By Scott Patterson – Compensation Analyst Team Leader
Ralph Lauren, CEO, Chairman and Founder of Ralph Lauren Corporation, has maintained strong pay levels through the economic slowdown with total realized compensation of more than $30M for each of the past four years thanks in part to his 2008 employment agreement. A new five-year agreement was signed in June 2012 but the jury may still be out on whether this new deal is the one that brings Mr. Lauren’s earnings back to earth.
Despite the new agreement reducing Mr. Lauren’s target cash compensation by 25 percent to $10.75M, his salary jumped $500,000 to $1.75M going even further above the tax deductible limit of $1M.
One of the keys to Mr. Lauren’s earnings successes over the years has been the $13M target under the cash incentive plan with a maximum award of $19.5M. Thankfully there was a maximum as each of the past three years has seen the CEO/Chairman earn exactly that, with $19.5M each year. The new agreement brings the target down to $9M with a maximum of $13.5M.
The new agreement, in regards to equity awards, changes from awarding a fixed number of shares/options to granting a monetary value of equity. For each fiscal year Mr. Lauren will be granted stock awards with a value of $14M. One-third of the award will be in stock options while the remaining two-thirds will consist of Restricted Performance Share Units (RPSUs). The RPSUs will vest based on Cumulative Net Earnings targets over a three year period with half of them tied to a modifier deter-mined by Relative TSR generated by the S&P 500 Index that could result in a 25 percent increase or decrease of the target.
This new standard of awarding equity according to dollar value would seem to inflate pay levels for Mr. Lauren, as his previous average three-year grant value was just over $10M. With the stock price going from $58.29 at the time of his previous employment agreement signing in 2008 to $141 at the signing of the new deal there is no surprise equity awards played a large part in attaining such high (arguably deserved) remuneration over the years. Perhaps with stock prices seeing a drop from this spring’s highs in the $170-$180 range it will be good timing to switch from a set number of shares to an inflated target value. However, the drop in potential bonus is almost made up for by the increase in stock awards. In normal circumstances this would be a more effective way of rewarding a CEO, with equity based on long-term targets, if it weren’t for the fact that Mr. Lauren already owns ample shares.
For example, with voting rights of all the class B shares under Mr. Lauren’s control, he elects 75 percent of the board. Such a level of control would not seem to argue in favor of the independence of the board members deciding on the terms of his employment agreement.