large companies on guaranteed compensation, but is willing to include smaller companies when doing a TSR comparison. The easiest element of pay to benchmark is salary, and it is a component that has risen remarkably at Southern. In 2016, Manning’s salary was increased $1.29 million. It appears that his salary has increased significantly every year. In 2009, when Fanning was CFO at the company his salary was $690,250. In 2010, the year he became CEO, he was paid a salary of $809,892. By 2011, Fannings salary had crossed the million dollar threshold and reached $1,064,399 with increases based in part on “market data.” And his salary continues to rise.

Use of aspirational peer groups is one of many factors that has inflated compensation for years. The abuse decreased when institutional investors focused on some of the outlandish examples. A useful study published by the IRRC Institute in 2012 found that peer group benchmarking is inherently flawed and inflationary.  Misuse of peer groups is subtler now, though by the time the practice slowed the inflated executive pay was already in the system.

Climate change denial is subtler these days too. Investors at Southern’s annual meeting will also have an opportunity to vote on a proposal calling for the company to issue a report Southern’s strategy for aligning business operations with the IEA 2°C scenario, while maintaining the provision of safe, affordable, reliable energy.

CalPERS which owns nearly 3 million of the shares, has already announced its support for the proposal.   “We believe proposal #6 is of particular significance in light of the global consensus regarding climate change and emission reduction targets reflected in the Paris Agreement. The importance of the proposal’s request is also underscored by the efforts of Financial Stability Board (FSB), an international body mandated by G-20 leaders to develop efficient climate-related financial risk disclosures.”


Annual meeting April 25

In 2016, IBM CEO Ginny Rometty received a 65% increase in total disclosed compensation: $32.7 million. A significant portion of the increase was due to a large stock option grant. Companies with large option grants sometimes contend that the figure in summary compensation tables overestimates the value of options. They rightly note that options only have value when stock price increase is complicated stuff: Myron Scholes, after all, won the Nobel prize for Economics in 1997 in part for his role in creating the Black-Scholes method. In this case, however, experts believe the value as presented may be an understatement.

As analyzed by ISS and further by Melin Anders of Bloomberg, IBM’s calculation of stock options – the same it has used for many years but highlighted this year by a grant of 1.5 million options valued at $12.1 million — is problematic. “Based on [ISS] calculations, the award [as estimated by the company] is almost 60 percent below the proxy adviser’s own ‘fair value’ estimate of about $29 million. That’s the biggest gap for S&P 500 companies that granted options to executives last year.” Melin also points out that the option award was granted at near the company’s five year low trading price.  Although there were price increase criteria attached, the stock price has since recovered enough that those have already been met.

Even without this analysis of option value, there’s a growing consensus that Rometty is overpaid. Michael Hiltzik wrote a great column this year calling her package, “proof that IBM continues to set the standard for overpaying its CEO for mediocre performance.”

Indeed, IBM appeared on our list of companies with overpaid CEOs last year as well.  In 2015 Rometty received a $4.5 million bonus, up $900,000 from 2014. This high pay came amidst falling profits and revenue.

This year her bonus increased again, by $400,000. In a document IBM filed at the SEC this month the company noted that, “The long-term incentive plan paid out at 32% for the 2014-2016 period due to lower operating EPS and free cash flow performance in the three year period.” However, it is critical to note the way EPS is influenced by stock buybacks.

A stock buyback is just what it sounds like: a company buying back some of its stock in the open market. There are times it may be appropriate, if the shares are undervalued and there’s really nothing better the company can do with the cash. But it also reduces the number of shares out there, making EPS look better by lowering the number of shares in the denominator of the fraction. Robert Ayres has as pithy an explanation of buybacks as I have seen: “When compensation is tied to share price, [executives] are rationally driven to take advantage of any legal mechanism to drive share prices up during their tenure.”

Ayres uses IBM as an example in “The Economic Consequences of Shareholder Value Maximisation” on the flaws of linking compensation primarily on stock performance rather than company performance.

He writes:

“Since the 1990s, blind dedication to Shareholder value maximization (which continues) has led to unending emphasis on cost-cutting (by job cutting), lack of product innovation and the use of cash to finance corporate stock buy-backs. Between 2005 and 2014, IBM delivered US$32 billion in dividends to shareholders and spent US$125 billion buying its own shares (to prop up the share price), while investing only US$111 billion in capital investment and R&D combined.”

Much more has been written and will be written about larger failures of IBM. Where did the circle start? It could have been when pay for performance was adopted in a narrow way that rewarded stock performance above all else. It could have been when buybacks became an accepted way to prop up stock price. It could have been when shareholder value primacy was widely adopted.

The question is who is going to stop the spiral. Shareholders play an important role with their votes.  A strong, appropriately engaged board should also provide a check.  Some of these larger strategic issues predate Rommety’s promotion to CEO in 2012, though she has been at the company since 1981. There has been a fair amount of turnover in the board, which may be another governance red flag, but there remain five directors who have served more than 10 years. The longest serving director, American Express CEO Kenneth Chenault – himself an overpaid CEO – has been on the board since 1998.  Glass Lewis & ISS have both recommended against the compensation plan, so many shareholders will vote against. We may see significant opposition to directors as well.

Newmont Mining

Annual meeting: April 20

CEO Gary Goldberg has been at Newmont Mining since 2011, becoming CEO in 2013. When Goldberg became CEO the stock price was trading at approximately $41 per share. In 2015 at one point it traded under $20. In 2016, the stock improved, and Goldberg’s total compensation increased 24% percent to $16.5 million. This large upside for improved stock performance represents a great flaw of executive compensation practices, because the inverse never seems to be true.

Indeed, Goldberg’s salary has increased every year, to $1.27 million in 2016. Likewise, with his stock awards, which were $5.9 million in 2014 and $11,778,961 in 2016 ($9,395,636 in performance stock units and $2,383,326 in restricted stock units).

According to press reports, ISS recommends a vote against because, according to a recent press report, “The CEO’s fixed pay and incentive opportunities increased following significant stock price decline.” Further, according to a company with a filing, ISS found that “the [compensation] plan could provide for vesting at target where stock price remains flat over the performance cycle.

Stock awards are a particularly problematic payment in an industry this volatile. The stock at Newmont swung wildly in 2016. Once article notes for example, that, “Over the past year, the stock has traded as low as 11.5 times free cash flow and as high as 31.0 times.” The price used to determine target value of the 2016-2018 awards was $19.04 per share. However, by December 30, 2016, the closing price of the stock was $34.07.

The company notes that such stock awards “represent the single largest component of the officer compensation program.” This is true. The proxy statement goes on to state that it is “aligned with shareholders experience.” That is false. Shareholders purchase stocks at a certain price; long term shareholders hold them through the ups and downs of stock. Executives do benefit considerably when stock price goes up, but face only paper losses based on estimates when the stock falls. Shareholders are unlikely to receive large grants at the bottom of the market, and executives often do.

United Airlines

In a few weeks, United will likely be sending out its proxy statement. Last year it was issued on April 21. But the events of the week inspired me to take a quick look at last year’s statement.

A quick search of the proxy statement filed last year shows that the word “executive” appears 421 times and the word “customer” appears 29 times. The only director whose biography lists customer service is that of CEO Oscar Munoz. More than once, the proxy statement lists responsibilities Munoz had at CSX including “service design, customer service, engineering, mechanical,  and technology.” However, customer service at a freight company is entirely different from customer service at an airline.

As many companies do, United also notes particular expertise of its board members. Here are some excerpts:

Director Caroline Corvi “brings an expertise with respect to the manufacturing of commercial aircraft.”

James Kennedy “brings to the Board a stockholders’ perspective and his expertise in management and finance, particularly as result of his tenure as President and Chief Executive Officer of T. Rowe Price.”

William Nuti “provides the Board with valuable expertise in management, finance and technology, developed during his years of service in the technology industry.”

Laurence Simmons “provides the Board his extensive expertise in finance, corporate strategic transactions and the energy industry. Mr. Simmons is the founder and Chairman of SCF Partners (“SCF”), a firm providing equity capital and strategic growth assistance to build energy service and equipment companies.”

Notice anything missing? The board on the whole seems somewhat tilted toward industry and technology expertise.

To its credit, United has used Customer service as one of the operational metric for determining executive compensation. In 2015, the company reported last year, “customer satisfaction survey results exceeded the target level with respect to the customer satisfaction component of the 2015 Annual Incentive Program awards (representing 20% of the total target opportunity). For 2015, customer satisfaction was measured by monthly improvement over the prior three-month rolling average customer satisfaction survey scores.”

A fundamental question for pay for performance is what the threshold level is set at. As far as I could tell that isn’t disclosed in the proxy statement. It leaves open the question: if something improves from truly dreadful to only dreadful, is it worthy of reward? Clear disclosure is more helpful. Delta’s proxy statement for example, notes its “continued our 1st place performance in fewest Department of Transportation customer complaints among the major network carriers.”

While targets were met on customer satisfaction in 2015, Munoz did not receive a bonus as he had only recently joined the company. Again, we can expect to see the new proxy statement in a few weeks. It will attract a great deal of interest.


Annual Meeting: April 10, 2017

Goodyear had a bad year in 2016. Revenues declined by 8%.  The stock lost value, with total shareholder return at -4.5%.

It shouldn’t be surprising then that the bonus for CEO Richard Kramer decreased from $11,577,753 in 2015, to $9,667,094 for 2016. This declining bonus suggests some allegiance to  of pay for performance.

However, total compensation year over year actually increased. For 2015 Kramer received $19,307,800 and in 2016 he received $19,798,104. How is this possible?

Well, while lowering the bonus, the board raised Kramer’s salary by 18%, to $1.3 million. In explaining the rationale for the increased the boards cited the development and completion of a strategic plan. They also noted that the increase was, “to move him closer to median market base salary rates given his tenure in his current role as CEO.” Increases in salary that seem born of a sense of entitlement, driving up bonus and retirement payments in future years, as these are based on salary.

It also drives up pay at other companies. Next year this 18% increase will be used to justify salary increases elsewhere. Such ratcheting up of pay is always problematic, but particularly so for those who hold funds in indexes. While there might be some who look at the absolute dollar amount of the increase and shrug, shareholders who are long term investors should pay close attention, because the increase will cascade through a system. That’s a part of how we arrived at the place of overpaid CEOs in the first place.

In May of last year State Street Global Advisers put out a report entitled, “Guidelines for Mitigating Reputational Risk in C-Suite Pay” noting that found the stable nature of pay packages for 2015 surprising “when evaluated in the context of poor performance and shareholder returns.” The report identified “methods used by companies to circumvent the pay-for-performance alignment” including the one described above, “Increased base salary and/or long-term stock grants that made up the decrease in short-term bonus payouts.”

Kramer’s stock awards and option awards did increase, though only slightly. Change in pension value was a bigger driver of the total compensation figure. There are those that argue that such increases should not be considered as the variations from year to year are driven by external factors. However, it does represent real money available to this CEO and not to those who do not have pensions. Kramer’s total pension is currently valued at nearly $18 million dollars.

I’d love to see someone do a deeper analysis of the calculation of the bonus which, while it didn’t meet target, was paid above threshold. The company discloses a significant number of exclusions that were used in calculating the EBIT and free cash flow figures. While they generally seem in line with what other companies do, a careful examination is merited. Also of note is the company’s large stock buybacks. As put it in a recent article entitled, Worrisome Headwinds at Goodyear Tire, “The company’s strategy rather seems like a bit of bribery. Our sales and profits are going down, but we’re going to pay you dividends and increase share repurchases to ‘enhance shareholder value.’”

Ralph Lauren

When companies have news they want shareholders to miss they often file it with the SEC late on a Friday afternoon. This was the case with the new employment agreement for Ralph Lauren, who is executive chairman and chief creative officer for the company that bears his name. Michelle Leder has made the “Friday night dump” her specialty and it was through a tweet that I learned about this, and followed up with some Monday morning mining.

While once common, employment agreements with excessive guarantees have grown rarer. Many shareholders vote against pay when packages are of even three years. On March 31, 2017, the board of Ralph Lauren signed an agreement with Ralph Lauren that will last for five years, through April 2, 2022. “His annual base salary will continue to be $1.75 million, and he will continue to have a target bonus opportunity in the amount of $6 million for each fiscal year.” These are extraordinarily generous guarantees, particularly given that the company also pays for a CEO.

However, the most alarming things in the agreement is what happens if Lauren – who is currently 77 years old — leaves employment for any reason, including disability. In terms of salary and bonus, the treatment is routine, though still generous. Much more problematic is treatment of unvested restricted performance share units (“RPSUs”) and PSUs which “will vest at target in their entirety on the date of his termination of employment.” Similar vesting will occur if the company fails to extend the contract after in 2022.

In the last proxy statement the board reported that it had, “changed our equity program so that 100% of our NEOs’ annual equity awards will be performance-based.” But this, and other suggestion that vesting is “based on achievement” are simply not true for Ralph Lauren given the size of the loophole in small print in the new employment contract.

The PRSU generally vest based achievement of earnings per share (EPS) metrics; the PSUs include long-term metrics such as cumulative EPS.  The company reports that performance level that needed to be achieved in order for the Fiscal 2016 PRSUs to be earned at target was an EPS of $7.01 per share; actual achievement was $6.42. A look at the 2015 proxy statement shows that the RPSUs also did not achieve target over the 2013-2015 time period. Yet, if Lauren retires for “disability” in the next five years his shares will vest 100% at target no matter how the company performs.

Ralph Lauren annual meeting likely won’t be held until August. Shareholders should mark their calendars to vote against the package and the compensation committee directors who approved it.