Item 11.
|
Executive Compensation.
|
COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary
We align our executive compensation practices to the business objectives of our Company in order to drive ongoing improvements in our
financial performance. This compensation discussion and analysis (CD&A) explains the strategy, design, and decision-making processes of our compensation programs and practices in the fiscal year ended February 2, 2019
(fiscal 2018) for our named executive officers. This CD&A is intended to provide perspective on the compensation information contained in the compensation tables that follow this discussion. This CD&A also discusses how the
fiscal 2018 compensation of our named executive officers aligns with the key goals of our compensation philosophy, namely, attracting and retaining the best talent and driving financial performance. We also discuss how our Company uses its
compensation programs including equity programs to encourage an ownership and stakeholder perspective among our named executive officers by providing them with a long-term interest in the growth and financial performance of our Company that aligns
with the interests of our shareholders.
We believe that continually analyzing and refining our compensation program enables us to achieve
the key goals of our compensation philosophy and supports ongoing improvements in our financial performance.
Fiscal 2018 Business Highlights
We call your attention to the following information about the Companys 2018 financial performance along with key executive compensation
actions and decisions, and our key corporate governance policies and practices. The following business highlights are only a summary. For more complete information about these topics, please review the Companys prior filings with the SEC.
RH is a curator of design, taste and style in the luxury lifestyle market. The Company offers its collections through its retail galleries
across North America, the Companys multiple Source Books, and online at RH.com, RHModern.com, RHBabyandChild.com, RHTeen.com and Waterworks.com. The home furnishings market is large and fragmented and we believe we have an opportunity to be
the home brand for the luxury consumer at scale, both nationally and internationally. Our growth and long-term strategy is centered on the expansion of our product assortment, developing new categories, the transformation of our real estate platform
and on international expansion.
We believe that compensation paid to our executive officers should be closely aligned with the performance
of the Company, on both a short-term and long-term basis. The compensation committees decision-making regarding executive compensation in any given fiscal year is informed in part by the financial performance of the Company during the prior
fiscal year as well as the strategic and business initiatives pursued by the Company during the year and over time. The Company undergoes an annual process to
re-assess
its compensation alignment. Accordingly,
the compensation committee took actions in 2018 to better align the compensation of our leadership team with the Companys performance goals and long-term business strategy as well as to retain the Companys key talent. Below we highlight
the Companys strong recent performance including fiscal 2018 financial performance, fiscal 2018 key strategies and initiatives and fiscal 2018 share price performance.
|
|
|
FISCAL 2018
|
Financial
Performance
(1)
|
|
GAAP diluted earnings per share of $5.68 compared to $0.01 last year, adjusted
diluted earnings per share of $8.54 compared to $3.05 last year, an increase of 180%.
GAAP net income of $150.6 million compared to $2.2 million last year, adjusted net income of $400 million compared to
$89.2 million last year, an increase of 151%.
GAAP
operating margin of 11.5% versus 5.4% last year, adjusted operating margin of 12.1% versus 7.0% last year.
GAAP net revenues and adjusted net revenues increased 3% to $2.51 billion.
|
Key Strategies & Initiatives
|
|
We focused in fiscal 2017 and fiscal 2018 on executing our new membership business
model, architecting a new operating platform and maximizing cash flow by increasing revenues and earnings while decreasing inventory and capital spending.
We believe that our record fiscal 2018 results demonstrate the strength of the RH brand, the power of our new business model, our focus on
managing the business with a bias for earnings versus revenue growth, and our continued success revolutionizing physical retailing.
|
12
|
|
|
FISCAL 2018
|
|
|
While most in our industry are closing or downsizing stores, we remain committed to
our quest of revolutionizing physical retailing. Our progress in fiscal 2018 included the opening of RH Portland and RH Nashville in the first half of the year, and the opening of two very unique and diverse retail experiences, RH New York and RH
Yountville, in September. We continue to be pleased with the performance of our new Galleries and now have six Galleries with our integrated hospitality experience.
As we did in fiscal 2017, we continued to hold ourselves
back from adding new businesses in fiscal 2018 outside of ongoing investments in RH Hospitality as we remained focused on optimizing the profitability of our new operating platform.
Our efforts architecting a new operating platform,
inclusive of our distribution center network redesign, the redesign of our reverse logistics and outlet business, and the reconceptualization of our home delivery and customer experience, is driving lower costs and inventory levels, and higher
earnings and inventory turns. We expect this multi-year effort to result in a dramatically improved customer experience, continued margin enhancement and significant cost savings over the next several years.
As previously mentioned, our plan is to accelerate our real
estate transformation, opening 5 to 7 new Galleries per year, up from 3 to 5 per year.
We have several new brand extension plans in our development pipeline. We are launching RH Beach House with a dedicated Source Book and plan to
launch RH Ski House with a dedicated Source Book. Additionally, we have plans to elevate and expand our assortments in key categories with the introduction of new bespoke collections as we pivot back to growth over the next several years. Our
investment in RH Interior Design continues to provide a significant revenue opportunity as we continue building our ability to provide world class interior design services in North Americain our continued move beyond creating and selling
products to conceptualizing and selling spaces.
|
Share Price Performance
|
|
We commenced fiscal 2018 with our common stock price trading at a price near $90 per
share and ended the fiscal year with our stock having traded in the range of $120 per share to above $130 per share toward the end of our fiscal year. We believe our stock price performance was driven by our financial performance through the year as
well as the success of our focus on execution, architecture and cash. In each of fiscal 2017, 2018 and 2019, the Company has deeply focused on capital allocation, optimization of free cash flow and increasing the gross margins of the business. For
example, our fiscal 2017 and fiscal 2018 share repurchase programs have resulted in the repurchase of $1.25 billion of our capital stock, which the Company believes will prove to be an excellent allocation of capital in the long term interest
of shareholders. Although our stock price has experienced substantial volatility from quarter to quarter including during fiscal 2018, we believe over the long term investors have and will continue to experience stock price appreciation.
As of February 1, 2019, the last trading day of fiscal
2018, the closing price of our common stock was $133.64 per share, compared to $92.04 per share, which was the closing price of our common stock as of February 2, 2018, the last trading day of fiscal 2017.
|
Other Performance Metrics
|
|
In fiscal 2018 we generated record revenues in excess of $2.5 billion, record
GAAP operating margin of 11.5%, record adjusted operating margins of 12.1%
(1)
, and industry leading ROIC of 27.8%.
(2)
We have included a stock performance table below to
disclose a measure of total shareholder return, reflecting positive performance, growth and the effectiveness of pay for performance alignment.
|
(1)
|
Reconciliations of GAAP to
non-GAAP
financial measures for adjusted
net revenues, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are provided in the tables included in Annex A to this Amendment.
|
(2)
|
We define Return on Invested Capital (or ROIC) as adjusted operating income
after-tax
for the most recent twelve-month period, divided by the average of beginning and ending debt and equity less cash and equivalents as well as short and long-term investments for the most recent twelve month
period. ROIC is not a measure of financial performance under GAAP, and should be considered in addition to, and not as a substitute for other financial measures prepared in accordance with GAAP. Our method of determining ROIC may differ from other
companies methods and therefore may not be comparable.
|
13
STOCK PERFORMANCE
The following table shows the total shareholder return for our common stock during the five fiscal year periods indicated below. The first row
of the table indicates the cumulative return of an investor purchasing one share of RH common stock at the market close on January 31, 2014 and its value (percentage increase or decrease) at the associated fiscal year ends indicated in the
table. The table then assumes a scenario where $100 was invested at the market close on January 31, 2014 in RH common stock, which is equivalent to 1.76 shares (if fractional shares were permitted), and its value (percentage increase or
decrease) at the associated fiscal year ends indicated in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
( Jan. 31)
|
|
|
2015
( Jan. 30)
|
|
|
2016
( Jan. 29)
|
|
|
2017
( Jan. 27)
|
|
|
2018
(Feb. 2)
|
|
|
2019
(Feb. 1)
|
|
Value of 1 share
|
|
|
$56.74
|
|
|
|
$87.53
|
|
|
|
$61.62
|
|
|
|
$26.09
|
|
|
|
$92.04
|
|
|
|
$133.64
|
|
Value of a $100 Investment
|
|
|
$100
|
|
|
|
$154.27
|
|
|
|
$108.60
|
|
|
|
$45.98
|
|
|
|
$162.21
|
|
|
|
$235.53
|
|
Percentage Change
|
|
|
N/A
|
|
|
|
54.27%
|
|
|
|
8.60%
|
|
|
|
-54.02%
|
|
|
|
62.21%
|
|
|
|
135.53%
|
|
This table is supplemental to the stock performance graph presented in the Original Filing.
The following table sets forth, for fiscal 2018, our named executive officers, as defined in Item 402 of Regulation
S-K
promulgated under the Securities Act of 1933, as amended:
|
|
|
NAME
|
|
TITLE
|
|
|
Gary Friedman
|
|
Chairman and Chief Executive Officer
|
|
|
Ryno Blignaut
(1)
|
|
President, Chief Financial and Administrative Officer
|
|
|
Karen Boone
(2)
|
|
Former President, Chief Financial and Administrative Officer
|
|
|
Eri Chaya
|
|
President, Chief Creative and Merchandising Officer and Director
|
|
|
DeMonty Price
|
|
President, Chief Operating, Service and Values Officer
|
|
|
David Stanchak
|
|
President, Chief Real Estate and Development Officer
|
(1)
|
Mr. Blignaut was hired on August 14, 2018. Mr. Blignaut left the Company in March 2019 due to
health considerations, at which time Jack Preston assumed the role of Chief Financial Officer.
|
(2)
|
Ms. Boone left the Company in November 2018.
|
We believe that compensation paid to our executive officers should be:
|
●
|
|
Closely aligned with the performance of the Company, on both a short-term and long-term basis;
|
|
●
|
|
Linked to specific, measurable results intended to create value for shareholders;
|
|
●
|
|
Transparent, accessible and understandable by all stakeholders to understand what drives our executives; and
|
|
●
|
|
Tailored to achieve the key goals of our compensation program and philosophy.
|
Our executive compensation programs are aligned with our shareholders interests, with performance-based compensation being tied primarily
to our annual earnings before taxes and our long-term stock price performance.
The compensation committee has continued to focus on
balancing the alignment of our executive compensation program with our financial performance, providing incentives for retention purposes, rewarding the continued transformation of the business in fiscal 2018 and tailoring our compensation
arrangements to match changes in our executive leadership. In March 2019, the compensation committee reviewed the Companys financial results, corporate performance measures and the adjusted net income before tax metric goals that were set for
fiscal 2018 with respect to its performance-based annual cash incentive awards. The committee reviewed the extent to which those established goals were achieved and determined that the related compensation earned was at the 170% achievement level
based on its targeted fiscal 2018 performance objectives (see Fiscal 2018 Business Highlights above for more information regarding the Companys financial performance and key strategies and initiative for fiscal 2018). In the
case of Mr. Blignaut, who was hired on August 14, 2018 and left the Company in March 2019, the compensation committee determined to provide him with a discretionary bonus for fiscal 2018 in recognition of his not being eligible for a bonus
under the LIP program due to his departure from the Company as well as in consideration of his contributions to the Company during his tenure and his assistance with the transition of his roles and responsibilities to Mr. Preston, the
Companys current Chief Financial Officer. In addition, the base salaries for Ms. Chaya, Mr. Price, Mr. Stanchak and Ms. Boone were increased from the fiscal 2017 base salaries, as further discussed below.
14
In the case of our Chairman and Chief Executive Officer, Mr. Friedman, the compensation
committee has determined that no additional equity grants be made to him for fiscal 2018 and fiscal 2019 given his multi-year equity grant structure. Equity grants are the primary form of long-term incentive compensation provided to
Mr. Friedman. In fiscal 2017, the compensation committee determined to grant multi-year equity awards with performance conditions tied to stock price performance to Mr. Friedman. One of our overriding goals informing our compensation
philosophy is to create in our management an ownership and entrepreneurial mindset in order to align management performance with improvements in shareholder returns. The multi-year stock option award granted to Mr. Friedman during fiscal 2017
required substantial stock price appreciation from the Companys share price on the date of grant: the stock price performance targets in Mr. Friedmans equity award were set at $100, $125 and $150 per share, measured over a minimum
four year time period from the date of grant and represented premiums to the grant-date stock price of 105.7%, 157.1% and 208.5%, respectively.
The fiscal 2017 equity award to Mr. Friedman was structured as a multi-year equity award with performance conditions tied to stock price
performance, which the committee determined to be a transparent and accessible measure of overall value that aligns Mr. Friedmans compensation with returns experienced by investors. The multi-year structure of the 2017 award was similar
to the multi-year structure of the prior equity grant to Mr. Friedman in 2013 and is designed to incentivize Mr. Friedman and align him with a long-term view in leading the Company. Mr. Friedman has not requested changes to his base
salary or bonus since 2016.
In its 2018 and 2019 annual review of executive compensation, the compensation committee affirmed the
effectiveness of the multi-year equity structure. Since the date of the equity award to Mr. Friedman, the financial and operational performance of RH has improved and the stock price has appreciated. As of February 2, 2018, the last
trading day of fiscal 2017, the closing price of our common stock was $92.04 per share, a substantial increase over the price at the time of the equity award to Mr. Friedman in May, 2017. As of February 1, 2019, the last trading day of
fiscal 2018, the closing price of our common stock had further increased to $133.64 per share. Based on the strong performance of RHs stock price since the date of the award to Mr. Friedman, each of the first two tranches have met
two-thirds
of the performance hurdles and the first two tranches have met the time requirement as of the date of this Amendment.
We believe this grant shows our commitment to set compensation and performance targets for our executives that align with our long-term growth
strategy and our shareholders interests.
We continue to believe that our executive compensation program, including the compensation
of our Chairman and Chief Executive Officer, is clearly structured to reflect the best interest of shareholders and that if we continue to drive improving operational and financial performance investors will be rewarded by stock price appreciation.
Shareholder Engagement
We actively
engage with major shareholders of the Company, which has been a practice of the Company since our initial public offering in 2012. At our 2018 annual meeting of shareholders, approximately 60% of the votes cast by our shareholders supported our
say-on-pay
proposal. We are committed to the interests of our shareholders and the delivery of shareholder value through our focus on execution, architecture and cash,
including through capital allocation, optimization of free cash flow and increasing the gross margins of the business. We believe that, as part of this commitment, it is important to maintain an ongoing dialogue with shareholders, including with
respect to feedback on our executive compensation programs. In 2016, we launched a formalized annual shareholder outreach program in order to solicit additional input from shareholders with respect to corporate governance and executive compensation
practices. This shareholder outreach effort continued in 2017, 2018 and 2019. Along with our annual shareholder outreach program, throughout the year, members of our leadership team, including our Chief Financial Officer and head of investor
relations, engage in regular shareholder and investor communications, in which we receive feedback.
As part of our shareholder outreach
efforts, we have provided explanations of our organizational and management structures and our constant efforts to continue evolving our management structure in order to refine the organizational design and improve its alignment with the evolution
of the business. In particular, we have highlighted that numerous business initiatives like the membership program have resulted in simplification of some aspects of our business, while other new initiatives require
on-going
management focus and efforts, and that the shifts in focus and responsibilities of our business and executive officers are designed to attune the organizational and management structures to the
transformation of our business. This formalized shareholder outreach program is designed to solicit feedback from the Companys shareholders with respect to a number of topics related to our executive pay practices and corporate governance
policies. This effort supplements the ongoing communications between our management and shareholders. We continue to receive feedback from our investors under our shareholder outreach program throughout the year.
As part of the shareholder outreach campaign,
15
|
●
|
In 2016, we solicited the views of institutional investors that we believe represented approximately 94% of
our issued and outstanding shares owned by institutional investors as of December 31, 2015, and had discussions with and received feedback from investors representing approximately 61% of such outstanding shares.
|
|
●
|
In 2017, we solicited the views of institutional investors that we believe represented approximately 55% of
our issued and outstanding shares owned by institutional investors as of December 31, 2016, and had discussions with and received feedback from investors representing approximately 40% of such outstanding shares.
|
|
●
|
In 2018, we solicited the views of institutional investors that we believe represented approximately 67% of
our issued and outstanding shares owned by institutional investors as of December 31, 2017, and had discussions with and received feedback from investors representing approximately 28% of such outstanding shares.
|
|
●
|
In 2019, we solicited the views of institutional investors that we believe represented approximately 69% of
our issued and outstanding shares owned by institutional investors as of December 31, 2018, and had discussions with and received feedback from investors representing approximately 31% of such outstanding shares.
|
In 2019, inasmuch as we had contacts with a large number of our investors in our prior annual shareholder outreach campaigns, a number of our
investors that had been previously contacted indicated there was not a need to have a further round of conversations in the current annual shareholder outreach campaign as their positions on the topics discussed had not changed in any significant
way from the prior year conversations.
In addition to the general feedback noted in the chart below, investors have expressed appreciation
of our outreach efforts and acknowledged our quick reaction and responsiveness to the against vote recommendation last year from two proxy advisory firms on our
say-on-pay
proposal. The results of the shareholder outreach campaign, including concerns and feedback we received, were provided to our board of directors.
|
|
|
WHAT WE HEARD
|
|
WHAT WE DID
|
Shareholders requested that we make our proxy statement more readable and
make the information presented more accessible.
|
|
We continue to make improvements to our proxy statements from previous years, including providing more information in tables and charts rather than within lengthy narrative form in order to
make the presentation easier to read and the information more accessible.
|
Shareholders requested increased transparency around peer group or other
competitive measurements used by the Company for our
pay-for-performance
alignment.
|
|
We provided additional disclosure around our market check approach to our compensation practices to ensure performance alignment and retention of our key executives.
|
Shareholders requested increased transparency into the decision to use
adjusted net income before tax in our annual (short-term) cash bonus or Leadership Incentive Program, or LIP.
|
|
We provided disclosure in our compensation discussion and analysis in order to explain the reasons we chose certain compensation metrics and to show how our program is aligned with
shareholder interests.
|
Shareholders requested increased transparency into the decision to use
stock price as part of the performance metric under our long-term incentive (equity) program.
|
|
Given one of our core foci is on innovation and business transformation, and our objectives to use
a metric that is objectively measurable, aligned on both the Companys short-term and long-term goals, useful across the multiple industries (such as
e-commerce
and hospitality) in which we operate or
intend to operate in the long-term, transparent, understandable and accessible to our shareholders and other key stakeholders, including our employees, we believe and have determined stock price is a useful performance metric that addresses all of
the Companys strategic goals for a performance metric.
We also provided
detailed information concerning the structuring of a stock option that the compensation committee approved for grant to Mr. Friedman, our Chairman and Chief Executive Officer, under the 2012 Stock Incentive Plan to purchase 1,000,000 shares of
the Companys common stock with certain selling
|
16
|
|
|
WHAT WE HEARD
|
|
WHAT WE DID
|
|
|
restrictions tied to stock price appreciation (the 2017 Stock Option Award).
|
Shareholders requested information related to other performance metrics
such as total shareholder return (TSR) and return on invested capital (ROIC).
|
|
We continued to refine our executive compensation program, including in 2018, to create
significant
pay-for-performance
alignment. Although we do not use these metrics as part of our long-term incentive strategy, we have been providing indications of these
measures in our Form
10-K
and as well as in our earnings releases and have determined to disclose them in our proxy statement for convenience.
We have included a stock performance table above to disclose a measure of total
shareholder return, reflecting positive performance, growth and the effectiveness of pay for performance alignment.
Please see
sub-section
entitled Fiscal 2018 Business Highlights at the beginning of the Compensation
Discussion and Analysis section of this Amendment.
|
Shareholders requested additional disclosure regarding certain corporate
governance practices.
|
|
We added details and information regarding certain of our corporate governance practices. In
particular, in 2018 we included disclosure about our newly adopted stock ownership guidelines, board and executive diversity and our corporate social responsibility programs that addresses environmental, social and governance issues relevant to the
Companys business.
|
Shareholders requested further disclosure about the basis for Mr.
Alberinis independence as a director in response to certain policy approaches by independent governance and proxy advisory firms around the ability of former chief executive officers to serve as independent board members on the boards of
companies they once served as chief executive officers.
|
|
We provided additional disclosures regarding the basis for the determination that Mr. Alberini is an independent director. Since his departure, Mr. Alberini served in senior
management roles at other companies, and is currently a director and CEO of Guess, Inc., which is a publicly traded company. Given his other active roles, and time away from RH management, we believe Mr. Alberini provides a valuable role as an
independent director to RH. In each year, the board also determined not to appoint Mr. Alberini to any of RHs committees of the board of directors that require directors be independent.
|
Shareholders requested further disclosure about the nature of our
Chairman and Chief Executive Officers multi-year awards and further explanation around the period that the award is intended to cover.
|
|
In those circumstances where we make a multi-year equity award to an executive officer, we intend
to disclose details concerning the multi-year nature of the award.
We have followed
a practice of making multi-year equity awards to our Chairman and Chief Executive Officer in several instances and we have provided substantial additional disclosure concerning those multi-year awards. In particular, we provided a multi-year equity
award to him in the second fiscal quarter of 2013. In the second quarter of fiscal 2017, we granted our Chairman and Chief Executive Officer an additional multi-year equity award that is designed to serve for a four year period. We have included
enhanced disclosure concerning these multi-year equity awards to our Chairman and Chief Executive Officer in our compensation discussion and analysis in order to explain the intent and details behind these large equity awards as well as the fact
that we have not granted further equity awards to Mr. Friedman in fiscal 2018 or fiscal 2019.
The multi-year structure arose out of a purposefully driven conversation and discussion between the compensation committee and Mr. Friedman and is
believed to incentivize Mr. Friedman and align him with a long-term view in leading the Company.
|
Shareholders also expressed a preference that equity awards
|
|
Our compensation program relies on equity and equity upside as a key incentive that aligns incentives between the management team and our investors. For
|
17
|
|
|
WHAT WE HEARD
|
|
WHAT WE DID
|
granted to the executive officers of RH in particular be tied to
performance metrics rather than simple time based metrics based on continued service.
|
|
example, we consider stock option awards, which only have value if the stock goes higher, a key
component of our compensation program.
Based on discussions and
compensation reviews in 2016 and 2017, we structured the 2017 Stock Option Award to Mr. Friedman to require substantial stock price appreciation from the price of our common stock on the date of grant in order for restrictions on the shares
underlying the award to lapse. We also required a four year service period for the Chief Executive Officer in order to assure that these price objectives would be measured on a sustained basis rather than at a single moment in time.
We believe the four year structure of the award aligns and incentivizes
Mr. Friedman to take a multi-year and long-term approach in leading the Company.
|
Shareholders requested additional disclosure around the new leadership
team and the recent changes to our organizational design.
|
|
As a result of the ongoing evolution of our business, we continuously adjust the structure and
operation of our executive leadership team to meet the needs of our business and optimize the outcome of our initiatives. We frequently implement changes to our organizational design in order to more closely align our management structure with the
changing needs of the business. We have launched numerous initiatives that have become integral to the ongoing development of our business including, among others: (i) our membership program; (ii) the introduction of RH Hospitality in many
of our new Gallery locations; (iii) the transformation of our real estate both through the introduction of new Galleries and changes in the real estate development model; (iv) ongoing restructuring and improvements to our distribution
centers, transportation network and supply chain; (v) the introduction and expansion of design services as part of our Gallery operations; (vi) improvements in our home delivery and outlet model including the introduction of reverse
logistics; (vii) improvements in our product assortment including the introduction of new categories such as RH Modern; and (viii) expansion of our business into international markets. While some of these initiatives such as the ongoing
development of RH Hospitality have required us to add incremental management positions, others have simplified our business.
Our efforts architecting a new operating platform, inclusive of our distribution center network redesign, the redesign of our reverse logistics
and outlet business, and the reconceptualization of our home delivery and customer experience, are driving lower costs and reductions in inventory levels. Likewise, the adoption of a membership model has resulted in simplification in our business
and corresponding reduction in certain management personnel. Many of the efforts to improve our organizational design have resulted in changes in our home office operations and increased responsibilities for our executive leadership team.
Over the last several years, we have eliminated a large number of middle
management positions as part of the organizational redesign and we have increased the scope of responsibility for our named executive officers including Ms. Chaya, Mr. Price and Mr. Stanchak, each of whom works closely with our CEO.
Ms. Chaya, our President, Chief Creative and Merchandising Officer oversees our product assortment and merchandising as well as related parts of our business including our Source Books and web presence. Mr. Price, our President, Chief
Operating, Service and Values Officer, oversees our Gallery operations, Human Resources, distribution centers and supply chain, outlet and call center operations. Mr. Stanchak, our President, Chief Real Estate and Development Officer oversees
our real estate transformation. The compensation committee determined to increase the base salaries for these named executive officers, as discussed below, in order to incentivize such named executive officers to continue to drive operational
performance through these initiatives.
|
18
OVERVIEW OF COMPENSATION PROGRAM AND PHILOSOPHY
Our compensation program is designed to do the following:
|
|
|
Attract and retain
|
|
We focus on attracting and retaining
top-caliber,
knowledgeable and experienced
senior executives
|
Encourage an ownership and entrepreneurial mindset
|
|
Our programs create in our management an ownership and entrepreneurial mindset in order to align the annual and long-term strategic goals of
our executives with those of our Company and our shareholders, including improvements in shareholder returns
|
Motivate
|
|
Our programs motivate our executives to achieve superior results for our Company and our shareholders
|
Reward performance
|
|
We pay for performance that is achieved through creativity, the capitalization of unique strategic opportunities and business initiatives,
and results in shareholder-aligned financial successes, including improvements in our stock price
|
Encourage appropriate risk taking
|
|
Our programs focus our executives to analyze business initiatives where we seek return on investment that exceeds downside
risks
|
Provide transparent reward systems
|
|
Our reward systems are easily understood by our managers and shareholders
|
Reinforce the succession planning process
|
|
Our programs help management to focus on identifying, and help us reward, retain and promote from within, the next generation of senior leadership to achieve the Companys growth, profitability and other
objectives through increased responsibilities and compensation
|
This compensation philosophy guides the compensation committee in assessing the compensation to be paid to our
executives, including our named executive officers. The compensation committee endeavors to ensure that the total compensation paid to the named executive officers is fair, competitive and consistent with our compensation philosophy. This
compensation philosophy also guides the compensation committee as to the proper allocation among current cash compensation (in the form of annual base salary), short-term compensation (in the form of performance-based, annual cash incentives), and
long-term compensation (in the form of equity incentive compensation). We evaluate both the performance and compensation of our named executive officers annually to ensure that the executive compensation program we implement achieves these goals.
One of our overriding goals informing our compensation philosophy is to create in our management an ownership and entrepreneurial mindset
in order to align management performance with improvements in shareholder returns. Our compensation programs aim to improve upon this interest alignment through various methods, including the use of stock options for equity grants, the use of
long-term price performance targets in the award granted to our Chief Executive Officer and various profit metrics in the bonus plan.
We
have implemented executive compensation policies and practices that reinforce our compensation philosophy and align with those commonly-viewed best practices and sound governance principles that we believe are appropriate for us. The following chart
summarizes these policies and practices:
|
✓
|
100% independent directors on our compensation committee
|
|
✓
|
Annual review and approval of our compensation strategy
|
|
✓
|
Independent compensation consultant engaged by our compensation committee
|
|
✓
|
Performance-based cash incentives
|
|
✓
|
Significant portion of executive compensation is either tied to corporate performance directly or indirectly
through stock price performance because of the equity component of compensation
|
|
✓
|
We have continued to shift our vesting practices to incentivize retention and a long-term leadership
approach by using either five-year or seven-year vesting periods, with vesting weighted more heavily in the back years
|
|
✓
|
For most equity awards, we have shifted our vesting practices to use five-year vesting periods
|
19
|
●
|
Generally, we use five-year vesting upon hiring, as well as for subsequent grants
|
|
●
|
Depending on the circumstances, awards may vest 20% per year on a straight-line basis or in a
back-end
loaded schedule where larger amounts vest in later years
|
|
●
|
We have been more frequently using the
back-end
loaded vesting
structure and shifting from awards that vest on a straight-line basis in order to create longer term incentives for performance
|
|
●
|
Five-year vesting structures that are not straight-line vesting may vest in several different ways
including, by way of example:
|
|
|
15% in year one; 15% in year two; 20% in year three; 25% in year four; and 25% in year five; or
|
|
|
10% in year one; 10% in year two; 20% in year three; 30% in year four; and 30% in year five
|
|
✓
|
Prohibition on short sales, hedging of stock ownership positions and transactions involving derivatives of
our common stock
|
|
✓
|
In May 2018, the board adopted stock ownership guidelines applicable to all directors and executive officers
of the Company in order to further align the financial interest of our directors and executive officers with the interest of our investors
|
|
✓
|
Our Chairman and Chief Executive Officer, Mr. Friedman, has consistently maintained a significant
equity ownership interest in the Company and, as of May 23, 2019, beneficially owns approximately 31.0% of the Companys common stock which, based on the average closing price for RH stock for fiscal 2018, was valued at approximately 468.5
times his annual base salary for fiscal 2018
(1)
, far above the multiple of six times salary minimum ownership requirement
|
|
✓
|
Broad-based company-sponsored health and retirement benefits programs
|
|
o
|
No single trigger change of control benefits
|
|
o
|
No post-termination retirement- or pension-type
non-cash
benefits or
perquisites for our executive officers that are not available to our employees generally
|
|
o
|
No hedging or derivative transactions involving our securities by directors, officers, employees or other
insiders
|
|
o
|
We have not repriced or bought out underwater stock options
|
|
o
|
No acceleration of share vesting generally instead, we have simple customary levels of severance
protection commensurate with a senior position
|
|
o
|
No tax
gross-ups
for change of control benefits
|
|
o
|
No defined value pensions or long term cash incentives like supplemental retirement plans or other forms of
long-term deferred compensation
|
|
o
|
No equity awards for management with short-term restrictions or vesting, such as
one-,
two-
or three-year vesting
|
(1)
|
Based on shares owned directly, shares owned indirectly and reported as beneficially owned for
Section 16 reporting purposes, and the in the money value of stock options, restricted stock and restricted stock units that are no longer subject to vesting or selling restrictions.
|
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee has served as one of our officers or employees at any time. None of our executive officers serves as a
member of the compensation committee of any other company that has an executive officer serving as a member of our board of directors. None of our executive officers serves as a member of the board of directors of any other company that has an
executive officer serving as a member of our compensation committee. None of our directors or executive officers are members of the same family.
COMPENSATION COMMITTEE REVIEW OF COMPENSATION
Our board of directors has established a compensation committee that is generally responsible for the oversight, implementation and
administration of our executive compensation plans and programs.
The compensation committee engages in the following, either together with
the board of directors as a whole or as a committee, making recommendations to the board of directors regarding approval, as necessary:
20
|
●
|
Annually review and approve the Companys corporate goals and objectives relevant to compensation of
the Chief Executive Officer;
|
|
●
|
Evaluate the Chief Executive Officers performance in light of such goals and objectives;
|
|
●
|
Determine and approve the Chief Executive Officers compensation level based on this evaluation;
|
|
●
|
Annually review the following:
|
|
|
Annual base salary levels;
|
|
|
Annual incentive compensation levels;
|
|
|
Long-term incentive compensation levels; and
|
|
|
Any supplemental or special benefits
|
|
●
|
Ensure that appropriate overall corporate performance measures and goals are set and determine the extent to
which the established goals have been achieved and any related compensation earned;
|
|
●
|
Determine the appropriateness of, and in some cases retain, a compensation consultant to offer advice for
the consideration of the compensation committee and consider the independence of such consultant in accordance with applicable SEC and NYSE rules; and
|
|
●
|
Perform other necessary tasks related to the implementation and administration of executive compensation
plans and programs.
|
The compensation committees annual review of executive compensation generally occurs within
the timeframe of April to June of each year.
COMPENSATION LEVEL SETTING PROCESS
Our compensation committee reviews the following, among other factors, when determining compensation:
|
●
|
The individuals performance and contributions to financial objectives;
|
|
●
|
Equity awards previously granted to the executive, which includes amounts of such awards that remain
unvested or are under selling restrictions and therefore continue to incentivize future performance;
|
|
●
|
Individual leadership, expectations, expertise, skill, and knowledge;
|
|
●
|
Overall compensation, including base salary and bonus opportunity, as a whole;
|
|
●
|
Analyses of competitive market compensation practices and labor market conditions;
|
|
●
|
Alignment with the long-term business strategy of the Company;
|
|
●
|
Retention and succession planning;
|
|
●
|
Input from senior management, including our Chairman and Chief Executive Officer; and
|
|
●
|
Input from an independent compensation consultant.
|
As we are headquartered in the San Francisco Bay Area, which is a highly dynamic and competitive market for talent, we seek to provide
competitive compensation practices for our executive leadership in order to attract and retain the best available talent.
To set a
competitive, reasonable and appropriate level of compensation, the board of directors and the compensation committee take a holistic approach and considers all relevant factors to the compensation decision being made in any given year. The board of
directors and the compensation committees approach to evaluating these factors is subjective, not formulaic, and may place more or less weight on a particular factor when determining a particular executive officers compensation.
ROLE OF MANAGEMENT IN DETERMINING EXECUTIVE COMPENSATION
In determining the total compensation for each executive officer, the board of directors and the compensation committee consider the specific
recommendations of our Chairman and Chief Executive Officer (other than with respect to his own compensation) and may consider input from other senior members of management.
21
Our Chairman and Chief Executive Officer plays a significant role in the compensation setting
process for the other named executive officers by:
|
●
|
Evaluating their performance;
|
|
●
|
Discussing the role and responsibilities of the relevant executive officer within the Company and the
expected future contributions of the executive officer;
|
|
●
|
Considering retention and succession planning;
|
|
●
|
Recommending business performance targets and establishing objectives; and
|
|
●
|
Recommending salary levels, bonuses and equity awards.
|
Our Chairman and Chief Executive Officer annually reviews the compensation paid to other named executive officers over the fiscal year through
presentations to the compensation committee, either as a committee or together with the board of directors as a whole, and provides his recommendations regarding the compensation to be paid to such persons during the next year. Following a review of
such recommendations, the board of directors or the compensation committee, after reviewing the other factors and input as discussed above, takes action regarding such compensation recommendations as it deems appropriate. The board of directors and
the compensation committee also consider input from our Chairman and Chief Executive Officer, as well as our Chief Financial Officer and certain of our Presidents, when setting financial objectives for our performance-based incentive program.
Our executive compensation program is designed to reward successful annual performance while encouraging long-term value creation for our
shareholders. Short- and long-term incentive compensation is subject to rigorous, objective,
at-risk
performance hurdles across our performance metrics and performance periods, which the compensation committee
intends to be an incentive to management to drive Company performance and encourage prudent risk management consistent with the Companys financial and strategic goals.
ROLE OF COMPENSATION CONSULTANTS
The
compensation committee has periodically engaged compensation consultants to assist the committee in assessing compensation market conditions. Willis Towers Watson, which advised the compensation committee with respect to our executive and board
compensation programs for fiscal 2015, was initially engaged by the compensation committee to provide evaluations and recommendations concerning our executive and board compensation programs and to advise the compensation committee with respect to
structuring our compensation plans to achieve our business objectives for fiscal 2016.
On January 14, 2017, Mercer was engaged by the
compensation committee to provide evaluations and recommendations concerning our executive and board compensation programs and to advise the compensation committee with respect to structuring our compensation plans to achieve our business objectives
for fiscal 2017. Mercer has continued to provide evaluations and recommendations concerning our executive and board compensation programs and to advise the compensation committee with respect to structuring our compensation plans to achieve our
business objectives for fiscal 2018 and fiscal 2019.
During their respective terms in fiscal 2016, and in fiscal 2017 and 2018, each of
Willis Towers Watson and Mercer conducted research as directed by the compensation committee and supported the compensation committee in the design of executive and board compensation. Although Willis Towers Watson and Mercer each worked with
management to develop plans that support our business objectives while carrying out its duties for the compensation committee, each of Willis Towers Watson and Mercer was retained by and reports directly to the compensation committee and does not
provide any other services to the Company other than those approved by the compensation committee that would not constitute a conflict of interest or that would not otherwise compromise their independence.
ANALYSES OF COMPETITIVE MARKET PRACTICES
Due to
the unique nature of our Company and the lack of direct industry competitors, we do not engage in a formal benchmarking process in setting compensation. Instead, we consider from time to time, as the compensation committee deems appropriate, an
array of available data and information in order to assess the competitiveness of our compensation program and philosophy, including market information concerning local and national market compensation practices that are determined to be relevant to
the Company. Given the location of our corporate headquarters in the San Francisco Bay Area, we pay close attention to the opportunities that exist for executives at other growth companies, both inside and outside the retail industry, located in the
San Francisco Bay Area, including public companies, as well as private companies that could be candidates for an initial public offering in the future.
22
We conducted a comprehensive review of market compensation practices for executive officer
compensation in fiscal 2016 and then again conducted a review in relation to our review of our Chief Executive Officers compensation at the time of setting his fiscal 2017 multi-year equity grant. At such times, the compensation committee
reviewed the compensation practices of a number of companies, including companies of similar size to us, companies that have
out-performed
the market consistently in terms of growth and return measures, other
brand and retail companies, particularly specialty retail companies, and companies in the technology sector. In addition, the compensation committee reviewed data related to a number of companies with headquarters located on the West Coast (in
particular, in the San Francisco Bay Area), regardless of size, because we believe such companies located on the West Coast have unique hiring and compensation practices, which are important for us to consider given the location of our headquarters
and the talent pool from which we hire our executive and other employees.
In addition, Mercer also provided the compensation committee
with data from their own review of proxy information. The result of this analysis is a comprehensive review of the elements of compensation and practices that are determined to be relevant in setting compensation for our executive officers.
In connection with the comprehensive review of market compensation practices, the Company and the compensation committee consider the executive
compensation practices and the market data only as reference points in the review of the Companys compensation practices, but do not benchmark or use market data in order to set compensation for the executive officers and other executives of
the Company.
For fiscal 2018, total compensation of the Companys named executive officers and other executives was generally within
the range of the market data referenced above, although individuals may be compensated above or below this level based on various reasons, such as competitive factors, our financial and operating performance and consideration of individual
performance and experience.
EXECUTIVE COMPENSATION COMPONENTS
The principal components of our compensation program for our named executive officers are summarized in the chart below, which is followed by a
detailed explanation of the principal components of our compensation program for our named executive officers. In determining our named executive officers overall compensation program, the compensation committee and the board of directors, as
applicable, each considers how a particular component motivates performance and promotes retention and sound long-term decision-making.
|
|
|
COMPENSATION ELEMENTS
|
|
OBJECTIVES
|
Annual base salary
|
|
Compensate for services rendered during the fiscal year.
|
Performance-based annual cash incentives
|
|
Motivate and reward our named executive officers for specific annual financial and/or
operational goals and objectives.
|
Long-term equity incentive compensation
|
|
Attract and retain our named executive officers and align the financial rewards paid
to our named executive officers with our long-term performance and the financial interests of our shareholders.
|
Perquisites and other personal benefits
|
|
Provide a competitive level of perquisites to better enable us to attract and retain
superior employees for key positions.
|
Employment agreements; severance and change of control
benefits
|
|
Promote stability and continuity of senior management.
|
Annual Base Salary
We provide our named executive officers with an annual base salary to compensate them for services rendered during the fiscal year. The base
salary for each of the named executive officers is guided by a variety of factors, which may include market information regarding salary levels for positions that are deemed relevant for comparison purposes, as well as such individuals work
experience, personal performance, responsibilities and other considerations, including internal alignment. The relative weight given to each factor is not specifically quantified and varies with each individual at the discretion of the compensation
committee and/or the board of directors.
23
Each named executive officers base salary is typically reviewed annually and is adjusted
from time to time on the following bases: evaluation of the executive officers personal performance for the year; the recommendations of our Chairman and Chief Executive Officer (other than with respect to his own base salary); the
Companys performance for the year; the competitive marketplace for executives in comparable positions, including market information regarding salary levels for positions that are deemed relevant for comparison purposes; and in the case of
increases in base salary other than on an annual basis, an individuals exceptional performance, or increased responsibilities.
During its annual review of executive compensation for fiscal 2018, the compensation committee reviewed data provided by Mercer and compared
that data to each executives current cash compensation. As part of their review, the compensation committee in particular considered, in addition to other factors listed above, our financial performance in 2018 and continued focus on multiple
long-term key strategies, including transforming our real estate platform, expanding our product offering and increasing our market share, architecting a new operating platform, elevating the customer experience, increasing operating margins,
optimizing the allocation of capital in the business and maximizing cash flow, and pursuing international expansion. Following this review, the base salaries of certain of our named executive officers were increased in fiscal 2018, with salary
amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME
|
|
BASE SALARY
|
|
|
PERCENTAGE
INCREASE
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2017
|
|
|
FISCAL 2018
|
|
|
|
|
|
|
|
|
Gary Friedman
|
|
$
|
1,250,000
|
|
|
$
|
1,250,000
|
|
|
|
0
|
%
|
|
|
|
|
Ryno
Blignaut
(1)
|
|
|
n/a
|
|
|
$
|
750,000
|
|
|
|
n/a
|
|
|
|
|
|
Karen Boone
(2)
|
|
$
|
750,000
|
|
|
$
|
775,000
|
|
|
|
3.33
|
%
|
|
|
|
|
Eri Chaya
|
|
$
|
850,000
|
|
|
$
|
950,000
|
|
|
|
11.76
|
%
|
|
|
|
|
DeMonty Price
|
|
$
|
700,000
|
|
|
$
|
850,000
|
|
|
|
21.43
|
%
|
|
|
|
|
David Stanchak
|
|
$
|
650,000
|
|
|
$
|
700,000
|
|
|
|
7.69
|
%
|
(1)
|
Mr. Blignaut was hired on August 14, 2018. Mr. Blignaut left the Company in March 2019 due to
health considerations, at which time Jack Preston assumed the role of Chief Financial Officer.
|
(2)
|
Ms. Boone left the Company in November 2018.
|
With our continued focus on the transformation of our business and executing a new business model, including the particular focuses on
execution, architecture and cash and capital allocation, the Company implemented changes to our organizational design, including by streamlining and realigning our home office operations. This included significant changes in the responsibilities
taken on by DeMonty Price, our President, Chief Operating, Service and Values Officer, who took on the responsibility over our supply chain, outlet and call center operations, Eri Chaya, our President, Chief Creative and Merchandising Officer, who
took on additional roles and responsibilities due to the departure of our former President, Chief Merchandising and Business Development Officer, and David Stanchak who was promoted at the end of fiscal 2017 to President, Chief Real Estate and
Development Officer. These changes in the responsibilities of such officers were accompanied by a simplification of our organizational structure and design as part of our constant efforts to reevaluate, refine and streamline the management
organizational structure and design in order to meet the needs of the business as our business transforms and evolves. As a result of this reorganization and increased set of roles and responsibilities by such officers, the compensation committee
made commensurate increases to their respective salaries.
Performance-Based Annual Cash Incentives
We have adopted the Leadership Incentive Program, or LIP, which is a cash-based incentive compensation program designed to motivate
and reward annual performance for eligible employees, including our named executive officers. The compensation committee considers annually whether LIP bonus targets should be established for the year and, if so, approves the group of employees
eligible to participate in the LIP for that year. The LIP includes various incentive levels based on the participants position with the Company. Cash bonuses under the LIP link a significant portion of the named executive officers total
cash compensation to our overall performance.
The LIP bonus for our named executive officers is based on achievement of financial
objectives, rather than individual performance, in order to focus the entire senior management team on the attainment of enterprise-wide financial objectives. Each named executive officer is provided a target bonus amount equal to a percentage of
the eligible portion of such officers base salary (which eligible portion is based on the salary earned during the fiscal year). The target bonus amount is based on the Company meeting the target achievement level for the relevant financial
objectives.
24
The compensation committee and/or the board of directors establishes the target achievement level
at which 100% of such participants target bonus will be paid (the 100% Achievement Level), the minimum threshold achievement level at which 20% of the participants target bonus will be paid (the 20% Achievement
Level) and the achievement level at which 200% of the participants target bonus will be paid (the 200% Achievement Level). The exact amount of the bonus payable under the LIP is based on the level of achievement of such
financial objectives, with the bonus amount increasing for each named executive officer as a percentage of the eligible portion of such officers base salary to the extent the achievement of such financial objectives for the fiscal year exceeds
the 100% Achievement Level, and with the bonus amount decreasing as a percentage of base salary to the extent the achievement of such financial objectives for the fiscal year is below the 100% Achievement Level (but above the 20% Achievement Level).
The compensation committee also may adopt separate minimum or maximum payout amounts for certain individuals under the LIP. The LIP is structured so that no bonuses are paid under the LIP unless we meet the 20% Achievement Level.
The compensation committee, either as a committee or with the board of directors as a whole, sets the financial objectives each year under the
LIP, and the payment and amount of any bonus depends upon whether we achieve at least a certain percentage of the financial objectives under the LIP (at least 20% for fiscal 2018). The compensation committee, either as a committee or with the board
of directors as a whole, generally establishes such objectives for the Company at levels that it believes can be reasonably achieved with strong performance over the fiscal year. In making the determination of minimum and target levels, the
compensation committee and/or the board of directors may consider the specific circumstances facing our Company during the year and our strategic plan for the year. The compensation committee and the board of directors have discretion to interpret
the LIPs performance objectives in light of relevant factors both internal and external to the Company, and to adjust the amount paid under the LIP accordingly. The compensation committee and the board of directors exercise such discretion
based on business judgment, taking into account both recurring and extraordinary factors affecting performance of the Company as well as other relevant factors. The compensation committee may consult the board of directors, as deemed necessary, with
respect to material issues concerning the administration of the LIP, including interpretations of the terms of the LIP.
For fiscal 2018,
the performance metric for the LIP was based on adjusted net income (Adjusted Income), which we define as consolidated income before taxes, adjusted for the impact of certain
non-recurring
and
other items that we do not consider representative of our ongoing operating performance. We believe that Adjusted Income provides meaningful information regarding the performance of our business and facilitates a meaningful evaluation of operating
results on a comparable basis with historical results. We do not adjust for depreciation or amortization. Therefore, Adjusted Income indirectly reflects the Companys capital use and capital expenditures, which are important factors of our
long-term business strategy. We believe the use of Adjusted Income is relevant in assessing overall performance of the Company and aligns this performance metric with the interests of shareholders. Our management uses this
non-GAAP
financial measure in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.
For fiscal 2018, the compensation committee approved the following targets under the LIP:
|
|
|
|
|
ACHIEVEMENT LEVEL
|
|
ADJUSTED INCOME BEFORE TAX
|
|
CHANGE FROM FISCAL 2017
|
|
|
|
20%
|
|
$ 169 million
|
|
increase of approximately $66 million
|
|
|
|
100%
|
|
$ 218 million
|
|
increase of approximately $60 million
|
|
|
|
200%
|
|
$ 280 million
|
|
increase of approximately $73 million
|
In fiscal 2018, LIP targets were established based upon the Companys operating plans and objectives for
fiscal 2018 which in turn were formulated in part based upon the results for fiscal 2017. The compensation committee sets the LIP targets with the objective of encouraging the management team to drive financial performance based upon the
Companys operating plan and financial objectives for the year in question.
The following table sets forth the bonus targets as a
percentage of the eligible portion of the executives base salary under the LIP in fiscal 2018 for our executive officers at the 20% Achievement Level, the 100% Achievement Level and the 200% Achievement Level. During its annual review of the
LIP and bonus targets for the executive officers for fiscal 2018, the compensation committee determined not to make any changes to the bonus targets as a percentage of the eligible portion of the executives base salary for Mr. Friedman,
Ms. Chaya, Mr. Price and Mr. Stanchak from such targets for fiscal 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
ACHIEVEMENT LEVEL
|
|
GARY FRIEDMAN
|
|
RYNO
BLIGNAUT
(1)
|
|
KAREN
BOONE
(2)
|
|
ERI CHAYA
|
|
DEMONTY PRICE
|
|
DAVID STANCHAK
|
|
|
|
|
|
|
|
Below 20%
|
|
0 %
|
|
0 %
|
|
0 %
|
|
0 %
|
|
0 %
|
|
0 %
|
|
|
|
|
|
|
|
20%
|
|
20 %
|
|
10 %
|
|
10 %
|
|
10 %
|
|
10 %
|
|
10 %
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
100%
|
|
125%
|
|
50%
|
|
50%
|
|
50%
|
|
50%
|
|
50%
|
200%
|
|
250%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
(1)
|
Mr. Blignaut was hired on August 14, 2018. Mr. Blignaut left the Company in March 2019 due to
health considerations, at which time Jack Preston assumed the role of Chief Financial Officer.
|
(2)
|
Ms. Boone left the Company in November 2018.
|
In March 2019, the compensation committee reviewed our financial results related to the LIP targets set in the prior year, and determined that
the Company reached the 170% Achievement Level with respect to the Companys financial objectives. In fiscal 2018, the Company substantially exceeded its targets under the LIP due to the Companys ongoing acceleration in financial
performance. The compensation committee determined that Adjusted Income for fiscal 2018 for purposes of the LIP was approximately $261.2 million, which reflected the compensation committees determination that certain other extraordinary
or
non-recurring
items should also be excluded from determining Adjusted Income for purposes of the LIP. The $261.2 million represents a 71% year-over-year increase from prior year results. Accordingly,
the compensation committee approved payment of the bonuses earned under the LIP for our named executive officers as follows:
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2018
|
|
CHANGE FROM
FISCAL 2017
BONUS AS % OF
BASE SALARY
|
NAME
|
|
BONUS EARNED
UNDER THE LIP
|
|
ELIGIBLE
PORTION OF
BASE SALARY
|
|
BONUS EARNED
AS % OF
ELIGIBLE BASE
SALARY
|
|
|
|
|
|
|
|
|
|
Gary Friedman
|
|
$2,664,063
|
|
$1,250,000
|
|
213%
|
|
100%
|
Ryno Blignaut
(1)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
Karen Boone
(2)
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
Eri Chaya
|
|
$ 781,302
|
|
$ 916,538
|
|
85%
|
|
40%
|
DeMonty Price
|
|
$ 681,766
|
|
$ 799,808
|
|
85%
|
|
40%
|
David
Stanchak
|
|
$ 582,464
|
|
$ 683,269
|
|
85%
|
|
40%
|
(1)
|
Mr. Blignaut was hired on August 14, 2018. Mr. Blignaut left the Company in March 2019 due to
health considerations, at which time Jack Preston assumed the role of Chief Financial Officer.
|
(2)
|
Ms. Boone left the Company in November 2018.
|
The LIP provides substantial variation in compensation from year to year based upon the achievement of financial performance objectives. In
prior years, we have paid bonuses under the LIP based on financial performance that has exceeded targets (in the case of fiscal 2014, based on achievement of 106% of target objectives) and that has partially met targets (in the case of fiscal 2015,
based on achievement of 30% of target objectives and in the case of fiscal 2017, based on the achievement of 90% of target objectives), and we have not paid bonuses under the LIP when the Company has not met targets (in the case of fiscal 2016,
based on achievement of less than 20% of target objectives).
Mr. Blignaut, who was hired on August 14, 2018, was not eligible
for a cash bonus payable under the 2018 LIP due to his departure from the Company in March 2019. The compensation committee determined to provide him with a discretionary bonus for fiscal 2018 in the amount of $171,000 in recognition of his
assistance with the transition of his roles and responsibilities to Mr. Preston, the Companys current Chief Financial Officer.
Long-Term
Equity Incentive Compensation
We believe that providing long-term incentives as a component of compensation helps us to attract and
retain our named executive officers. These incentives also align the financial rewards paid to our named executive officers with our long-term performance, thereby encouraging our named executive officers to focus on our long-term performance goals.
In June and August 2018, the compensation committee performed its annual review of executive compensation, including a review of the
Companys annual share usage, or burn rate, and equity use as they relate to equity grants for executive officers to determine if such grants were appropriate and in line with our compensation philosophy and objectives. The
compensation committee also took into consideration (i) Mr. Friedmans recommendations, other than with respect to his own compensation, (ii) the competitive environment for executive talent in the San Francisco Bay Area,
(iii) each executive officers current equity holdings and the present value thereof and (iv) the Companys continued desire to align its executive officers long-term
26
interests with those of our shareholders. The compensation committees determinations regarding equity grants for executive officers for 2018 were also influenced by the desire to provide
additional retention incentives to the Companys executive officers, and the level of awards approved by the compensation committee took into account this desire to include a retention feature in the awards. The compensation committees
determinations regarding equity grants for employees for 2018 were also influenced by the desire to manage the annual share usage, or burn rate, and thus the compensation committee elected to substantially limit new equity grants and
scale back new hire awards in fiscal 2018.
In fiscal 2018, the compensation committee reviewed the grants of equity awards to the
executive officers. In fiscal 2017, the compensation committee determined to award Mr. Friedman a multi-year equity award with performance conditions tied to stock price performance. Consistent with the compensation committees
determination that such fiscal 2017 equity award be a multi-year grant, the compensation committee did not make equity awards to Mr. Friedman in fiscal 2018 or fiscal 2019. See 2017 Stock Option Award to Chairman and Chief Executive
Officer below for further detail regarding the multi-year equity award.
In fiscal 2018, the compensation committee determined to
make additional equity awards to the other named executive officers. The compensation committee approved grants of stock options to the named executive officers, as follows:
|
|
|
|
|
NAME
|
|
STOCK OPTIONS
|
|
RESTRICTED STOCK UNITS
|
|
|
|
Gary Friedman
|
|
|
|
|
|
|
|
Ryno Blignaut
|
|
100,000
(1)
|
|
|
|
|
|
Karen Boone
|
|
25,000
(2)
|
|
|
|
|
|
Eri Chaya
|
|
50,000
(3)
|
|
|
|
|
|
DeMonty Price
|
|
50,000
(3)
|
|
|
|
|
|
David Stanchak
|
|
25,000
(2)
|
|
|
(1)
|
The stock options were granted at an exercise price of $153.10 per share, the fair market value of our common
stock on August 14, 2018, the date of grant. The options vest at a rate of 20% per year over five years on each anniversary of the date of grant, and expire in 10 years, subject to the named executive officers continued service with the
Company.
|
(2)
|
The stock options were granted at an exercise price of $109.87 per share, the fair market value of our common
stock on June 6, 2018, the date of grant. The options vest on each anniversary of the date of grant with 2,500 options on each of years 1 and 2, 5,000 options on each of years 3 and 4 and 10,000 options on year 5, and expire in 10 years,
subject to the named executive officers continued service with the Company.
|
(3)
|
The stock options were granted at an exercise price of $109.87 per share, the fair market value of our common
stock on June 6, 2018, the date of grant. The options vest on each anniversary of the date of grant with 5,000 options on each of years 1 and 2, 10,000 options on each of years 3 and 4 and 20,000 options on year 5, and expire in 10 years,
subject to the named executive officers continued service with the Company.
|
We recently shifted our compensation
practices towards the exclusive use of stock options, in lieu of full value awards such as restricted stock units, as part of our long-term equity incentive plan. We believe this shift, by rewarding the executives for creating upside
gains in the share prices, creates the right incentives for our executives to drive performance and better align the long-term incentives of our executives with that of the long-term view of our shareholders. We found the use of other instruments
such as restricted stock units did not significantly differentiate itself from cash compensation. As a high-growth company, we believe the use of stock options aligns our executives with the expectation of shareholders for the Company to exceed and
increase its value overtime.
2017 Stock Option Award to Chairman and Chief Executive Officer
On May 2, 2017, the compensation committee granted a stock option to Mr. Friedman under the 2012 Stock Incentive Plan to purchase
1,000,000 shares of the Companys common stock with certain selling restrictions tied to stock price appreciation, with a ten year term and an exercise price of $50 per share, a premium to the market price for the common stock on the date of
the grant. Selling restrictions attached to the shares only lapse upon the achievement of both certain stock price-based performance objectives and certain time-based service period requirements, as further described below. The compensation
committee believes that the combination of time-based restrictions and performance-based restrictions tied to stock price appreciation creates a strong alignment between Mr. Friedman and the objectives of the Companys shareholders. As
previously disclosed, the 2017 Stock Option Award was structured to be a multi-year award covering a four year period, similar to the 2013 award that was previously in place for four years. Consistent with this expectation the compensation committee
did not grant Mr. Friedman an additional equity award in fiscal 2018 or fiscal 2019. The key terms of the 2017 Stock Option Award are:
|
●
|
|
The 2017 Stock Option Award may be exercised at any time but the selling restrictions on the underlying shares
would only lapse upon the Companys common stock price achieving price objectives of $100 per share, $125 per share and
|
27
|
$150 per share and Mr. Friedman remaining in service through the achievement of such stock price performance requirements.
|
|
●
|
|
To achieve any given price target, the Companys weighted average stock price, measured over a period of
the last ten trading days on a volume weighted average price, must remain at or above the dollar thresholds stated above for twenty consecutive trading days (i.e., a trailing ten day average minimum price that must be sustained for twenty
consecutive trading days).
|
|
●
|
|
Stock price performance is measured annually over a performance year, and the selling restrictions
may lapse for up to
one-quarter
of the award in any given performance year. A performance year is any twelve-month period that begins on May 2nd. With respect to any given performance year, if the
twenty day average trading price as described above for RH common stock exceeds $100 per share, $125 per share, or $150 per share during such performance year, then the selling restrictions will lapse as to a maximum of 83,333 shares,
166,666 shares, or 250,000 shares, respectively, on the last day of such performance year, if Mr. Friedman remains in service with RH as an employee with the authority, duties, or responsibilities of a chief executive officer at such date.
|
|
●
|
|
Any share selling restrictions that have not lapsed by the end of the eighth performance year will thereafter
only lapse on the twentieth anniversary of the grant date. As a result, if the stock price goals are not achieved by the eighth performance year, the underlying shares issuable upon any exercise of the option could not be sold until the twentieth
anniversary of the grant date and RH would have certain rights to repurchase such shares at a point in time after exercise using an unsecured promissory note.
|
The following table quantifies the stock price appreciation from the date of grant that would be required to achieve each price objectives:
|
|
|
|
|
|
|
PRICE TARGET ($)
|
|
PREMIUM TO GRANT
DATE STOCK PRICE
(%)
|
|
|
|
Exercise Price
|
|
$ 50
|
|
2.8%
|
|
|
|
Performance Targets
|
|
$100
|
|
105.7%
|
|
|
|
|
|
$125
|
|
157.1%
|
|
|
|
|
|
$150
|
|
208.5%
|
The following chart presents graphically the number of shares that would be eligible to have selling restrictions lapse in each year of the
first four anniversaries of the date of grant at the various stock price objectives:
28
During the first performance year, which ended on May 1, 2018, the $100 stock price
performance objective was not achieved even though the stock price traded above $100 per share on 35 separate trading days during such year. The reason such target was not achieved is a function of the requirement that the stock price remain above
the price target for twenty consecutive trading days and that the price is measured on each day as a
ten-day
average price. These features have the effect of requiring that the stock remain above the target
price objective for a sustained period of time. Given that none of the stated price levels were met before May 1, 2018, the 250,000 options for which selling restrictions were eligible to lapse as early as the end of the first year after the
date of grant were carried forward into future years up until the end of the eighth year from the date of the grant.
During the second
performance year, which ended on May 1, 2019, the $100 stock price performance objective was achieved and the $125 stock price performance objective was achieved. As a result, the selling restrictions on 333,332 of the shares under the option
have lapsed, as follows: (a) the selling restrictions for the carried over shares from the first performance year lapsed as to (i) 83,333 shares on June 12, 2018, the date on which the $100 stock price was met, and (ii) 83,333 shares on
July 16, 2018, the date on which the $125 stock price was met and (b) the selling restrictions as to 166,666 shares from the second performance year lapsed on May 1, 2019. The $150 stock price performance objective was not achieved
even though the stock price traded above $150 per share on 29 separate trading days during the year ended May 1, 2019, again due to the requirement that the stock price remain above the price target for twenty consecutive trading days and that
the price is measured on each day as a
ten-day
average price.
In its annual review of executive
compensation, the compensation committee affirmed the effectiveness of the multi-year equity structure. As of February 2, 2018, the last trading day of fiscal 2017, the closing price of our common stock was $92.04 per share. As of
February 1, 2019, the last trading day of fiscal 2018, the closing price of our common stock was $133.64 per share. The multi-year structure is believed to incentivize Mr. Friedman and align him with a long-term view in leading the Company
and avoids, among other things, the unnecessary annual distraction that most other companies face in having to address renegotiations of executive compensation with their chief executive officer.
The compensation committee believes that the structure of the 2017 Stock Option Award was well designed and provides the right incentives to
Mr. Friedman as the committee believes that this award structure is contributing to RHs financial and stock price performance.
If Mr. Friedmans employment with RH is (i) terminated by RH without cause, (ii) terminated by Mr. Friedman for good
reason (as such terms are defined in the option award agreement), or (iii) terminated for death or disability (as such term is defined in the option award agreement), then any selling restrictions on shares subject to the 2017 Stock Option
Award that would have been eligible to lapse at any time during the twelve-month period following such termination had such termination not occurred will be eligible to lapse based solely upon the achievement of the stated price levels at any point
during such twelve-month period. For further details regarding the option award agreement, see the Companys Current Report on Form
8-K
filed on May 3, 2017.
Perquisites and Other Personal Benefits
We provide certain named executive officers with perquisites and other personal benefits that we and the compensation committee believe are
reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. We generally provide our named executive officers a car allowance, which is adjusted from time to time
based on expenses incurred by our executive officers in connection with their travel to local retail locations and expenses related to fuel, tolls and parking. The compensation committee periodically reviews the levels of perquisites and other
personal benefits provided to the named executive officers.
The named executive officers may not defer any component of any annual
incentive bonus earned and do not participate in another nonqualified deferred compensation plan. Likewise, the Company does not maintain any defined benefit pension plans for its employees. However, our named executive officers are eligible to
participate in the Companys 401(k) savings plan, as well as the Companys group health and welfare plans, on the same terms and conditions as other Company employees.
It has been our practice to provide key executive officers with relocation benefits in connection with their initial hiring by our Company. In
some instances, newly hired key executives are provided a signing or guaranteed minimum bonus in order to assist with their transition into the Company and the San Francisco Bay Area or for other reasons. However, relocation incentives or benefits
may be subject to repayment if the executive does not remain with the Company for the period of time specified in his or her offer documents. None of our named executive officers received such benefits in fiscal 2018.
29
In addition, from time to time, the compensation committee may approve cash bonuses outside of
the LIP on a discretionary basis for reasons such as individual performance or in connection with an executive officers initial employment arrangement with the Company or other events, and such bonus awards may overlap with bonus awards paid
under the LIP. Payments of discretionary bonuses to our named executive officers, if any, are disclosed in the Bonus column of the Summary Compensation Table in this Amendment. None of our named executive officers received a
discretionary bonus in fiscal 2018, with the exception of Mr. Blignaut, who received a discretionary bonus for fiscal 2018 in recognition of his assistance with the transition of his roles and responsibilities to Mr. Preston, the
Companys current Chief Financial Officer, as well as the fact that he was not eligible for a LIP bonus by the terms of the plan due to his departure from the Company.
Employment Agreements; Severance and Change of Control Benefits
We have entered into agreements with certain key employees, including certain of the named executive officers, which agreements provide
severance benefits in the event of certain terminations of employment. These severance protection agreements are designed to promote stability and continuity of senior management. Information regarding amounts that would be payable under such
agreements for the named executive officers is provided under the heading Potential Payments Upon Termination and Change in Control in this Amendment. None of our employment agreements or other policies have tax
gross-up
features. In the event that any termination payments made to our Chairman and Chief Executive Officer are deemed under Section 280G of the U.S. Internal Revenue Code of 1986, as amended (the
Code), to constitute excess parachute payments subject to an excise tax, then such payments will be payable either (i) in full or (ii) as to such lesser amount that would result in no portion of such payments being subject to
the excise tax, and our Chairman and Chief Executive Officer will receive the greater, on an
after-tax
basis, of (i) or (ii) above, as determined by an independent accountant or tax advisor selected by
our Chairman and Chief Executive Officer and paid for by the Company.
RISK CONSIDERATIONS IN OUR COMPENSATION PROGRAM
We conducted an assessment of the Companys compensation policies and practices for its employees and concluded that these policies and
practices as currently designed are appropriately weighted among base salaries and short- and long-term incentives such that the Companys employees are not encouraged to take excessive risks. The compensation committee believes that such
compensation policies and practices are not reasonably likely to have a material adverse effect on the Company. In reaching this conclusion, the compensation committee reviewed the compensation elements that comprise our compensation program, as
well as the objectives that each item is designed to encourage, as described above under Executive Compensation Components.
Anti-Hedging
Practices
Our insider trading policy provides that no employee or director may hedge ownership of our stock by engaging in short sales
or purchasing and selling derivative securities related to our stock.
Clawback Provisions
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), public companies will be required to adopt a
policy to recover certain compensation in the event of a material accounting restatement. The Company will adopt a clawback policy as required by Dodd-Frank when final regulations are provided by the SEC and the NYSE and become effective.
Stock Ownership by Executives
In May
2018, the Board adopted stock ownership guidelines applicable to all directors and executive officers of the Company in order to further align the financial interest of our directors and executive officers with the interest of our investors. See
Corporate Governance & Director IndependenceDirector and Executive Stock Ownership Guidelines.
Our Chairman and
Chief Executive Officer, Mr. Friedman, has consistently maintained a significant equity ownership interest in the Company and, as of May 23, 2019, beneficially owns approximately 31.0% of the Companys common stock which, based on the
average closing price for RH stock for fiscal 2018, was valued at approximately 468.5 times his annual base salary for fiscal 2018, far above the multiple of six times salary minimum ownership requirement. Additional information regarding the
stockholdings of our other named executive officers and directors is set forth in this Amendment in the section entitled Security Ownership of Certain Beneficial Owners and Management.
Tax Deductibility
Section 162(m) of
the Internal Revenue Code (Section 162(m)) limits the amount that we may deduct for compensation paid to certain of our executive officers to $1,000,000 per person in any year. Prior to December 22, 2017, when the Tax Cuts and
Jobs Act of 2017 (TCJA) was signed into law, compensation that qualified as performance-based was excluded for
30
purposes of calculating the amount of compensation subject to the $1,000,000 limit. Under the TCJA, this performance-based exception is repealed for taxable years beginning after
December 31, 2017, except with respect to certain grandfathered compensation. The compensation committee reviews and considers the deductibility of executive compensation under Section 162(m) when determining the compensation
of the Companys executive officers. However, the compensation committee retains the flexibility and discretion to approve compensation that is nondeductible under Section 162(m) as a means to ensure competitive levels of total
compensation for our executive officers and promote varying corporate goals. In any event, the compensation committee intends to maintain an approach to executive officer compensation that strongly links pay to performance, and promotes the
attraction and retention of qualified executives, but will also take into account
tax-effectiveness
of different compensation alternatives as it selects the right compensation mix.
CEO Pay Relative to Median Pay of Our Employees
The compensation for our CEO in fiscal 2018 ($3,943,757 as disclosed in the 2018 Summary Compensation Table) was approximately 115 times the
annual total compensation, as defined by Item 402(u) of Regulation
S-K,
of our median employee ($34,416). Total compensation includes base salary, bonus compensation, equity awards and other
perquisites and allowances. Our CEO to median employee pay ratio is calculated in accordance with Item 402(u) of Regulation
S-K
and represents a reasonable estimate calculated in accordance with SEC
regulations and guidance. We identified the median employee by examining the gross wages reflected in our payroll records as reported to the Internal Revenue Service on Form
W-2
for all individuals, excluding
our CEO, who were employed by us on November 15, 2017. We used the same median employee that we identified in fiscal 2017 in determining median employee compensation for fiscal 2018. We included all employees, whether employed on a full-time,
part-time, temporary or seasonal basis. We did not make any assumptions, adjustments, or estimates with respect to payroll compensation amounts. After identifying the median employee based on total
W-2
payroll
compensation, we calculated annual total compensation for such employee using the same methodology we use for our named executive officers as set forth in the 2018 Summary Compensation Table. Our CEO pay relative to the median pay of our employees
for fiscal 2018 is significantly lower than the fiscal 2017 ratio because the compensation for our CEO in fiscal 2017 included the value of the fiscal 2017 equity award to Mr. Friedman. As discussed above, the fiscal 2017 equity award was
structured as a multi-year award and, consistent with that intent, Mr. Friedman was not granted any equity awards in fiscal 2018. As a result, his fiscal 2018 total compensation was significantly lower than his fiscal 2017 total compensation.
COMPENSATION COMMITTEE REPORT
The
information contained in the following report of the Companys compensation committee is not considered to be soliciting material, filed or incorporated by reference in any past or future filing by the Company under the
Exchange Act or the Securities Act of 1933, as amended, unless and only to the extent that the Company specifically incorporates it by reference.
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with our management. Based on
its review and discussions, the compensation committee recommended to our board of directors that the Compensation Discussion and Analysis be included in this Amendment.
Submitted by the compensation committee of the board of directors of RH:
Dr. Leonard Schlesinger (Chairman)
Mark
Demilio
COMPENSATION OF NAMED EXECUTIVE OFFICERS
Summary Compensation Table
The following
table shows the compensation earned by our named executive officers fiscal 2018, fiscal 2017 and fiscal 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME AND
PRINCIPAL
POSITION
|
|
FISCAL
YEAR
|
|
SALARY
|
|
BONUS
|
|
STOCK
AWARDS
(1)
|
|
OPTION
AWARDS
(1)
|
|
NON-EQUITY
INCENTIVE PLAN
COMPENSATION
(2)
|
|
ALL OTHER
COMPENSATION
(3)
|
|
TOTAL
|
Gary Friedman
Chairman and
CEO
|
|
2018
|
|
$ 1,250,000
|
|
$
|
|
$
|
|
$
|
|
$ 2,664,063
|
|
$ 29,694
(6)
|
|
$ 3,943,757
|
|
2017
|
|
$ 1,250,000
|
|
$
|
|
$
|
|
$23,870,000
|
|
$ 1,409,375
|
|
$ 35,095
(6)
|
|
$ 26,564,470
|
|
2016
|
|
$ 1,250,000
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ 36,100
(6)
|
|
$ 1,286,100
|
Ryno Blignaut
(4)
President, Chief
Financial and
Administrative
Officer
|
|
2018
|
|
$ 357,692
|
|
$ 171,000
(7)
|
|
$
|
|
$ 8,594,000
|
|
$
|
|
$ 6,000
|
|
$ 9,128,692
|
Karen Boone
Former
President,
|
|
2018
|
|
$ 556,731
|
|
$
|
|
$
|
|
$ 1,560,750
|
|
$
|
|
$ 9,000
|
|
$ 2,126,481
|
|
2017
|
|
$ 737,601
|
|
$
|
|
$
|
|
$
|
|
$ 332,658
|
|
$ 12,000
|
|
$ 1,082,259
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAME AND
PRINCIPAL
POSITION
|
|
FISCAL
YEAR
|
|
|
SALARY
|
|
BONUS
|
|
STOCK
AWARDS
(1)
|
|
OPTION
AWARDS
(1)
|
|
NON-EQUITY
INCENTIVE PLAN
COMPENSATION
(2)
|
|
ALL OTHER
COMPENSATION
(3)
|
|
TOTAL
|
Chief Financial
and Administrative
Officer
|
|
|
2016
|
|
|
$ 700,000
|
|
$
|
|
$ 1,971,000
|
|
$ 1,733,550
|
|
$
|
|
$ 12,000
|
|
$ 4,416,550
|
Eri Chaya
President,
CCO, CMO
and Director
|
|
|
2018
|
|
|
$ 916,538
|
|
$
|
|
$
|
|
$ 3,121,500
|
|
$ 781,302
|
|
$ 12,000
|
|
$ 4,831,340
|
|
|
2017
|
|
|
$ 837,601
|
|
$
|
|
$
|
|
$
|
|
$ 377,758
|
|
$ 12,000
|
|
$ 1,227,359
|
|
|
2016
|
|
|
$ 800,000
|
|
$
|
|
$ 1,971,000
|
|
$ 1,733,550
|
|
$
|
|
$ 12,000
|
|
$ 4,516,550
|
DeMonty Price
President,
Chief Operating, Service
and Values Officer
|
|
|
2018
|
|
|
$ 799,808
|
|
$
|
|
$
|
|
$ 3,121,500
|
|
$ 681,766
|
|
$ 12,000
|
|
$ 4,615,074
|
|
|
2017
|
|
|
$ 687,601
|
|
$
|
|
$
|
|
$
|
|
$ 310,108
|
|
$ 12,000
|
|
$ 1,009,709
|
|
|
2016
|
|
|
$ 650,000
|
|
$
|
|
$ 2,124,000
|
|
$ 1,875,944
|
|
$
|
|
$ 12,000
|
|
$ 4,661,944
|
David
Stanchak
(5)
President, Chief Real
Estate and
Development Officer
|
|
|
2018
|
|
|
$ 683,269
|
|
$
|
|
$
|
|
$ 1,560,750
|
|
$ 582,464
|
|
$ 12,000
|
|
$ 2,838,483
|
|
|
2017
|
|
|
$ 637,601
|
|
$
|
|
$
|
|
$ 461,404
|
|
$ 287,558
|
|
$ 13,853
(8)
|
|
$ 1,400,416
|
(1)
|
Reflects the aggregate grant date fair value of the awards made in fiscal 2018, fiscal 2017 and fiscal 2016,
computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC 718) rather than the amount paid to or realized by the named executive officer. See Note 16
Stock-Based
Compensation
to our audited consolidated financial statements contained in the Original Filing.
|
(2)
|
Reflects the cash awards that our named executive officers received under our LIP for fiscal 2018, fiscal
2017 and fiscal 2016 performance, as applicable. Discretionary bonuses not awarded under the LIP are reflected in the Bonus column above.
|
(3)
|
Reflects perquisites to the named executive officers in the form of car allowances, except as otherwise
noted.
|
(4)
|
Mr. Blignaut was not a named executive officer prior to fiscal 2018 and, as a result, no disclosure is
made for fiscal 2017 and fiscal 2016 in accordance with SEC rules.
|
(5)
|
Mr. Stanchak was not a named executive officer prior to fiscal 2017 and, as a result, no disclosure is
made for fiscal 2016 in accordance with SEC rules.
|
(6)
|
In fiscal 2018, represents $12,000 in the form of a car allowance and $17,694 in imputed income related to
Mr. Friedmans personal use of corporate aircraft. In fiscal 2017, represents $12,000 in the form of a car allowance and $23,095 in imputed income related to Mr. Friedmans personal use of corporate aircraft. In fiscal 2016,
represents $12,000 in the form of a car allowance and $24,100 in imputed income related to Mr. Friedmans personal use of corporate aircraft.
|
(7)
|
Represents a discretionary bonus for fiscal 2018 in recognition of his assistance with the transition of his
roles and responsibilities to Mr. Preston, the Companys current Chief Financial Officer.
|
(8)
|
In fiscal 2017, represents $12,000 in the form of a car allowance and $1,853 in imputed income related to
Mr. Stanchaks personal use of corporate aircraft.
|
For a description of actions taken by the compensation
committee with respect to base salaries of our named executive officers for fiscal 2018, please see section entitled Base Salary in the Compensation Discussion and Analysis section of this Amendment.
For a description of the material terms of the named executive officers employment agreements, please see the section entitled
Employment Agreements in this Amendment.
For a description of our
Non-Equity
Incentive
Plan Compensation, please see the section entitled Performance-Based Annual Cash Incentives in the Compensation Discussion and Analysis section of this Amendment. For the compensation committees determination of awards under the
LIP for our named executive officers for fiscal 2018, please see the section entitled Performance-Based Annual Cash Incentives in the Compensation Discussion and Analysis section of this Amendment. For the vesting schedules of
outstanding equity awards and additional information concerning outstanding equity awards, please see Outstanding Equity Awards at Fiscal
Year-End
in this Amendment.
Grants of Plan-Based Awards
As further
described above in the Compensation Discussion and Analysis section of this Amendment, the named executive officers are eligible to receive an annual cash bonus based on a percentage of their base salary under our LIP. Our Companys financial
objectives with respect to the LIP are established each year and the payment and the amount of any bonus depend upon whether our Company achieves those performance goals. The specific amount any participant could receive depends on the level of our
performance. The amounts shown in these columns for the named executive officers are based on the following assumptions:
In the
threshold column, the amount for each named executive officer reflects the minimum bonus that would be awarded if we reach the 20% achievement level of our financial objectives, which is the minimum achievement level required for bonus
payouts under the LIP.
In the target column, the amount for each named executive officer reflects the bonus amount that would
be awarded if we reach the 100% achievement level of our financial objectives.
32
In the maximum column, the amount for each named executive officer reflects the bonus
that would be awarded if we reach the 200% achievement level of our financial objectives.
The following table provides information on the
possible payouts under our LIP for fiscal 2018 based on certain assumptions about the achievement of performance objectives for our Company and the individual named executive officer at various levels. The following table does not set forth the
actual bonuses awarded to the named executive officers for fiscal 2018 under the LIP. The actual bonuses awarded to the named executive officers for fiscal 2018 are reported in the Summary Compensation Table above under the column entitled
Non-Equity
Incentive Plan Compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESTIMATED FUTURE PAYOUTS UNDER NON-EQUITY
INCENTIVE
PLAN AWARDS
(1)
|
|
ALL OTHER
STOCK
AWARDS: #
OF SHARES
OF STOCK
OR UNITS
|
|
ALL OTHER
OPTION
|
|
|
|
|
NAME
|
|
GRANT
DATE
|
|
THRESHOLD
|
|
TARGET
|
|
MAXIMUM
|
|
AWARDS
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS
|
|
EXERCISE
OR BASE
PRICE OF
OPTION
AWARDS
|
|
GRANT DATE
FAIR VALUE OF
STOCK AND
OPTION
AWARDS
(2)
|
Gary Friedman
|
|
|
|
$250,000
|
|
$1,562,500
|
|
$ 3,125,000
|
|
|
|
|
|
|
|
|
Ryno Blignaut
|
|
|
|
$35,769
|
|
$ 178,846
|
|
$ 357,692
|
|
|
|
|
|
|
|
|
|
|
8/14/2018
|
|
|
|
|
|
|
|
|
|
100,000
|
|
$ 153.10
|
|
$ 8,594,000
|
Karen Boone
|
|
|
|
$76,635
|
|
$ 383,173
|
|
$ 766,346
|
|
|
|
|
|
|
|
|
|
|
6/6/2018
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$ 109.87
|
|
$ 1,560,750
|
Eri Chaya
|
|
|
|
$ 91,654
|
|
$ 458,269
|
|
$ 916,538
|
|
|
|
|
|
|
|
|
|
|
6/6/2018
|
|
|
|
|
|
|
|
|
|
50,000
|
|
$ 109.87
|
|
$ 3,121,500
|
DeMonty Price
|
|
|
|
$ 79,981
|
|
$ 399,904
|
|
$ 799,808
|
|
|
|
|
|
|
|
|
|
|
6/6/2018
|
|
|
|
|
|
|
|
|
|
50,000
|
|
$ 109.87
|
|
$ 3,121,500
|
David Stanchak
|
|
|
|
$ 68,327
|
|
$ 341,635
|
|
$ 683,269
|
|
|
|
|
|
|
|
|
|
|
6/6/2018
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$ 109.87
|
|
$ 1,560,750
|
(1)
|
Target awards as a percentage of the eligible portion of base salary for the named executive officers are set
forth in the section entitled Performance-Based Annual Cash Awards in the Compensation Discussion and Analysis section of this Amendment.
|
(2)
|
For stock option awards, reflects the aggregate grant date fair value of the awards made in fiscal 2018,
computed in accordance with FASB ASC 718. See Note 16
Stock-Based Compensation
to our audited consolidated financial statements contained in the Original Filing. Amounts shown do not reflect compensation actually received or that may be
realized in the future by the named executive officer. The grant date fair value for stock option awards was $62.43 and $85.94 on June 6, 2018 and August 14, 2018, respectively, the two dates on which the stock option awards were made.
|
OUTSTANDING EQUITY AWARDS AT FISCAL
YEAR-END
The following table shows all outstanding stock options and stock awards held by the named executive officers as of February 2, 2019, the
last day of fiscal 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCK OPTION AWARDS
|
|
|
RESTRICTED SHARE AWARDS
|
|
|
|
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS
|
|
|
|
|
|
|
|
|
SHARES OR UNITS THAT
HAVE NOT YET VESTED
|
|
NAME
|
|
EXERCISABLE (#)
|
|
|
UNEXERCISABLE (#)
|
|
|
OPTION
EXERCISE
PRICE ($)
|
|
|
OPTION
EXPIRATION
DATE
|
|
|
NUMBER OF
SHARES (#)
|
|
|
MARKET
VALUE ($)
(1)
|
|
Gary Friedman
|
|
|
2,976,826
|
|
|
|
|
|
|
$
|
46.50
|
|
|
|
10/31/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
$
|
75.43
|
|
|
|
7/1/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
(2)
|
|
|
|
|
|
$
|
50.00
|
|
|
|
5/1/2027
|
|
|
|
|
|
|
|
|
|
Ryno Blignaut
|
|
|
|
|
|
|
100,000
|
(3)
|
|
$
|
153.10
|
|
|
|
8/13/2028
|
|
|
|
|
|
|
|
|
|
Karen Boone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eri Chaya
|
|
|
95,600
|
|
|
|
|
|
|
$
|
29.00
|
|
|
|
10/31/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
30,000
|
(4)
|
|
$
|
61.30
|
|
|
|
5/7/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
4,000
|
(5)
|
|
$
|
87.31
|
|
|
|
5/5/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
70,000
|
(6)
|
|
$
|
39.42
|
|
|
|
5/3/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(7)
|
|
$
|
109.87
|
|
|
|
6/5/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
(16)
|
|
$
|
3,341,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
(17)
|
|
$
|
267,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000
|
(18)
|
|
$
|
4,677,400
|
|
DeMonty Price
|
|
|
16,123
|
|
|
|
|
|
|
$
|
29.00
|
|
|
|
10/31/2022
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
15,000
|
(4)
|
|
$
|
61.30
|
|
|
|
5/7/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
4,000
|
(5)
|
|
$
|
87.31
|
|
|
|
5/5/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
4,000
|
(8)
|
|
$
|
93.51
|
|
|
|
10/1/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
28,000
|
|
|
|
42,000
|
(9)
|
|
$
|
44.52
|
|
|
|
4/20/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
28,000
|
(10)
|
|
$
|
39.42
|
|
|
|
5/3/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(7)
|
|
$
|
109.87
|
|
|
|
6/5/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
(16)
|
|
$
|
1,670,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
(10)
|
|
$
|
267,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
(19)
|
|
$
|
267,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
(20)
|
|
$
|
2,405,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,000
|
(21)
|
|
$
|
2,271,880
|
|
David Stanchak
|
|
|
15,000
|
|
|
|
10,000
|
(11)
|
|
$
|
91.69
|
|
|
|
4/22/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
30,000
|
(12)
|
|
$
|
90.92
|
|
|
|
4/27/2025
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCK OPTION AWARDS
|
|
|
RESTRICTED SHARE AWARDS
|
|
|
|
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS
|
|
|
|
|
|
|
|
|
SHARES OR UNITS THAT HAVE
NOT YET VESTED
|
|
NAME
|
|
EXERCISABLE (#)
|
|
|
UNEXERCISABLE (#)
|
|
|
OPTION
EXERCISE
PRICE ($)
|
|
|
OPTION
EXPIRATION
DATE
|
|
|
NUMBER OF
SHARES (#)
|
|
|
MARKET
VALUE ($)
(1)
|
|
|
|
|
14,000
|
|
|
|
21,000
(9)
|
|
|
$
|
44.52
|
|
|
|
4/20/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
12,000
(13)
|
|
|
$
|
25.39
|
|
|
|
6/26/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
17,000
(14)
|
|
|
$
|
45.21
|
|
|
|
8/28/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
(15)
|
|
|
$
|
109.87
|
|
|
|
6/5/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(22)
|
|
$
|
1,336,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
(20)
|
|
$
|
1,202,760
|
|
(1)
|
Calculated by multiplying the number of unvested stock awards by $133.64, the fair market value of the
Companys common stock on February 1, 2019, the last trading day of fiscal 2018.
|
(2)
|
Represents options granted to Mr. Friedman under our 2012 Stock Incentive Plan on May 2, 2017.
These options are fully vested but the underlying shares are subject to selling restrictions that only lapse upon the achievement of both certain stock price-based performance objectives and certain time-based service period requirements. See
Executive Summary2017 Stock Option Award to Chairman and Chief Executive Officer for a detailed explanation of the vesting and other provisions of this option award. As of February 2, 2019, 833,334 of these options were
subject to selling restrictions.
|
(3)
|
Represents options granted on August 14, 2018. Subject to continuous service, these options vest and
become exercisable as to 1/5th of the options on each anniversary of the grant date, and will be fully vested on August 14, 2023.
|
(4)
|
Represents options granted on May 8, 2014. Subject to continuous service, these options will be fully
vested on May 8, 2019.
|
(5)
|
Represents options granted on May 6, 2015. Subject to continuous service, these options vest and become
exercisable as to 50% of the options on each remaining anniversary of the grant date, and will be fully vested on May 6, 2020.
|
(6)
|
Represents options granted on May 4, 2016. Subject to continuous service, these options vest on each
anniversary of the date of grant with 20,000 options on year 3 and 25,000 options on each of years 4 and 5, and will be fully vested on May 4, 2021.
|
(7)
|
Represents options granted on June 6, 2018. Subject to continuous service, these options vest on each
anniversary of the date of grant with 5,000 options on each of years 1 and 2, 10,000 options on each of years 3 and 4 and 20,000 on year 5, and will be fully vested on June 6, 2023.
|
(8)
|
Represents options granted on October 2, 2015. Subject to continuous service, these options vest and
become exercisable as to 50% of the options on each remaining anniversary of the grant date, and will be fully vested on October 2, 2020.
|
(9)
|
Represents options granted on April 21, 2016. Subject to continuous service, these options vest and
become exercisable as to 1/3rd of the options on each remaining anniversary of the grant date, and will be fully vested on April 21, 2021.
|
(10)
|
Represents restricted stock units granted on May 4, 2016. Subject to continuous service, these options
vest on each anniversary of the date of grant with 6,000 options on year 3 and 11,000 options on each of years 4 and 5, and will be fully vested on May 4, 2021.
|
(11)
|
Represents options granted on April 22, 2015. Subject to continuous service, these options vest and
become exercisable as to 50% of the options on each remaining anniversary of the grant date, and will be fully vested on April 22, 2020.
|
(12)
|
Represents options granted on April 28, 2015. Subject to continuous service, these options vest and
become exercisable as to 50% of the options on each of April 22, 2019 and 2020, and will be fully vested on April 22, 2020.
|
(13)
|
Represents options granted on June 27, 2016. Subject to continuous service, these options vest and
become exercisable as to 1/3rd of the options on each remaining anniversary of the grant date, and will be fully vested on June 27, 2021.
|
(14)
|
Represents options granted on August 29, 2017. Subject to continuous service, these options vest on each
anniversary of the date of grant with 3,000 options on year 2, 4,000 options on year 3 and 5,000 options on each of years 4 and 5, and will be fully vested on August 29, 2022.
|
(15)
|
Represents options granted on June 6, 2018. Subject to continuous service, these options vest on each
anniversary of the date of grant with 2,500 options on each of years 1 and 2, 5,000 options on each of years 3 and 4 and 10,000 on year 5, and will be fully vested on June 6, 2023.
|
(16)
|
Represents restricted stock units granted on May 8, 2014. Subject to continuous service, these
restricted stock units will be fully vested on June 16, 2019.
|
(17)
|
Represents restricted stock units granted on May 6, 2015. Subject to continuous service, these
restricted stock units vest as to 50% of the units on each of June 16, 2019 and 2020, and will be fully vested on June 16, 2020.
|
(18)
|
Represents restricted stock units granted on May 4, 2016. Subject to continuous service, these
restricted stock units vest on each anniversary of the date of grant with 10,000 units on year 3 and 12,500 units on each of years 4 and 5, and will be fully vested on May 4, 2021.
|
(19)
|
Represents restricted stock units granted on October 2, 2015. Subject to continuous service, these
restricted stock units vest as to 50% of the units on each of September 14, 2019 and 2020, and will be fully vested on September 14, 2020.
|
(20)
|
Represents restricted stock units granted on April 21, 2016. Subject to continuous service, these
restricted stock units vest as to 1/3rd of the units on each of June 16, 2019, 2020 and 2021, and will be fully vested on June 16, 2021.
|
(21)
|
Represents restricted stock units granted on May 4, 2016. Subject to continuous service, these
restricted stock units vest on each anniversary of the date of grant with 4,000 units on year 3 and 6,500 units on each of years 4 and 5, and will be fully vested on May 4, 2021.
|
(22)
|
Represents restricted stock units granted on April 23, 2015. Subject to continuous service, these
restricted stock units vest as to 50% of the units on each of April 22, 2019 and 2020, and will be fully vested on April 22, 2020.
|
OPTIONS EXERCISED, UNITS VESTED AND STOCK VESTED
The following table shows all restricted stock units or stock awards that vested in fiscal 2018, as well as stock options that were exercised
by the named executive officers in fiscal 2018.
34
|
|
|
|
|
|
|
|
|
NAME
|
|
OPTION AWARDS
|
|
RESTRICTED STOCK AWARDS
|
|
NUMBER OF
SHARES
ACQUIRED ON
EXERCISE
|
|
VALUE
REALIZED ON
EXERCISE
|
|
NUMBER OF
RESTRICTED
STOCK
UNITSVESTED
|
|
VALUE OF
RESTRICTED
STOCK UNITS
ON VESTING
|
Gary Friedman
|
|
|
|
$
|
|
|
|
$
|
Ryno Blignaut
|
|
|
|
$
|
|
|
|
$
|
Karen Boone
|
|
130,876
|
|
$ 9,171,411
|
|
8,500
|
|
$ 917,170
|
Eri Chaya
|
|
|
|
$
|
|
8,500
|
|
$ 917,170
|
DeMonty Price
|
|
7,777
|
|
$ 956,649
|
|
9,500
|
|
$ 1,414,050
|
David Stanchak
|
|
|
|
$
|
|
8,000
|
|
$ 924,610
|
BURN RATE AND DILUTION
We calculate our burn rate using the total number of equity awards (full value stock awards and stock options) granted under our
stock incentive plan during the current fiscal year as a percentage of the total number of common shares outstanding as of the prior fiscal year. Our fiscal 2018 burn rate was 2.0%.
We believe to understand our use of equity under our stock incentive plan (including our annual burn rate) requires understanding the impact of
our recent share buyback programs on our dilution. As a result, we analyze our equity metrics as a percentage of both the total number of common shares outstanding and the total number of pro forma common shares outstanding, which takes into account
our share buyback programs.
Our pro forma overhang for fiscal 2018 based on the pro forma common shares outstanding was 18.5%.
Our annual overhang for fiscal 2018 based on the total number of common shares outstanding was 38.7%.
We calculate our equity overhang as the total number of outstanding shares issued or awarded (including any unexercised and unvested
outstanding awards) under our equity plans as a percentage of the total number of common shares outstanding. Our pro forma equity overhang takes into account the effect of the Companys share repurchase program by using the total number of
common shares outstanding prior to the Companys share repurchases (as of fiscal 2016) and includes the actual issuance of common stock via equity instruments through the current fiscal year end period.
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2018 (POST REPURCHASE ACTIVITY)
|
|
FISCAL 2016
(PRE-
REPURCHASE
ACTIVITY)
|
|
ON FISCAL 2018
SHARES
OUTSTANDING
|
|
ON FISCAL 2016
SHARES
OUTSTANDING
|
|
ON PRO FORMA
FISCAL 2018 SHARES
OUTSTANDING
|
Options & RSUs Outstanding
|
|
9,591,678
|
|
7,914,885
|
|
7,914,885
|
|
7,914,885
|
Shares Outstanding
|
|
40,828,633
|
|
20,477,813
|
|
40,828,633
|
|
42,745,524
(1)
|
Overhang
|
|
23.5%
|
|
38.7%
|
|
19.4%
|
|
18.5%
|
(1)
|
Pro forma fiscal 2018 shares outstanding is equal to the total shares outstanding as of fiscal 2016, plus the
issuance of 1,919,691 shares during fiscal 2017 and fiscal 2018 as a result of the exercise of stock options and vested RSUs, minus the repurchase of shares from a former employee of 2,800 shares, and excludes the Companys share repurchase
activity under the Board approved share repurchase programs.
|
PENSION BENEFITS
None of our named executive officers received any pension benefits during fiscal 2018.
NONQUALIFIED DEFERRED COMPENSATION
None of our
named executive officers contributed to or received earnings from a nonqualified deferred compensation plan during fiscal 2018.
EMPLOYMENT AND OTHER
COMPENSATION AGREEMENTS
We have entered into employment agreements with the following named executive officers.
35
Gary Friedman
We have entered into an employment agreement with Mr. Friedman, our Chairman and Chief Executive Officer. Mr. Friedmans
employment agreement provides for an annual base salary of at least $1.25 million. If Mr. Friedmans employment is terminated by us without cause (as defined in the agreement) or by Mr. Friedman for good reason (as defined in the
agreement), he is entitled to (a) all accrued salary and vacation pay through the termination date, (b) severance payments totaling $20 million, less withholdings, paid on our regular payroll schedule over the 24 months following the
termination date, (c) any earned but unpaid portion of his annual bonus, (d) a
pro-rata
amount (based on the number of days Mr. Friedman was employed during the fiscal year through the
termination date) of Mr. Friedmans target bonus for the applicable fiscal year in which termination of employment occurs, to be paid at the same time and in the same form as Mr. Friedmans annual bonus would otherwise be paid,
(e) subject to his timely election under COBRA, continuation of medical benefits for 24 months following the termination date, subject to Mr. Friedmans payment of applicable premiums at the same rate that would have been applied had
he remained an executive officer of our Company, paid for by us to the same extent that we paid for his health insurance prior to termination, (f ) his vested shares and options that are still subject to selling restrictions will remain outstanding
for two years following the date of termination (during which time the selling restrictions may lapse in accordance with their terms) and will be subject to repurchase by us after two years at the then fair market value to the extent that such
selling restrictions remain unlapsed, and (g) any unvested performance-based equity awards that Mr. Friedman may hold shall remain outstanding and vest according to their terms for a period of two years following the date of termination
and shall be forfeited to the extent unvested after such period.
Mr. Friedmans employment agreement also provides that in the
event he receives payments that would be subject to an excise tax, he would receive the greater of either (i) the payment in full or (ii) such lesser amount which would result in no portion of such payments being subject to the excise tax,
on an
after-tax
basis.
If Mr. Friedmans services are terminated by us for cause (as
defined in the agreement), he is entitled to all accrued salary and vacation pay through the termination date. Upon such termination for cause, certain of Mr. Friedmans other equity interests that are either unvested or subject to selling
restrictions and repurchase rights will terminate, expire and be forfeited for no value, or otherwise be subject to repurchase in accordance with their terms and shall be forfeited to the extent unvested after such period. See
Compensation Discussion and AnalysisLong-Term Equity Incentive Compensation.
Mr. Friedman has agreed that,
during his employment with us or during the term when he is receiving continued payment from us after termination of his employment as described above, he will not directly or indirectly work for or engage or invest in any competitor. In addition,
Mr. Friedman has agreed that, during his employment with us and for the two year period thereafter, he will not (a) solicit, directly or through any third party, any employee of ours or (b) use our proprietary information to solicit
the business of any of our material customers or suppliers, or as specified in the employment agreement, encourage any of our suppliers and customers to reduce their business or contractual relationship with us. The agreement also contains a mutual
non-disparagement
clause.
Eri Chaya, DeMonty Price, David Stanchak, Ryno Blignaut and Karen Boone
On March 29, 2018, we entered into compensation protection agreements with each of Ms. Chaya, Mr. Price, Mr. Stanchak and
Ms. Boone. On August 14, 2018, we entered into a compensation protection agreement with Mr. Blignaut. The compensation committee determined to offer these compensation protection agreements to each of these executive officers in order
to provide uniform severance protection terms for each such executive officer. The effect of the compensation protection agreements is to supersede any other compensation severance arrangements previously in place for any such executive officer.
The compensation protection agreements provide each of the foregoing executive officers with severance if the executives employment
is terminated by us without cause (as defined in the agreement), or by the executive for good reason (as defined in the agreement). In the event of such termination and subject to the executives execution and nonrevocation of a release of
claims and continued compliance with the restrictive covenants described herein, the executive is entitled to: (a) all accrued base salary through the termination date; (b) any earned and unpaid portion of the annual bonus for the year
prior to year in which such termination occurs; (c) to the extent bonuses have been paid for the year prior to the year in which the termination takes place (or no such bonus was paid at all), a prorated bonus based on the number of days the
executive is employed in the year of termination based on our actual performance and if applicable, on executives individual performance at the midpoint of the applicable range; (d) severance payments equal to 12 months base salary, less
withholdings, paid on our regular payroll schedule following the termination date; and (e) subject to the executives timely election under COBRA, payment of a portion of the executives COBRA premiums at the same rate that would have
been applied had the executive remained an employee, paid for by us to the same extent that we paid for the executives health insurance prior to termination, for 12 months following the termination date (or if earlier, when the executive
becomes eligible for similar coverage from another employer). The compensation protection agreements also provide that in the event the executive receives payments that would be subject to an excise tax, the executive would receive a lesser amount
which would result in no portion of such payments being subject to the excise tax. Each executive has agreed that during employment with us, the executive will not directly or indirectly work for or
36
engage or invest in any competitor. Each has also agreed that during employment with us and the 12 months following employment, the executive will not solicit, directly or through any third party
any business from any of our material customers or suppliers or encourage any of our customers or suppliers to reduce their business or contractual relationship with us. Each executive will also cooperate with us following termination of employment
in the defense of any action brought by a third party against us that relates to the executives employment with us.
POTENTIAL PAYMENTS UPON
TERMINATION OR CHANGE IN CONTROL
Gary Friedman
The information below describes and quantifies certain compensation that would have been paid to Chief Executive Officer in the event of his
termination of employment or a change in control, assuming such event was effective at February 2, 2019, the last day of our 2018 fiscal year, and based on fiscal 2018 compensation.
|
|
|
BENEFITS AND PAYMENTS
|
|
TERMINATION WITHOUT CAUSE OR
RESIGNATION WITH GOOD REASON
|
Severance pursuant to employment agreement
(1)
|
|
$ 20,000,000
|
Bonus
(2)
|
|
$ 2,664,063
|
Intrinsic value of equity
(3)
|
|
$ 69,700,056
|
Health coverage total benefits
(4)
|
|
$ 20,998
|
Total
|
|
$ 92,385,117
|
(1)
|
Payable over 24 months.
|
(2)
|
Corresponds to Mr. Friedmans annual bonus amount for fiscal 2018.
|
(3)
|
Performance-based option awards where the shares underlying the option are subject to selling restrictions
shall continue to have such selling restrictions lapse according to the performance terms for a period of one or two years following such termination, as applicable. In the event Mr. Friedman is terminated on February 2, 2019, the selling
restrictions applicable to his 2017 stock option awards would lapse in full (assuming, in the case of the 2017 stock option award, that the stock price performance targets set forth in the 2017 award are met within the one year time period following
such termination). The value shown includes the value of such options held by Mr. Friedman that he would receive if the stock price hurdles are achieved on such termination date. This value is based on the excess of $133.64, the closing price
of our common stock on February 1, 2019, the last trading day of fiscal 2018, over the exercise price of such options, multiplied by the number of shares that could be exercisable assuming that the selling restrictions lapsed on such
termination date.
|
(4)
|
Continuation of medical benefits for 24 months following the termination date, subject to his payment of
applicable COBRA premiums at the same rate that would have been applied had he remained an executive officer of the Company, paid for by us to the same extent that we paid for his health insurance prior to termination.
|
Ryno Blignaut, Eri Chaya, DeMonty Price and David Stanchak
The information below describes and quantifies certain compensation that would have been paid to Mr. Blignaut, Ms. Chaya,
Mr. Price and Mr. Stanchak under the compensation protection agreements in the event of his or her termination of employment or a change in control, assuming such event was effective at February 2, 2019, the last day of our 2018
fiscal year, and based on fiscal 2018 compensation.
|
|
|
|
|
|
|
|
|
BENEFITS AND PAYMENTS
|
|
TERMINATION WITHOUT CAUSE OR RESIGNATION WITH GOOD
REASON
|
|
RYNO
BLIGNAUT
|
|
ERI
CHAYA
|
|
DEMONTY
PRICE
|
|
DAVID
STANCHAK
|
|
|
|
|
|
|
|
|
|
Salary continuation
(1)
|
|
$ 750,000
|
|
$ 950,000
|
|
$ 850,000
|
|
$ 700,000
|
Bonus
(2)
|
|
$ 303,879
|
|
$ 781,302
|
|
$ 681,766
|
|
$ 582,464
|
Health coverage total benefits
(3)
|
|
$ 18,242
|
|
$ 18,242
|
|
$ 13,421
|
|
$ 20,295
|
Total
|
|
$ 1,072,121
|
|
$ 1,749,544
|
|
$ 1,545,187
|
|
$ 1,302,759
|
(1)
|
This amount reflects salary continuation at each such executive officers current salary rate paid over
twelve months.
|
(2)
|
Corresponds to each such executive officers annual bonus amount for fiscal 2018 that such executive
officer would be entitled to receive if still employed on the date in 2019 that bonuses are actually paid.
|
(3)
|
Continuation of medical benefits for twelve months following the termination date, subject to the payment of
applicable COBRA premiums by such executive officer at the same rate that would have been applied had he or she remained an executive officer of the Company, paid for by us to the same extent that we paid for his or her health insurance prior to
termination.
|
Karen Boone
Ms. Boone left the Company in November 2018. No compensation was paid to Ms. Boone in connection with her resignation.
COMPENSATION OF DIRECTORS
37
On May 2, 2018, the board adopted several changes to the going forward compensation of
non-management
directors, with such changes to become effective at the time of the July 18, 2018 annual meeting on a going-forward basis. In order to better align with prevailing market practices, the board of
directors determined to eliminate all per meeting fees in favor of an increase in the annual cash retainer for
non-employee
members of $15,000 per annum. The increased retainer is expected to align with the
approximate level of fees paid previously as per meeting fees for the meetings of the board of directors each year. In addition, to reflect the level of work required for certain board roles, the board of directors elected to add a cash retainer of
$30,000 per annum for the Lead Independent Director role (where there previously was no cash payment) and to increase the annual cash retainer for the head of the audit committee and compensation committee by $30,000 and $40,000, respectively.
We compensate all
non-employee
members of our board of directors as follows:
|
|
|
|
|
|
|
|
|
|
PRIOR TO JULY 18, 2018
|
|
EFFECTIVE AS OF JULY 18, 2018
|
|
|
|
Annual cash retainer
|
|
$120,000, paid quarterly in advance
|
|
$135,000, paid quarterly in advance
|
|
|
|
Lead Independent Director
|
|
20,000 stock options granted upon appointment
(1)
|
|
20,000 stock options granted upon appointment and $30,000, paid quarterly
in advance
|
|
|
|
Audit committee chairman
|
|
$50,000, paid quarterly in advance
|
|
$80,000, paid quarterly in advance
|
|
|
|
Compensation committee chairman
|
|
$35,000, paid quarterly in advance
|
|
$75,000, paid quarterly in advance
|
|
|
|
Audit committee member
|
|
$25,000, paid quarterly in advance
|
|
$25,000, paid quarterly in advance
|
|
|
|
Compensation committee member
|
|
$20,000, paid quarterly in advance
|
|
$20,000, paid quarterly in advance
|
|
|
|
Nominating & corporate governance committee chairman
|
|
$25,000, paid quarterly in advance
|
|
$25,000, paid quarterly in advance
|
|
|
|
Nominating & corporate governance committee member
|
|
$15,000, paid quarterly in advance
|
|
$15,000, paid quarterly in advance
|
|
|
|
Board meeting attendance fees
|
|
$2,500 per
in-person
meeting;
|
|
N/A
|
|
|
|
|
|
$1,500 per telephonic meeting
|
|
N/A
|
|
|
|
Annual equity grant of restricted stock
|
|
Aggregate value of $125,000
(2)
|
|
Aggregate value of $125,000
(2)
|
(1)
|
This option was granted in March 2016 upon Mark Demilios appointment as Lead Independent Director. No
additional grant was made in fiscal 2018. The options vest in five equal installments over five years, subject to the individuals continuing service as the Lead Independent Director, such that the option shall become exercisable for 4,000
shares on the first anniversary of the date of the individuals appointment as Lead Independent Director and for an additional 4,000 shares upon each of the second, third, fourth and fifth anniversaries thereafter.
|
(2)
|
Based on the average closing price of our common stock on the date of grant, determined using the closing
prices for the ten consecutive trading days prior to and inclusive of the date of grant, which shares vest in full on the
one-year
anniversary of the date of grant. Grants are made for service for the period
between the annual meeting of shareholders for the fiscal year in which the grant was made and the annual meeting of shareholders for the following fiscal year.
|
Annual equity grants described above are granted on the date of the annual meeting of shareholders each year.
Mr. Friedman and Ms. Chaya, as current Company employees, did not receive any compensation for board service for fiscal 2018. All
directors receive reimbursement for reasonable
out-of-pocket
expenses incurred in connection with meetings of our board of directors.
38
The following table shows the compensation earned by all
non-employee
directors during fiscal 2018:
|
|
|
|
|
|
|
|
|
|
|
NAME
|
|
FEES EARNED
|
|
STOCK AWARDS
(1)
|
|
TOTAL
|
|
|
|
|
Carlos Alberini
|
|
$135,740
|
|
$122,235
|
|
$257,975
|
|
|
|
|
Keith Belling
|
|
$135,740
|
|
$122,235
|
|
$257,975
|
|
|
|
|
Mark Demilio
|
|
$264,192
|
|
$122,235
|
|
$386,427
|
|
|
|
|
Hilary Krane
|
|
$158,240
|
|
$122,235
|
|
$280,475
|
|
|
|
|
Katie Mitic
|
|
$158,240
|
|
$122,235
|
|
$280,475
|
|
|
|
|
Ali Rowghani
|
|
$150,740
|
|
$122,235
|
|
$272,975
|
|
|
|
|
Leonard Schlesinger
|
|
$192,712
|
|
$122,235
|
|
$314,947
|
(1)
|
Reflects the aggregate grant date fair value of the awards of restricted stock made in fiscal 2018, computed
in accordance with FASB ASC 718,
Stock-Based Compensation
. See Note 16
Stock-Based Compensation
in our audited consolidated financial statements contained in the Original Filing. Amounts shown do not reflect compensation actually
received or that may be realized in the future by the director.
|
At February 2, 2019, the last day of our 2018
fiscal year, the aggregate number of unvested restricted stock awards and unexercised stock options held by each of our directors during fiscal 2018, other than Mr. Friedman and Ms. Chaya, is set forth below. Information regarding equity
awards held by Mr. Friedman and Ms. Chaya is set forth in the table entitled Outstanding Equity Awards at Fiscal
Year-End
in this Amendment.
|
|
|
|
|
|
|
|
NAME
|
|
UNVESTED
RESTRICTED STOCK
(1)
|
|
UNEXERCISED
STOCK OPTIONS
|
|
|
|
Carlos Alberini
|
|
915
|
|
|
|
|
|
Keith Belling
|
|
915
|
|
|
|
|
|
Mark Demilio
|
|
915
|
|
20,000
(2)
|
|
|
|
Hilary Krane
|
|
915
|
|
|
|
|
|
Katie Mitic
|
|
915
|
|
|
|
|
|
Ali Rowghani
|
|
915
|
|
|
|
|
|
Leonard Schlesinger
|
|
915
|
|
|
(1)
|
All restricted stock awards listed above vest as to 100% of the shares on July 18, 2019.
|
(2)
|
Mr. Demilio was granted options to purchase 20,000 shares of stock in connection with his appointment as
Lead Independent Director on March 9, 2016. Such options vest pro rata over five years such that they will be fully vested on March 2, 2021, subject to Mr. Demilios continued service as Lead Independent Director.
|
39