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GMI Ratings Governance Issue |American Eagle Outfitters, Inc.

June 08, 2012 | About:
GMI Ratings

GMI Ratings

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An article out of the Pittsburgh Post-Gazette yesterday afternoon reveals that American Eagle (AEO) shareholders voted against pay plans at Wednesday morning’s annual meeting. This after approximately three-quarters of shareholders supported pay plans in 2011. The lack of majority support at AEO brings us to at least 40 Say on Pay failures at U.S. corporations thus far in 2012, according to a post earlier this week on TheCorporateCounsel.net.

According to the Gazette, Chairman Jay L. Shottenstein felt the votes were a reflection of the separation package received by former CEO James O’Donnell, who retired from the company in January 2012. However, there was probably more to it than that. In fact, Mr. O’Donnell actually received almost three times more total realized compensation for fiscal year 2010 ($26 million) than he did in fiscal 2011 ($10 million).

Not to ignore the significance of the exit package received by Mr. O’Donnell. His employment agreement stipulated that upon termination of his employment with the company he would receive a retirement benefit equal to his highest base salary plus bonus earned during any of the preceding seven fiscal years ($3.6 million). Additional severance, bonus, paid time off and “consulting fees” brought his total termination payments up to about $6 million. He took home an additional $3 million in nonqualified deferred compensation.

At GMI Ratings, American Eagle Outfitters scores a “D” ESG Rating and it’s for more reasons than just Mr. O’Donnell’s exiting pay package. For instance, Mr. O’Donnell’s base salary continued to climb above the $1 million limit for tax-deductibility over the past several years. After receiving $1.35 million in salary for compensation year 2007, his salary rose to $1.475 million in 2008. The following year, his salary was increased to $1.6 million and he received $1.7 million in base salary each of the past two years. Indeed, his salary, a fixed form of compensation, continued to increase even as shareholder returns lagged behind industry peers over the last 1-, 3-, and 5-year periods.

Despite having an admirably high AGR score of 98, indicating that the company's financial statements reflect more conservative accounting than the vast majority of companies, American Eagle has been red flagged by GMI Ratings for a variety of compensation issues. For instance, total summary compensation for the CEO was well over five times the median of other named executive officers last year and ballooned up to almost eight times the median in 2011, Mr. O’Donnells final year as CEO. Equity grants to executive officers have largely been time-vesting and absent any meaningful performance conditions. Total summary compensation is also well above the median of company peers without the performance to warrant such compensation. While chairman Shottenstein may feel this vote was a one-time response to a high exit package, we believe more substantial compensation changes need to be made before management can expect shareholders to be satisfied with compensation policy.

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Region: North America

Sector: Cyclical Consumer Goods / Services

Industry: Retail - Apparel / Accessories

Market Cap: $ 3,917.4mm (Mid Cap)

ESG Rating: D

AGR: Conservative (98)

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Rating: 3.7/5 (3 votes)

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