The J.C. Penney Company. Inc. filed its latest definitive proxy statement yesterday. As a long-time customer (particularly in my youth), I was curious to see what special features they might have added to their Compensation Discussion and Analysis, especially in view of their leadership changes in fiscal 2018.
The biggest enhancement I noticed comes right at the beginning of the CD&A, in the form of a “highlights” series of questions and answers that mirror many (if not most) of the questions that an investor might ask. Not only does the section summarize many of the key items in the body of the CD&A, but it also serves as an effective supporting statement for the company’s Say-on-Pay proposal.
Here are the questions asked and the company’s corresponding responses:
How do we determine pay?
∎ We designed our 2019 compensation programs to align executive pay with Company performance
∎ Our 2019 executive pay mix was structured with an emphasis on variable pay, dependent on achievement of pre-established performance goals
∎ We considered multiple factors, including but not limited to, individual performance, position, and responsibilities, when determining total compensation opportunities
∎ We benchmark executive pay against a peer group that represents the characteristics of our business, the labor market in which we compete, and similar size parameters in terms of revenue, market capitalization, and enterprise value relative to JCPenney
How did we perform?
∎ In 2019, we announced the Company’s Plan for Renewal, articulating our steps to rebuild the fundamentals of our business and become more customer focused to restore profitable and sustainable growth
∎ We improved our gross margin rates by 210 basis points, lowered inventory by 11 percent, reduced expenses, defined our customer focus segment and tested new customer experience concepts
∎ We exceeded our 2019 bonus adjusted EBITDA goal
How did we pay our NEOs?
∎ Incentive award payouts to our NEOs were based on bonus adjusted EBITDA, which is a measure of the Company’s operating profitability
– Our CEO’s 2019 annual cash bonus was based on full year results and was earned at 131.8% of target
– For NEOs (other than Ms. Soltau), Spring 2019 bonuses were earned at 151.5% of target, and Fall 2019 bonuses were earned at 131.6% of target
∎ The Company did not reach its 2019 bonus adjusted EBITDA performance goal for 2017 Performance-Based Restricted Stock Unit (PBRSU) awards, which was set at the time of grant; as a result, these awards were not earned
∎ Time-based restricted stock awards are dependent upon the Company’s stock price performance and have decreased in value versus the grant value
What did we change for 2019?
∎ To align the teams around our Plan for Renewal business strategies to deliver profitable and sustainable growth, fiscal 2019 annual cash bonuses were determined by the achievement of pre-established bonus adjusted EBITDA goals
∎ In 2019, our performance-based Long-Term Incentive (LTI) awards were converted from stock to cash to preserve shares and proactively manage stockholder dilution
How do we address risk and governance?
∎ With an appropriate balance of short and long-term compensation, incentive award value realized by our NEOs was based on the achievement of specific financial performance goals and the value of the Company’s stock price at the end of a three-year performance period
∎ We follow practices that promote good governance and serve the interests of our stockholders, with caps on variable pay opportunities and policies on claw-backs, anti-pledging, anti-hedging, and stock ownership goals
All of this culminates in the central question for stockholders: “Why should we approve your say on pay?” To which the company responds:
∎ 2019 incentive award payouts for our NEOs were entirely dependent on achievement of pre-established financial performance goals
∎ The majority of our NEOs’ pay is at risk and dependent on financial performance
∎ Our executive compensation programs are aligned with stockholder interests, linking pay opportunities to profitable growth and long-term stockholder value
We’ll soon learn how persuasive this approach is when stockholders cast their votes at this year’s annual meeting. Coming off a year where it received just over 70% support on its 2019 Say-on-Pay proposal, the company is looking to move the momentum in the other direction. Also, for this purpose, it supplements the Q&As with an extended description of its stockholder outreach efforts. This disclosure offers a good example of how to structure this discussion to cover the touchpoints generally sought by the major proxy advisory firms.
Two Other Disclosure Items
As the company wraps up its CD&A, it covers a couple of standard items that I found worth highlighting. The first is its tax discussion, which, like virtually all such discussions, focuses on Section 162(m). However, this discussion is brief and to the point:
Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any given year with respect to the Chief Executive Officer and certain of our other most highly paid executive officers. To maintain flexibility in compensating NEOs in view of the overall objectives of our compensation programs, the Committee has reserved the right to grant compensation that is not tax deductible should it determine that doing so will better meet the Company’s objectives.
To the extent that Section 162(m) remains a material item for compensation disclosure purposes, I expect that we are going to start to see many of these discussions take a similar tact.
Also, I like the company’s hedging disclosure, which goes a bit beyond the anodyne “we prohibit hedging” statements that continue to be in vogue these days:
The Board considers it inappropriate for directors or executive officers to enter into speculative transactions in Company securities. The Company’s Corporate Governance Guidelines prohibit directors and senior management from engaging in short sales, options trading or other similar derivative transactions in Company securities, or hedging or monetization transactions, such as zero-cost collars and forward sale contracts, in which the individual continues to own the underlying security without the full risks and rewards of ownership. In addition, the Company’s directors and senior management may not purchase Company securities on margin, hold Company shares in a margin account or pledge Company shares as collateral for a loan because a margin sale or foreclosure sale may occur at a time when such director or officer is prohibited from trading under the Company’s insider trading policy. The Company’s Statement or Business Ethics also prohibits associates from entering into options trading or short selling or other similar derivative transactions in Company securities, entering into hedging transactions, purchasing Company shares on margin, holding Company shares in a margin account or pledging Company shares as collateral for a loan.
I tend to prefer disclosures which summarize the specifics of a company’s insider trading policy (or, as here, corporate governance guidelines). Typically, these statements go beyond just stating the company’s policy to explain the reason underlying the policy. To me, this provides better disclosure to investors and effectively promotes the objectives of the disclosure in the first place.
-Mark Borges, CompensationStandards.com March 31, 2020
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