Liz Claiborne Hikes Cap on Exec Bonus Payouts
05/01/03
Board Alert
In an effort to gain more flexibility and hold on to its top execs, Liz Claiborne’s board plans to raise the cap on its cash bonuses. That cap on bonuses payable to an individual executive will climb from $2 million to $5 million. The highest cash bonus the company has ever paid was $1,903,179 to CEO Paul Charron in 2002.
Executive compensation is shifting to a heavier emphasis on bonuses and cash, while long-term comp plans particularly stock option plans, are getting scaled back. The backlash against options has made companies gun-shy about using them widely.
At the same time, fashion and apparel companies such a Claiborne fight to keep experienced executives with good instincts and good track records. The new bonus structure potentially affects only about a dozen key senior managers in the company, says comp committee chair Raul Fernandez, special advisor to General Atlantic Partners, a private equity investment company.
Retaining those top executives is particularly important for Claiborne because it has had a run of success under its current leadership. Since Charron, a seasoned former Procter & Gamble brand manager, took over in 1995, Claiborne’s sales have risen 66%; to $3.4 billion in 2001. Net income was up 4.8%, ahead of competitors. In fact, Charron’s 2002 bonus was double that of 2001.
“One of the best ways of getting people is figuring out where people are at and what it takes to attract and retain them. We’re constantly recruiting people,” says Fernandez.
Clearly, the board wants to keep Charron, a high-performing executive who understands the often fickle tastes of shoppers and who effectively leads the marketing effort for more than 20 Claiborne brands.
Fernandez notes that Claiborne has had “a record of 26 consecutive quarters of meeting or beating the Street” in a difficult environment and sector. “I feel comfortable that the [bonus] structure we have in place will continue the positive shareholder impact,” he says. The bonus modification is “well within accepted practices.”
Claiborne’s policy is intended to attract and retain talent, according to Paul Dorf, managing director of Compensation Resources Inc. “It’s important for boards to really take responsibility for compensation to attract the right kinds of executives, motivate them, focus them on desired results and retain them,” he says.
Boards such as Claiborne’s are also trying to tie compensation more closely to performance. For one thing, this might assuage shareholders angered by what they see as gratuitous executive pay. The way to do that is by giving comp committees the flexibility to award a range of bonuses based on performance.
“Our baseline is performance and shareholder value,” says Fernandez. “This is very positive. Our responsibility is to have all the appropriate incentives in place, in the context of being competitive.”
But, notes Carl Schmitt, a principal of San Francisco-based Presidio Pay Advisors, the board is recommending a “no” vote to a shareholder proposal that all future stock options be performance-based. “That’s not a strong argument as to why shareholders should believe [the board is] acting in their best interest,” Schmitt declares.
Before Claiborne can boost bonuses substantially the company must address tax issues, say compensation experts.
A publicly traded company can’t deduct compensation in excess of $1 million for its top five executive officers unless the compensation is performance-based. Shareholders must also approve such performance-based compensation, a cap on pay, who is eligible for the bonus and general performance measures. The apparel maker is asking for shareholders to approve this sole amendment to the company’s 1999 cash bonus plan at the annual meeting May 22.
