Bookstore Barnes & Noble has been buoyed in recent months by the success of its Nook e-reader business, though activist investor Jana Partners could soon push for a sale or spin-off of the e-reader business, which recently posted sales up more than 34% from a year ago. Microsoft on April 30 said it agreed to invest $300 million in the company’s digital and college businesses, sending shares up nearly 60% from its price the Friday before the announcement amid optimism that B&N’s reader will compete with the likes of Amazon’s Kindle and the Apple iPad. The company stock price has since settled, currently trading at levels similar to the end of 2011.
However, evidence suggests that Barnes & Nobles’s compensation committee was determined to reward CEO William Lynch for expanding the company’s digital business in spite of designated performance metrics that fell short. Furthermore, when Barnes & Noble released its 2012 proxy this week, there was an equity table footnote that caused many to do a double take:
“This percentage does not include the grant of options to Mr. Lynch to purchase 500,000 shares of common stock that the Company subsequently determined were not validly granted pursuant to the 2009 Incentive Plan because they exceeded the limit on the number of stock options that may be granted to any individual participant within any 36-month period.”
After granting William Lynch, CEO of Barnes & Noble since March 2010, a discretionary block of half a million options, the company was forced to retract the other half of the intended one million option grant. According to the 2009 Incentive Plan, no plan participant may be awarded more than one million shares or stock during any three-year period. Mr. Lynch was awarded 166,667 restricted shares in May 2011, meaning a one million block of options would have violated the terms of incentive plan.
The compensation committee intends to put a proposal before shareholders at the September annual meeting requesting permission to grant 500,000 more options to Mr. Lynch. As justification, the committee explains “it is critical to the Company to retain Mr. Lynch.” His 2012 total summary compensation was more than $10 million, including $8 million in equity grants, up from $1.6 million in 2011.
The compensation committee’s insistence on extending the terms of its incentive plan to accommodate the grant isn’t surprising. In fact, the majority of Mr. Lynch’s compensation since taking over at Barnes & Noble in 2010 has been discretionary.
The grant of 166,667 restricted shares mentioned above was not justified in terms of performance conditions. Instead, in the proxy the company cites “significant retention concerns” and “morale concerns” as reasons for the grant. Similarly, the company fell well short of its EBITDA goal, the metric used to determine annual bonuses. However, rather than not pay a bonus, the company awarded Mr. Lynch a discretionary bonus of $450,000 – roughly 40% of his base salary – citing “significant accomplishments in 2011.” Last year, the company generated only about 50% of its minimum EBITDA goal, $163.4 million of a minimum target of $242.3 million. Rather than not pay a bonus, Mr. Lynch got a discretionary bonus of $675,000 “in recognition of service and significant accomplishments in Fiscal 2011.”
Mr. Lynch also received a 22% salary increase this year, again not for performance reasons, but “because it is critical to the Company to retain Mr. Lynch given his role in the Company’s digital strategy and the importance of his significant experience in the technology sector.” Discretionary pay is undoubtedly in the best interest of management but difficult to justify for shareholders looking to executives for measurable company gains.
Barnes & Noble currently has an ESG Rating of “D” at GMI Ratings, due to concerns over practices including discretionary payments, related party transactions, and high potential termination payments for executive officers. The company has an Average AGR Rating, indicating higher accounting and governance risk than 52% of companies including poor ratios in Intangible Assets/Assets, Goodwill/Total Assets, and Liquidity: Cash Ratio.
Region: North America
Sector: Cyclical Consumer Goods / Services
Industry: Retail – Specialty
Market Cap: $ 990.8mm (Small Cap)
ESG Rating: D
AGR: Average (48)
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