Staples 2014 Annual Report Download - page 40

EXECUTIVE COMPENSATION AND COMPENSATION DISCUSSION AND ANALYSIS
36 STAPLES Notice of Annual Meeting of Stockholders
Shareholder Outreach & Response to 2014 Say-on-Pay Vote
Staples has undertaken a comprehensive shareholder outreach
program for a number of years. Our Board values the opportunity
to engage directly with our shareholders to hear their thoughts,
since it allows the Board to better represent their interests.
In 2014, our Say-on-Pay proposal received support from 46%
of our shareholders. We considered these results seriously,
particularly after the strong level of support a year earlier.
Following the 2014 annual meeting, the Committee asked
management to intensify our outreach program to make sure
we fully understood shareholder concerns that led to the
results in order to address them promptly and effectively.
We completed two rounds of engagement with institutional
investors since the 2014 annual meeting, with constructive
dialogue with stockholders representing more than 40% of
shares. A summary of their perspectives is listed below.
฀, Board Response and 2015 Changes
• General Compensation Structure: In 2013, we
completely overhauled our compensation structure and
adopted a program that is 100% performance based for
both long-term and short-term incentive plans. This change
reflected our belief that executive compensation should
drive long-term value creation for shareholders. Staples is
among only 11% of S&P 500 companies that grant 100%
of long-term equity awards in the form of performance
shares, according to Equilar. While this emphasis on
performance shares was well received by our leading
investors, some shareholders expressed concerns about
the size of the pay opportunity for our CEO. However, as
discussed in more detail in this CD&A, Mr. Sargent’s total
target compensation is below the median of our peer
group. Additionally, approximately 89% of Mr. Sargent’s
total target compensation is performance-based.
• Reinvention Award: A number of shareholders expressed
concern with the reinvention award - a special one-time
cash award we provided in 2013 to approximately 5,000
of our 83,000 employees, including our executives – after
no bonuses were paid from the annual incentive plan for
the second year in a row.
Though we slightly missed our EPS threshold in 2013, we
were increasingly concerned with retention, and therefore,
granted all of our bonus-eligible employees a one-time
cash award of 16% of their target bonus to recognize their
hard work and level of effort, as well as the progress made
towards our sales goal, which was above the threshold
performance in a difficult sales environment. Many
associates had also assumed additional responsibilities in
connection with the reinvention.
After our engagement with shareholders we understand
that a number of them do not believe NEOs should
have received the cash award. While the Committee
was concerned with retention at all levels, including for
NEOs, ฀฀฀฀฀฀
discretionary awards to NEOs clearly. We did not
provide such an award to any NEOs this year and
have no plan to do so in the future.
• Concern with ‘Overlapping’ Cash Awards: Some
shareholders expressed concerns with the fact that two
of our legacy long-term cash awards – the 2012-2014
grant, (which was granted prior to the 2013 overhaul of
our compensation program) and the 2013-2014 grant –
overlapped with the new equity awards granted under
our new program design, the 2013-2015 performance
share awards.
We understand that shareholders prefer a simplified,
transparent structure that avoids multiple opportunities to
compensate executives for the same results. The legacy
cash award programs ended in 2014. Going forward, we
intend to rely solely on three-year, 100% performance
based awards for our long-term equity program.
• Length of Performance Periods: Several shareholders
also expressed concerns with the Board’s decision to
set performance goals annually within our three-year
performance awards, rather than set a single target three
years in advance.
The needs of our customers are rapidly changing and
the short-term impacts of these secular changes on our
business are difficult to predict. Accordingly, there is a lot
of variability in goals set 3-years out – they could end up
unrealistically high, in which case they would lose their
ability to incentivize and retain executives, or unrealistically
low, which would provide payouts for performance the
Board we would not find sufficiently rigorous. We made
the decision that at this point, during our reinvention,
to respond to rapid market evolution, three-year goals
would be counter-productive from the standpoint of the
company and shareholder value.
That said, we understand that some shareholders have
expressed a preference for longer-term metrics. Our
performance shares include a 3-year performance
modifier of +/-25% based on relative TSR over the period,
and we may consider additional metrics with longer
horizons in the future when we have greater visibility into
the company’s expected performance.
• Change in Performance Metrics: Some shareholders
felt that too much emphasis was placed on sales metrics
within the incentive plans and suggested more focus on
profit drivers.
฀฀฀฀฀฀฀฀฀฀
Total Sales metric in the 2015 Annual Cash Incentive
Plan with Gross Margin Dollars to place greater
฀฀฀
฀฀฀฀฀฀฀
• CEO Salary: Our CEO elected not to accept a 2.5%
base salary increase that had been granted in early 2014. • Elimination of Tax-Gross Up: In January 2015, our CEO agreed to amend his existing severance agreement
to remove a legacy tax-gross-up provision that could have
potentially triggered in the event of a change in control.