OfficeMax CFO Bruce Besanko received “rock star treatment” from his employer, according to a recent posting on the blog Footnoted.org. In a recent 8-K, the blog notes, the company announced that Besanko had been granted a retention bonus comprised of about $740,000 worth of restricted stock units that will vest between 2011 and 2013.
“That’s a lot of money, to be sure, but it’s especially generous when you consider how much Besanko makes,” according to the post on the blog, which sifts through current Securities and Exchange Commission filings for hidden corporate nuggets. OfficeMax’s March proxy states that Besanko’s total compensation for 2009 (including some sign-on bonuses) ended up at $1,863,403, including $575,000 in base salary and about $765,000 worth of long-term equity incentives. His retention grant thus provided a bump-up of nearly 40% to the total package.
OfficeMax’s reasons for granting the award to Besanko, as well as one to chief merchandising officer Ryan Vero, are unclear from its filing, which is part of the reason Footnoted chose to highlight the grant. Through a company spokesman, Besanko and OfficeMax officials declined to comment on any aspect of it.
Besanko’s treatment, however, may be more ordinary than the blog suggests. According to CFO’s analysis of the finance chief’s total compensation, based on data supplied by CapitalIQ, the seasoned finance executive is right in the middle of the range of compensation CFOs at similarly sized companies make, both within his industry (consumer discretionary) and across other industries, even considering the additional bonus.
Among the 25 companies in the consumer discretionary category with revenues between $5 billion and $10 billion (OfficeMax’s 2009 revenues were $7.2 billion), 9, including OfficeMax, paid their CFOs between $1.5 million and $2.99 million. Eight paid more, and 8 paid less. Of the 126 public companies in this revenue range (excluding those in the financial-services industry), 63 paid their CFOs in that range, with 30 paying more and 33 paying less.
Despite the seeming normality of its amount, experts are divided on how appropriate the form of Besanko’s award may be. On one hand, many companies are worried about retaining top executives, particularly those who have seen the value of their long-term equity incentives sink underwater. That, combined with a slight uptick in executive hiring these days, can make it more attractive for CFOs to jump ship and “start with a clean slate,” says Steve Cross, managing partner of compensation consultancy Cogent Partners.
Retention bonuses can be attractive because “they have been around forever, and I don’t think they’re viewed as overly excessive, particularly since they’re not a flow of cash out the door,” says Joseph Adams, a partner at McDermott Will & Emery specializing in executive compensation. “You usually have to stick around to get them.”
So far, though, Cross hasn’t seen many clients use one-off retention bonuses to solve the problem, in large part because they wouldn’t be very popular with the many shareholders who are underwater themselves. They can also create more problems than they solve, since the special awards may spawn jealousy if the company singles out particular executives to receive them, or risk being ineffective if they don’t.
Instead, Cross has seen companies address retention in more subtle ways, such as making bonus goals broader and financial incentives more relative to market performance. For a given executive, they might even give a promotion to, say, executive vice president, and a raise to go along with that, “but all through the regular pay package, rather than one-off awards.”
When companies have given retention awards to CFOs in the past several months, they’ve typically been attached to a very specific reason.
Spectrum Brands CFO Tony Genito, for example, has been offered a multipronged bonus, including restricted stock valued at $500,000 and up to $500,000 in cash payable next June, if he agrees to relocate with the company from Madison, Wisconsin, to Atlanta, Georgia, the company’s August 17 8-K disclosed.
AEP, meanwhile, granted 41,380 RSUs each to four officers, including CFO Brian X. Tierney, “to better ensure the retention of these CEO succession candidates,” according to the electrical power company’s August 9 8-K. Those won’t start vesting until 2013, indicating a somewhat prolonged horse race to determine the company’s next chief.
Several other companies, including Williams-Sonoma and Herley Industries, have recently offered their CFOs retention bonuses in the case of the sale of the company (a change of control), which Adams says is the most common use of such awards. “You want to incent those people to see the transaction all the way through,” he notes.
Helping Besanko recover some value could be one reason for the OfficeMax grant. To be sure, Besanko is far from completely underwater: the 200,000 options he was granted at the time he was hired currently carry a value of about $1.2 million. But the package of long-term incentives comprised of RSUs and options that he was granted earlier this year is currently below its initial $550,000-plus value, thanks to a stock-price drop.
The move appears to have set up Besanko and Vero for big gains in the future. “The thing that really caught our attention was the timing of the retention award, more than the actual amount,” says Michelle Leder, editor and founder of Footnoted. “If you look at the stock price for OfficeMax,” which has declined by about 45% since its peak in early May, “it seems like incredibly good timing on the grants.”
OfficeMax may also be trying to sharpen its succession plan following the late-July departure of its chief operating officer. Earlier this year, current CEO Sam Duncan announced his plan to retire in February 2011, and Besanko and Vero could reasonably be considered to be among the top current candidates.
Whatever the reason, however, OfficeMax board members would do well to remember that retention awards may have only limited effectiveness in actually keeping someone on board. “The fact that someone has taken it doesn’t mean they are staying,” notes Adams, and “may actually just increase someone else’s cost to buy out the executive.”