Wednesday, May 09, 2007

'Say on Pay' -- Bon-Ton Stores Shows the Way...Why NO!

Dozens of “say on pay” resolutions have been put forward this year by shareholders at annual meetings of U.S. corporations amid controversy over soaring executive pay compensation.

According to Institutional Shareholder Services, a corporate governance advisory service, a total of 240 pay-related proposals have been filed for annual meetings held in January through May 2007, up from 131 in the comparable period last year. “Say on pay” proposals form a high-profile subset of these resolutions, with more than 60 shareholder proposals submitted to date.

Management at those companies—of course—are advising shareholders to vote against this—and similar, non-binding advisory proposals—arguing that pay practices approved by compensation committees are in keeping with good corporate-governance principles.

Vote results for seven of the resolutions reported so far this year show average support of 41 percent. To date, the highest level of support came April 24 at Merck & Co. (MRK-$52.24), when 49.2% of the votes cast supported the resolution.

Verizon Communications Inc. (VZ-$40.62) may become the first publicly traded U.S. company where the shareholder “say or pay” resolution might be adopted by investors, depending on the outcome of a close vote at the Company’s annual meeting last week.

In a
press release, the No. 2 U.S. phone company, said “the preliminary results for the proposal on an advisory vote on senior executive compensation was too close to determine whether the proposal passed or was defeated, and a final result would be announced in the next few weeks.”

In our view, introducing a shareholder voice on pay will neither improve board accountability nor strengthen the pay-for-performance linkage. The 10Q Detective posits that U.S. Companies will just engage in Orwellian
newspeak: amending and restating performance metrics—‘lowering the bar,’ where bad performance is simply replaced by ‘ungood.’

There are some ideas so wrong that only a very intelligent person could believe in them. – British author George Orwell (1903 – 1950)

During the last four years, department store operator Bon-Ton Stores Inc. (BONT-$48.61) experienced dramatic growth in the size and scope of its operations, primarily through the acquisition of The Elder-Beerman Stores Corp. in October 2003 and the $1.1 billion acquisition of the Carson’s division of Saks Incorporated in March 2006. Sales increased from $713 million in 2002 to over $3.3 billion in 2006.

During the same period, the number of stores increased from 72 stores operating in nine states to 283 stores operating in 23 states.

Trading on these impressive trends, the Company’s common stock has performed well as the Company has grown, rising in value from $4.14 per share on the last trading day in 2002 to $37.32 on the last trading day in 2006.

Given its impressive performance—financial and stock gains—it should surprise no one that CEO Byron L. Bergren earned total compensation of about $4.1 million in fiscal 2006, $1.5 million of which was in the form of a cash bonus (which was also the maximum bonus available to him under the Company’s current cash bonus plan).

[We would be remiss—as the 10Q Detective—if we did not mention, too, that included in the $4.1 million was $91,313 in “all other compensation”— $39,418 of which was for rental housing in Milwaukee, Wisconsin, for use during his trips to the Company’s merchandising operations there. We wonder if any of these trips coincided with spring fever in Milwaukee, which means only one thing to the locals—Coho salmon fishing on Lake Michigan!]

To some extent, apparel sales at Bon-Ton are dependent on (i) economic events in the automobile industry, which affect sales trend in the Company’s markets in Ohio, Michigan, and Indiana—states where Bon-Ton has more than one-third of its stores; (2) rising energy prices, which could adversely impact discretionary spending by consumers; and (iii) unseasonably warm weather that in the fall and/or wet weather in the spring would negatively affect traffic trends.

Merchandising decisions [buyers making judicious clothing style decisions] and integrating store acquisitions, impact same store sales at apparel retailers too.

On April 12, 2007, Bon-Ton reported a 3.8% drop in March sales at its stores open at least a year, citing unseasonably cold weather and weak performances from its home and furniture categories.

Analysts, on average, expected the same-store sales to rise 4.5 percent, according to a poll by Reuters.

Citing the aforementioned risks, share-net is expected to slow in fiscal 2008 (ending January), pegged at $3.48, up 18.8% from $2.93 in fiscal 2007. This estimate might be high, for analysts are looking for a traditional strong (seasonal) second half, postulated on a strong turnaround at its legacy stores and the successful integration of its recent acquisition.

how do future events at Bon-Ton link with “say for pay?”

Reflecting the aforementioned slowing of same store comps, the share price of Bon-Ton has plummeted 15.7% in the last two months, peaking at $57.66 per share on March 29, 2007.

In the Company’s recently filed proxy, the Board of Directors communicated to investors that it was the compensation committee’s
philosophy that the Company’s executive officers’ compensation should be directly linked to corporate performance and increases in shareholder value.

Curiously, the Board of Directors is now looking to amend and restate Bon-Ton’s ‘Cash Bonus’ plan:
  • The Cash Bonus Plan was adopted by the Board of Directors as a means to provide greater flexibility in the establishment of performance goals and setting of target bonuses….
  • The purpose of the amendment and restatement adopted by the Board is to increase the maximum individual bonus available under the Cash Bonus Plan from $1,500,000 to $5,000,000 and from two times base salary to three times base salary of an eligible participant.

In calendar 2006, 34% of CEO Bergren’s annual bonus ($1.5 million) and 34% of his Long-Term and equity compensation (restricted shares worth $1 million and performance-based RSUs worth $1 million) were tied to the financial performance and stock performance of the Company.

If the Company is successful in changing the dollar size of its executive Cash Bonus Plan, even if corporate performance and shareholder value drop in comparison to prior years, by raising the maximum payout—on a percentage basis—Bergren could still earn $1.5 million (or more) as a cash bonus.

The Board could defend their payout option, and an ‘ungood’ performance, falling short of stated metrics (bonus weighting: 75%-net income and 25%-net sales), becomes acceptable—as well as the compensation paid to Bergren—even though he made the same bonus for a better performance in the prior year!

During times of universal deceit, telling the truth becomes a revolutionary act. – George Orwell

Editor David J Phillips holds no financial interest in any of the stocks mentioned in this article. The 10Q Detective has a FULL DISCLOSURE policy

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