American Eagle Gets Some High-Priced Help
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American Eagle Outfitters (NYSE: AEO) has been stalled for the last three years giving shareholders little to be excited about except for a $0.44 dividend yielding 2.6% which is not a lot to be excited about.
The current CEO, James O’Donnell, retired in January 2012 after being with AEO for 8 years. At least 5 of those years were good but since 2008, he has been unable to pull the company out of its tailspin. In spite of business going at breakneck speeds downhill, he took home $18 million in 2009 and $9 million in 2010. O’Donnell will collect nearly $15 million for retiring.
The new CEO is Robert Hanson a 23-year veteran of Levi Strauss. He took over as CEO on January 28th as the year ended and was in attendance at the Q4 2011 conference call on March 7. Hanson will be paid nearly $13 million for his first year at his first gig as head of a teen retail chain. That does look cheap compared to Michael Jefferies at Abercrombie & Fitch (NYSE: ANF) who pulled down $23 million in 2010 and a cool $36 million in 2009. Hanson is doing better than the Aeropostale (NYSE: ARO) CEO, Thomas Johnson, at just $5 million in 2010.
Considering the size of his first paycheck with AEO, I was looking for some dazzle at the conference call outlining his plans for a turnaround. It was underwhelming and full of the generalities that have become standard at teen retail conference calls where CEOs are searching for their groove. Thomas Johnson gave a nearly identical plan over the past few quarter’s calls ---higher productivity, clothes on-trend, better price points -—all very generic.
In the meantime, while investors wait for American Eagle’s new business strategy to become clear, they have time to peruse the employment terms and then decide if the deal was better for the Eagle or Mr. Hanson. While he won’t be making anything close to ANF’s CEO, it is his first year at AEO and apparently his first year running a teen retailer and the compensation looks generous. In his last year at Levi Strauss, he made $2.5 million as executive vice president and president of Levi’s global brands. The job with AEO pays considerably better. His negotiating team was obviously pretty good.
Most of the items have become SOP for incoming CEOs – signing bonuses, moving expenses, bonuses, cars, and plenty of stock options. Unfortunately, shareholders have very little input concerning any excesses.
The Signing bonus and Pay Package
Hanson spent 23 years with Levi as the global president. That does appear to make him something of an expert in all things denim. Running a teen retailer may require a whole different skill set. Whichever way it turns out AEO is paying a high price to find out if he can do the job and Hanson has nothing to lose. The deal is worth around $13 million and even if AEO fails to recover, he is set for a couple of years.
The deal is a doozy
The following are just the perks for signing on with AEO and not even part of the annual salary
The signing bonus is major league caliber. He does have to repay it if he leaves the company short of 12 months. My money is on his staying power for at least a year. He has to pay the taxes on it -— he couldn’t get that paid as part of the deal.
1) Signing Bonus
There is a one-time very generous signing bonus of $3,339,000.00 payable in a lump sum within 60 days of signing.
2) Deferred Compensation
Immediately accrues a $300,000 credit to his deferred compensation account
No pay package is complete without a few million options and restricted stock thrown in. Here we have another $2.5 million added to the pot. Hanson does have to meet some as yet unspecified performance goals. It will be interesting to see how and where they set the bar.
3) Restricted Stock Unit Award
Restricted stock worth $2,500,000.00. The number of units subject to this RSU award will be calculated by dividing $2,500,000.00 by the closing price of AEO common stock on the start date and that was $14 and equal to 179,000 shares.
AEO has to give Hanson options in addition to RSUs. These are just the signing perks in addition a $1.03 million base salary.
4) Stock Options
The stock options add another $2,500,000.00. The exercise price will be the closing price of AEO common stock on the grant date.
And why is it executives never have to pay their own relocation expenses? Regardless of whether executives could afford it, it has become a standard perk that can be very expensive.
5) Relocation Assistance
Such benefits will include travel expenses for up to six (6) house-hunting trips for Executive and a companion and household goods moving expenses, relocation allowances, temporary living expenses, and other relocation costs or expenses to which the parties agree
These must be repaid if he fails to stay at least 12 months.
Even legal fees incurred by the employment agreement are paid by AEO. At $500 per hour, Hanson is covered for 30 hours. I hope that’s enough.
6) Legal Fees
AEO agrees to pay reasonable legal fees to review and negotiate this agreement in an amount not to exceed Fifteen Thousand Dollars ($15,000.00).
Finally we get to the salary. Keep in mind this is all guaranteed in spite of performance for a CEO that has no teen retail record.
7) Base Salary
Hanson will be paid $1,030,000.00 <b>per year</b>. During the Term, the Committee shall review the Executive's base salary on an annual basis taking into consideration such factors as market trends, internal considerations and job performance, and may (but is not obligated to) increase, but not decrease, the annual base salary upon such review
This is a guarantee of over $1 million per year that can only increase and not decrease even if AEO continues to slog along not getting anywhere as it has done for the past few years.
8) Annual Incentive Cash Bonus
Hanson is eligible to receive an annual incentive cash bonus each year beginning with 2012 at a maximum of 130% of his base salary and, beginning with the 2013 fiscal year, the low end will be 130% of his base salary and the maximum will be 260% of his base salary.
For the math challenged, at the high end he could take home $3.6 million per year. Keep in mind there are predetermined performance goals. Be sure to look at the conditions those bonuses are based on when the proxy comes out if you are a shareholder.
In addition to the salary and bonus to further align his interests with the company, he gets more stock grants of $3.2 million for 2012. Not to mention, there are a few loose ends that anybody only making $3.6 million per year needs help with—health care, insurance, disability, expense accounts, luxury car for both personal and business use —- the usual that CEOs now demand.
9) Employee Benefits
- Profit sharing or 401(k) plans
- Employee stock purchase
- Group life
- Disability insurance
- Paid time off
- Discount privileges
10) Car and Commuting Expenses
AEO will provide a single luxury automobile for both business and personal use. Any amount included in Executive's W-2 wages relative to such automobile shall be not be grossed up for tax purposes.
Is it too much compensation for too little track record? Unfortunately investors will not know until Hanson has been in place for awhile. He is guaranteed most of the above package if he stays for an entire year. Investors may not fare as well if he lacks the chops to turn the Eagle around.
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