The Power of Compensation Committees

They can simply move the goalposts...

I came across some interesting information while reading proxy reports recently. I was doing research on Grocery Outlet and saw that in their March 2021 Investor Presentation they compared their results to five other “deep discount” stores. They are Five Below, Ollie’s Bargain Outlet, Ross Stores, TJX Companies (parent company of Tj Maxx) and Burlington. I then began to read the proxy statements for each of the companies listed above and realized how much power Compensation Committees have. Those who benefitted most from this power are the Named Executive Officers (NEOs) of each respective business. For this write up I compared each business’ 2020 Proxy Statement to their 2021 Proxy Statement and highlighted the changes I saw in their Executive Compensation structures due to COVID-19.

*** Do note that this post has a fair amount screen caps taken from proxy statements for each respective company. ***

Five Below (NASDAQ: FIVE)

The NEO’s at Five Below were compensated through a Base Salary, Annual Incentive Bonus and Long-Term Equity Incentive Grants

Base Salary – There was nothing different about each NEO’s base salary from 2019 to 2020 other than predetermined salary increases and temporary salary reductions of 50% for the CEO and 25% for the other NEOs in the first quarter of 2020. Full salary payments were reinstated in the second quarter.

2019 Annual Incentive Bonus – These were bonuses based on predetermined metrics by the Compensation Committee. They were paid out as a percentage of each NEOs base salary. Per pp. 31-32 of the 2020 Proxy Statement, “The payout opportunity is based on pre-incentive adjusted operating income (defined below) and total Company sales for all Named Executive Officers. Product margin is included as a third metric in the scorecards of Messrs. Romanko and Specter. In addition, Mr. Specter has inventory turnover as a fourth metric. “Adjusted operating income” means the Company’s operating income (determined prior to giving any effect to any bonuses potentially payable under the Incentive Bonus Plan) as reflected in the Company’s audited financial statements, adjusted to exclude the impact of: (a) all expense (net of reimbursement) incurred as part of a public offering of the Company’s securities, whether by the Company or by selling shareholders or both; (b) expenses incurred related to acquisition transaction costs; (c) income/expense incurred due to a change in accounting principles; (d) external expenses incurred during the start-up period for any new business venture; and (e) any other adjustments that may be approved by the Compensation Committee.” Mr. Romanko was and still is the Chief Merchandising Officer of Five Below. Mr. Specter was and still is the Chief Administrative Officer of Five Below. There is nothing else provided as to why product margin and inventory turnover are used as targets for Mr. Romanko or Mr. Specter. The payouts ranged from 0%-150% of the target and no payouts were awarded if the company did not meet pre-incentive adjusted operating income threshold.

Below is a screencap detailing thresholds, targets, maximum, actual achievement and total Fiscal 2019 Bonus Achievement for each NEO:

The figures in the right-hand column of the “Fiscal 2019 Bonus Metric” are what’s important. It looks like the NEOs weren’t going to get a bonus. However, that was not the case. The paragraph just below the “Fiscal 2019 Bonus Metric” provided an unexpected twist and made me laugh when I read it. It comes straight from p. 31 of the 2020 Proxy Statement. I have copied it below in its entirety.

“Subsequent to the end of fiscal 2019, in light of the impact on the Company of tariffs imposed by the United States on certain imports from China and the substantial efforts of the executive team to fully mitigate such impact, the compensation committee authorized an adjustment to the bonus payout to the NEOs under the Incentive Bonus Plan to provide each NEO a fiscal 2019 bonus equal to 50% of their respective targets. The actual amount of each incentive bonus payable to Named Executive Officers is shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table below.”

So much for tariffs keeping the NEOs from a sizeable bonus, huh?

2020 Annual Incentive Bonus – The Compensation Committee decided to base bonuses off pre-incentive adjusted operating income and net sales for each NEO. This time payouts ranged from 0%-200% of the targets with no payouts awarded if the company did not hit the pre-incentive operating income threshold. Each NEOs bonus would also be adjusted up or down 20% based on the achievement of strategic company goals.

The screencap below shows how things went:

So what happened after? The Compensation Committee decided to payout “Qualitative Awards” because of the impact of COVID-19. These awards were equal to 75% of each NEOs salary. Per p. 38 of the 2021 Proxy Statement, this decision was on “business continuity and liquidity preservation during the first half of 2020, resuming our growth and supporting the business through a time of unprecedented demand during the second half of fiscal 2020, and fiscal 2020 financial and stock performance despite the negative impact of COVID-19 to our business.” A full breakdown of what constitutes business continuity, liquidity preservation, resumption of growth and fiscal 2010 financial and stock performance can be found on pp. 39-40 of the 2021 Proxy Statement.

2019 Long-Term Equity Incentive Compensation – 25% of this form of compensation was granted in Restricted Stock Units (RSUs) and 75% in Performance-based Restricted Stock Units (PRSUs). Per p. 32 of the 2020 Proxy Statement, “We believe this balance of equity grants will motivate and reward for long-term, sustainable performance that is aligned with shareholder interests.” Taken again directly from p. 32 of the 2020 Proxy Statement regarding RSUs, “The retentive element of RSUs that vest solely based on continued service provides a complement to the PRSUs, which, in addition to containing a service-based vesting component, vest based on the achievement of specified performance criteria. Each RSU represents the right to receive one share of our stock, contingent on continued service to the Company… RSUs generally vest over a four-year period, with 50% vesting on the second anniversary of grant and 25% vesting on each of the third and fourth anniversaries. In addition, RSUs granted in 2019 or after generally become fully vested upon a Named Executive Officer’s termination due to his or her death or disability.” Regarding PRSU’s and taken from pp. 32-33 of the 2020 Proxy Statement, “PRSUs are designed to reward for performance over a three-year period. Key design details include: PRSUs represent the right to receive shares of our common stock based on the attainment of applicable performance criteria and, generally, are further subject to continued service through the performance period. Performance is evaluated based on the Company’s three-year cumulative operating income, subject to adjustments, if any, as determined by the compensation committee. At the end of the three-year performance period, if at least threshold performance is not achieved no PRSUs will vest and the grants will expire with no actual compensation being delivered to the executives.” Hitting the threshold target would result in a 50% grant, hitting the target threshold would result in a 100% grant and hitting the maximum threshold would result in a 150% grant of PRSUs. The screencap below shows the PRSU awards to Five Below’s NEOs in 2019 based on the 2017 PRSU vesting cycle.

2020 Long-Term Equity Incentive Compensation – The wording around how the company would grant RSUs and PRSUs to NEO’s in 2020 was largely the same. Then COVID-19 happened, and the company wasn’t going to hit the threshold targets that the NEO’s needed to get their awards. The NEOs decided to forfeit their RSUs and PRSUs for the year. However, the Compensation Committee decided to award “Off Cycle Equity Awards” to them. The document goes on to describe why the Compensation Committee awarded “Off-Cycle Equity Awards” and their structure which you can read about on pp. 43-45 of the 2021 Proxy Statement. The point is that the NEOs were paid generously for their services and not much less than they would’ve been based on estimated values of PRSUs awards. The image is a screencap of a table taken directly from p. 45 of the 2021 Proxy Statement.

Total compensation for Five Below’s NEOs is shown in the table below which is taken from p. 47 of the 2021 Proxy Statement. Please note that it also includes summary compensation for 2019.

The image below is taken from p. 48 of the 2021 Proxy Statement.

From what I gathered, the first image showing total NEO compensation includes the RSU and PRSU awards that were forfeited by the NEOs. The second image shows what the actual awards totals are when you back them out. NEOs at Five Below were compensated generously any way you slice it.

Ollie’s Bargain Outlet (NASDAQ: OLLI)

Compensation for the NEOs at Ollie’s Bargain Outlet was comprised of a Base Salary, Annual Incentive Compensation and Long-Term Equity Incentive Compensation.

Base Salary – Base salaries had no changes between 2019 and 2020 other than pre-agreed upon increases for every NEO except John Swygert in 2020.

2019 Annual Incentive Compensation – This was based on hitting an “Adjusted EBITDA” target. Per p. 19 of the 2019 Proxy Statement, Ollie’s defines “Adjusted EBITDA” as… “net income before net interest income or expense, loss on extinguishment of debt, depreciation and amortization expenses and income taxes. Adjusted EBITDA represents EBITDA as further adjusted for non-cash items of stock-based compensation expense and certain purchase accounting items, and a gain on an insurance settlement.” On the low end, the Annual Incentive Plan could pay out anywhere from 0% of their base salary if “Adjusted EBITDA” is <85% of the target to 200% of their base salary if “Adjusted EBITDA” is 115% or more of the target. The “Adjusted EBITDA” target for 2019 was $216.8 million. Actual “Adjusted EBITDA” for 2019 was $196.0 million. Bonus payouts to each NEO ranged from approximately ~15% - 30% of their salary.

2020 Annual Incentive Compensation – Surprisingly, Ollie’s Bargain Outlet exceeded their target for bonuses and none of the language around this bonus changed. Imagine that. Most of the NEOs’ pay (in the CEO’s case, 2/3’s of his pay) was based on their Annual or Long-Term Incentive Plan. The Annual Incentive Plan was based on clearing an “Adjusted EBITDA” target. On the low end, the Annual Incentive Plan could pay out anywhere from 0% of their base salary if “Adjusted EBITDA” is <85% of the target to 200% of their base salary if “Adjusted EBITDA” is 115% of the target. The “Adjusted EBITDA” target was $225.4 million. Actual “Adjusted EBITDA” was $306.5 million which was 136% of the target. 2020 Annual Incentive Compensation payouts to NEO’s are show below and are taken from p. 21 of Ollie’s most recent proxy statement.

It is unclear why John Swygert has a higher bonus payout percentage than the other NEOs or why the NEOs have different bonus payout percentages. I couldn’t find anything in their employment agreements that provides guidance on this.

Long-Term Equity Incentive Compensation –This was comprised of Restricted Stock Units (RSUs) and Stock Options. The only change between the 2020 and 2021 Long-Term Incentive Compensation was in regard to how RSUs vested for employees with less than 10 years of service at Ollie’s. Per p. 21 of the 2021 Proxy Statement, the awards are “intended to compensate NEOs for sustained long-term performance, align the interests of our NEOs and stockholders and encourage retention through multi-year vesting schedules. Long-term equity incentive awards may take a variety of forms. In fiscal 2019, we granted RSUs and stock options. Levels, mix and frequency of awards are determined by the Compensation Committee, and are designed to reflect each recipient’s level of responsibility and performance.” Per p. 22 of the 2021 Proxy Statement, “Our long-term equity incentive program for fiscal 2020 was designed to generally deliver 50% of long-term equity value in RSUs and 50% in stock options for our NEOs. We believe awarding a significant percentage of pay in the form of long-term equity fosters strong alignment between executive and shareholder interests.” RSUs and Stock Options both vest ratably over a four-year period. RSUs used to cliff vest after four years for employees with less than 10 years of service at Ollie’s. As you can see, there was a fair bit of subjectivity for the Compensation Committee grant these long term awards.

Below is the Summary Compensation Table for Ollie’s from the 2021 Proxy Statement. Please note that it also includes summary compensation for 2019. Per citation 3 on p. 24 of the 2021 Proxy Statement and as noted above, Mr. Swygert did not receive any additional stock or options awards in 2020 because he was granted $2,000,000 of such awards on 12/9/2019 when he became President and CEO of Ollie’s Bargain Outlet.

Ross Stores (NASDAQ: ROST)

Ross’s NEO’s compensation was made up of three components: Base salary, Annual Cash Incentive Program and Long-Term Equity Incentives.

Base salary – The composition of base salary for each NEO was unchanged compared to 2019 other than preapproved increases. The same was true in 2020 except that NEO’s took salary deductions ranging from 20%-100% for the months of April and May of 2020. Full salaries were reinstated in May after 50% of Ross’ stores opened back up.

2019 Annual Cash Incentive – This was based on a pre-established annual pre-tax operating income performance goal per p. 20 of the 2020 Proxy Statement. The company exceed their target in 2019 which resulted in a bonus payout of 116.08% of the NEO’s salary.

2020 Annual Cash Incentive – The Compensation Committee decided to use a different approach for this year due to COVID-19. Instead of the usual pre-established annual pre-tax operating income performance goal, they decided to base the bonus on the achievement of “Key Business Priorities”. Per p. 25 of the 2021 Proxy, “the “Key Business Priorities” were focused on the most critical actions necessary to sustain the business through the uncertainty caused by the COVID-19 pandemic, and to position the Company to thrive in a post-pandemic environment. These “Key Business Priorities” included: (1) taking aggressive action to preserve and strengthen the Company’s cash liquidity during the pandemic; (2) mitigating risk given the uncertain economic environment and the possibility of additional required store closures, by balancing driving sales with managing inventory conservatively; (3) effectively operating the business during the different phases of the pandemic, including closing and reopening stores as needed and managing our supply chain through this unprecedented disruption; and (4) complying with applicable local, state, and federal COVID-related safety requirements to protect the health and safety of our customers and associates.” From pp. 25-26 the company lists some selected criteria they used to assess whether the company achieve these “Key Business Priorities”. They include strengthening the company’s liquidity, reducing capex, temporary furloughs, extensive safety measures, etc. The list goes on into further detail, but hopefully you get the point. These are mostly qualitative and not quantitative metrics. After assessing the company’s performance, the Compensation Committee decided to award a 95% bonus to each NEO. As a reminder, this means that each NEO received a cash bonus equal to 95% of their 2020 salary.

2019 Long-Term Equity Incentives – This was composed of Restricted Stock Awards and Performance Share Awards. The restricted stock vests after five years and, per p. 23 of the 2020 Proxy Statement, “the determination of the value of the restricted stock awards granted to our NEOs is based on the Committee's assessment of the individual's prior and outstanding awards, the vesting schedule of such outstanding awards, and a subjective analysis of each individual's scope of responsibilities, individual performance, criticality to the Company, expected future contributions to the Company, and cost of replacing the executive.” Regarding the Performance Share Awards, the company states that, “this portion of compensation is completely at risk due to the performance-based structure of our performance share awards. The number of shares earned under our performance awards can vary significantly based on the Company's degree of success in the achievement of pre-established pre-tax profit (adjusted pre-tax earnings) targets. A portion of the performance shares (typically 70%), once earned, is then generally subject to further vesting based on continued service to the Company over the next two years. We believe this framework encourages retention and further strengthens the incentive to produce long-term value for our stockholders by working to increase the share price over a multi-year time horizon.” The NEO’s each received Restricted Stock and Performance Share Awards in 2019.

2020 Long-Term Equity Incentives – The composition of was the same as 2019, however the metric used to determine the Performance Share Awards was changed. The Compensation Committee decided to go with the “Key Business Priorities” discussed above instead of pre-established pre-tax profit targets. The NEO’s each received Restricted Stock and Performance Share Awards in 2020.

Below is a screencap of the “Summary Compensation Table” on p. 34 of the 2021 Proxy Statement. Please note that this table also includes summary compensation for 2019:

Just like with Five Below, Ross’ Compensation Committee figured out a way to provide generous compensation packages to their NEO’s during COVID-19. One final interesting fact is that Ross’ CEO made 2020x the median employee’s salary. $17,518,158 for the CEO and $8,672 for the median employee. That is not a typo. I put this in here because it is an eyewatering figure. The company goes on to state that:

“As disclosed above in the notes to the 2020 Summary Compensation Table, in order to comply with compensation reporting rules, we are required to include both an original value ($5,600,081) and an incremental value ($5,128,483) associated with the modification of the performance share award granted in March 2020 and modified in August 2020. Because the CEO pay ratio is intended to provide greater transparency to annual CEO pay and how it compares to the pay of the Median Employee, we are providing a supplemental pay ratio that excludes the incremental value, as it does not provide actual additional compensation to the CEO.

The resulting 2020 supplemental ratio is 1,429 to 1, which we believe is a more realistic representation of the actual pay ratio.”

TJX Companies (NYSE: TJX)

TJX had a particularly dense compensation section coming in at almost 40 pages. Part of me thinks they did this so no one will read it. To their credit, they provided a lot of information about how and why they compensated NEO’s the way that they did. The screencap below shows how TJX changed their compensation structure for 2020. It is taken from p. 31 of the 2021 Proxy Statement.

Compensation for TJX’s NEOS was comprised of a Base Salary, Annual Cash Incentives and Long-Term Incentives. As with Five Below and Ross, TJX’s Compensation Committee set certain targets and then they changed them because of COVID-19.

Base Salary – Base salary stayed the same for NEO for 2019 and 2020. The NEOs took partial, but not full salary reductions between mid-April and early July of 2020. Their full salary payments resumed after July 2020.

2019 Annual Cash Incentives - Annual cash incentives (aka Management Incentive Plan) in 2019 were based pre-tax income and total sales. Pre-tax income had a weight of 80% while total sales made up the other 20% of the potential bonus. The company exceeded their targets which resulted in the NEO’s receiving a bonus payment of 141.04% of their salary.

2020 Annual Cash Incentives – The Compensation Committee determined that the 2020 Annual Cash Incentives should be based on human capital, operational recovery and cash/financial management because of COVID-19. Please read pp. 36-37 of the 2021 Proxy Statement for a further breakdown of each metric. After meeting and discussing company performance, the Compensation Committee decided to award an 80% Annual Cash Incentive bonus to the NEO’s. This means they received 80% of their base salary as a bonus.

2019 Long-Term Incentives – This is composed of Performance Share Units (PSUs), Restricted Stock Units (RSUs) and Long-Range Performance Incentive Plan (LRPIP). First are Performance Share Units (PSUs). Per p. 38 of the 2020 Proxy Statement, “For fiscal 2020, PSUs made up the largest portion of target long-term incentives for our NEOs. PSUs granted in fiscal 2020 will be earned based on the achievement of EPS compound annual growth rate (CAGR) goals measured at the end of a three-year performance cycle (fiscal 2020-2022). The PSUs will also be subject to a downward ROIC modifier, which means that if the Company does not achieve its ROIC goals, award payouts would be adjusted downward by 20%.” Next are the RSUs. Per p. 38 of the 2020 Proxy Statement again, “NEOs were awarded RSUs in fiscal 2020 that are generally scheduled to vest in full three years from the grant date. NEOs who have satisfied special service retirement eligibility criteria are eligible for partial vesting of RSUs based on full years completed in the service period, as discussed under Potential Payments upon Termination or Change of Control. RSUs are intended to maintain an appropriate degree of stability and retention within the program and support our management continuity and succession planning, which is a longstanding, key component of our leadership strategy.” Lastly, there is the Long-Range Performance Incentive Plan. Per p. 39 of the 2020 Proxy Statement, “LRPIP awards are designed to motivate our NEOs and other key Associates to achieve or exceed long-term financial goals, as well as to foster teamwork and collaboration across the Company and promote retention. Our LRPIP awards have overlapping three-year cycles, with a new cycle starting each fiscal year.” The Compensation Committee decided that cumulative three year adjusted pre-tax income was the appropriate benchmark for this incentive payout. The company achieved 101.13% of their target which resulted in a payout of 102.82% of each NEOs salary. I’m not sure how an achievement of 101.13% equals a payout of 102.82%. The Proxy Statement doesn’t provide any additional guidance about this.

2020 Long Term Incentives - The text and metrics from 2019 to 2020 were largely unchanged at first glance.  There were again three components that make Long-Term Incentive bonuses at the TJX Companies. The first is the Long-Range Performance Incentive Plan (LRPIP) awards. They were based on three year adjusted pre-tax income, awarded in three-year cycles and unfortunately for the NEOs, 2020 (FY 2021) was the end of one of them. They were and still are issued on a rolling basis with each new year starting the cycle for three years down the line. It was decided that 2020 (FY2021) shouldn’t be included in the calculation in the most recent proxy statement. However, the first two years (FY2019 and FY2020) were included in the calculation. You would be right in guessing that the company exceeded their target for the first two years (FY 2019-2020) which resulted in an additional bonus payout of 76.7% of the NEO’s salary. The same thing happened with the second component of the Long-Term Incentives; Performance Share Units (PSUs). They were based on a three-year cycle. It was again decided that 2020 (FY 2021) shouldn’t be included, but the two previous years in which the business again exceeded their metrics were. This resulted in the NEO’s receiving 76.7% of the target PSUs. The third and final component of Long-Term Incentives are Restricted Stock Units (RSUs). They do not vest until four years after they’ve been issued. Also, you must still be an employee of the TJX Companies to receive the awards with certain exceptions being made for length of service, age and/or retirement. Taken from p. 41 of the 2021 Proxy Statement, the Compensation Committee granted “RSUs to our NEOs, with the size of each award determined based on factors that included the executive’s responsibilities, the potential value of each grant, contractual obligations, and an assessment of the overall competitiveness and mix of our executive compensation.” Each NEO received RSUs in 2020.

Total compensation for TJX’s NEOs in 2019 and 2020 is shown below. It is taken directly from p. 50 of the 2021 TJX proxy statement.

This is starting to become a theme, but the Compensation Committee once again found a way to generously compensate the NEO’s of the TJX Companies.

Burlington

Compensation at Burlington was comprised of a Base Salary, Annual Cash Incentives and Long-Term Incentives.

Base salary - The NEO’s took a reduction in their base salary for a few months while COVID was happening. Michael O’Sullivan, the CEO, didn’t take a salary from March – Mid-June of 2020. The other named NEO’s took voluntary reductions in their salary of 50% over the same period. Their salaries and previously agreed upon increases were reinstated following Mid-June of 2020.  

2019 Annual Cash Incentives - Burlington’s targets for this metric were “Adjusted Net Income Per Share” and Comparable Store Sales Percentage with a 50% weighting each. Per p. 54 of the 2020 Proxy Statement, The Committee believes that ANI Per Share is an appropriate and primary indicator to our stockholders of overall business health, and its inclusion as a performance goal achieves our desire to use a measure of profitability that drives stockholder value creating behaviors. The second measure, Comp Sales Percentage (a growth metric comparing, and requiring improvement over, last year’s performance), focuses our executives on both strengthening our core business and driving revenue growth. Adjusted Net Income per Share is defined as Adjusted Net Income (net income (loss) for the period, exclusive of the following items, if applicable: (i) net favorable lease costs; (ii) costs related to debt amendments; (iii) loss on extinguishment of debt; (iv) impairment charges; and (v) other unusual, non-recurring or extraordinary expenses, losses, charges or gains, all of which are tax effected to arrive at Adjusted Net Income) divided by the fully diluted weighted average shares outstanding.” If you’d like a full breakdown of the Annual Cash Incentive metrics and payouts then please refer to pp. 55-56 of the 2020 Proxy Statement, but I am going to move on to what the actual bonus payments were to save time. The business exceeded their “Adjusted Net Income Per Share” metric by 103.87% resulting in a payout percentage of 115.47%. The business achieved 79.6% of their Comparable Store Sales Percentage target resulting in a payout percentage of 89.98%. The dollar amounts of the 2019 Annual Cash Incentives are shown in in the Summary Compensation Table screencap below.

2020 Annual Cash Incentives - In 2020, the Compensation Committee met with their Compensation Consultant and determined that “Adjusted Net Income Per Share” and Comparable Stores Sales Percentage weren’t the right metrics to use. Per p. 54 of their most recent proxy statement, the company decided on “utilizing a single financial metric (Adjusted EBIT) to measure performance, evaluating achievement based solely on performance during the second half of fiscal 2020, establishing wider than historical performance ranges and reducing the maximum payout from 200% of target in fiscal 2019 to 120% of target in fiscal 2020.” Target “Adjusted EBIT” was ($20) million while actual “Adjusted EBIT” was $282 million. Michael O’Sullivan did not take the Annual Cash Incentive Award.  This was … “based on the economic environment and the pandemic, Mr. O’Sullivan recommended to the Compensation Committee that he forego a fiscal 2020 Annual Incentive Plan award. In consideration of the unprecedented times, as well as the CEO’s recommendation, the Committee accepted Mr. O’Sullivan’s recommendation and did not approve a payout to him for fiscal 2020 while commending Mr. O’Sullivan’s leadership throughout the year.” This comes from citation 1 which is directly under the Annual Incentive Plan Payouts to each NEO. The rationale for changing the way the Annual Cash Incentives were determined makes for good reading and is described on p. 55. My favorite sentence is, “In making this evaluation, the Committee considered, among other things, the significant efforts undertaken by management in response to the pandemic, the sacrifices made by management in terms of pay reductions and furloughs, and the need to keep management fully engaged for what was likely to remain a challenging balance of fiscal 2020.” Keep in mind that after all those sacrifices that management made by reducing pay and furloughs that their CEO still managed to make $9,560,206 in total compensation and each NEO made more than they did in 2020. The median employee at Burlington made $10,147 which is a CEO Pay Ratio of 942 to 1.

Long-Term Incentives – These were unchanged from what I can tell. They are composed of three parts: Performance Share Unites (PSUs), Time Based Stock Options and Time Based Restricted Stock Units (RSUs). PSUs are based equally on three-year, pre-established EBIT margin expansion and sales CAGR goals which vest at a 50% - 200% rate based on the achievement of said goals. Per p. 58 of the most recent proxy, “Under the terms of the awards, the performance metrics may be adjusted by the Committee for any unusual non-recurring or extraordinary expenses, losses, charges or gains that may arise during the performance period.” So, it looks like these can be adjusted for almost any reason. Shocker. The company did not make any adjustments of these in 2019 or 2020 because of COVID-19. Stock Options vest in 25% increments over four years. RSUs are similar in that they vest in 25% increments over four years. However, they’re contingent on the NEO still being employed at Burlington at the vesting date to do so.

The 2020 Summary Compensation Table for the CEO and NEO’s is shown below. Please note that is also includes summary compensation for 2019.

The Compensation Committee again awarded generous compensation to the NEOs.

So what and who cares?

I wrote this piece to show the power that the Compensation Committees have. I know that it’s only five examples and from one specific sector, but my point remains. Their power is that they can and will move the goalposts if they deem it to be necessary. They can adjust or flat out change the rules, metrics and targets that govern executive compensation. Again, I’m not saying this to criticize them, but this is something that investors need to be aware of. It’s not like Compensation Committees were doing this in the shadows. Their decision-making process and compensation approvals are right there in publicly available documents. In closing, I think the Compensation Committees will continue to wield this power for quite some time for two reasons. The first is that most investors don’t read Proxy Statements and are unaware of how the executives of the businesses they’re shareholders of are compensated. Second, we are in a world increasingly dominated by index funds who can’t possibly have the time to research and determine whether executive compensation at each of the businesses they’re shareholders of is appropriate or not.

There are also some final questions I’d like to pose. Does this amount of compensation matter in the grand scheme of things when the companies profiled in this writeup are doing billions of dollars a year in sales and have decent to exceptional returns on capital? Does it matter that their NEOs managed to make so much in 2020 while their median employees didn’t? Where is the line in the sand for Compensation Committees in terms of granting vs. not granting stock awards? Is management in control only when things are going well, their stock/earnings/ROIC are up, and it’s “business as usual”? It will be interesting to see how they act when markets go down and companies aren’t going to hit their target thresholds again. Will the Compensation Committees move the goalposts or will they hold stock and incentive-based awards to their original targets? We can only wait and see. Thanks again as always for reading.