Doing the math at Polo Ralph Lauren …

June 4, 2010

Back when we took basic algebra, we always found those “story problems” a little labored, what with trains leaving separate stations simultaneously all the time. Little did we know that, a few decades later, we’d be applying those same principles to deciphering multimillion-dollar pay arrangements for titans of industry.

But it all came rushing back this week when we were perusing the 10-K that Polo Ralph Lauren filed on Wednesday. The exhibit consisted of a terse amendment to President and Chief Operating Officer Roger Farah’s 7-month-old employment agreement:

1. Section 6(a)(i)(1)(y) of the Agreement is hereby amended in its entirety to read as follows:

—the sum of (I) the Executive’s salary at the rate in effect on such date (unless employment is terminated by the Executive for Good Reason pursuant to Section 5(b) hereof as a result of a Salary reduction, in which case, at the rate in effect prior to such reduction), plus (II) $6 million; …

That sent us scurrying back to an 8-K that the company filed in October last year, with Farah’s most recent employment agreement, where we found the relevant portion of the original:

(a) If the Corporation shall terminate the Executive’s employment for any reason other than an Enumerated Reason as set forth in Section 6(d) hereof or if the Executive resigns for Good Reason pursuant to Section 5(b) hereof, subject to the provisions of Section 8 hereof, the Executive shall be entitled to the following:

(i) an amount equal to (1) the product of (x) the greater of two (2) or the number of full and partial years from the date of termination through March 30, 2013 (up to a maximum of three (3)), and (y) the sum of (I) the Executive’s Salary at the rate in effect on such date (unless employment is terminated by the Executive for Good Reason pursuant to Section 5(b) hereof as a result of a Salary reduction, in which case, at the rate in effect prior to such reduction), plus (II) the amount of the Target Annual Incentive Bonus described herein —

So we got out the pencil and paper and distilled it down to its essence:

Old severance = (2 or 3) x (salary + target annual incentive bonus)
New severance = (2 or 3) x (salary + $6 million)

(Just to clarify, the “2 or 3” is in there because the severance multiples pay figures by the number of years left in his three-year contract, but with an explicit minimum of two and a maximum of three.)

Now, a quick look at Polo Ralph Lauren’s proxy filing from July 2009 shows that Farah hadn’t received a bonus of more than $2.97 million in the previous three years, and last year it was $2.2 million. Throw in his most recent salary figure, and you can solve our two equations:

Old severance = (2 or 3) x ($900,000 + $2,197,800) = (2 or 3) x $3,097,800 = $6.2 million or $9,2 million
New severance = (2 or 3) x ($900,000 + $6,000,000) = (2 or 3) x $6,900,000 = $13.8 million or $20.7 million

And that doesn’t include the acceleration of his various equity awards or continued health-insurance coverage and auto allowance.

In any case, kids, there’s the power of a little algebra and a real-life story problem: Change a few words in a largely opaque formula, and it could mean an additional $7.6 million to $14.5 million for Farah, should he be unlucky enough to be fired or laid off.

Image source: magoexperto via Flickr

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