As we cruised through the proxy that AutoZone, Inc. (AZO) filed yesterday, we zipped along nicely as if we were on a smooth stretch of interstate. But after a few zigs and zags, we noticed a sudden acceleration when we got to the executive pay section.
Of particular note, the total compensation for William C. Rhodes, III, AutoZone’s Chairman, President, and CEO, zoomed from $3.8 million in fiscal year 2010 to more than $11.36 million in fiscal 2011.
The increases came in the form of both cash and equity, but – still – it seemed like such a steep increase that the matter caused us to stop for a while and dig for some answers. Now Rhodes is no newcomer to the company: He worked his way up through the ranks over the past 16 years and has been the president, CEO, and a director since 2005. Still, why would his compensation jump nearly three-fold in one year?
As it turns out, there are several reasons. Rhodes’ base salary rose to $992,308 (a raise of more than $71,000), and his non-equity incentive bonus jumped to more than $2 million (an increase of nearly $436,500). On the equity side, his stock awards jolted from last year’s comparatively paltry $21,335 to more than $6.6 million for FY 2011. In addition, option awards increased by more than $415,000, to almost $1.58 million.
Last December, the board gave Rhodes a “one-time award” of 25,000 performance-restricted stock units for the stated purpose of “[motivating] continued high performance while enhancing the retention characteristics of [his] compensation package.” We thought it was worth including the vesting criteria at the bottom of p. 28 of the proxy, in part because the goals were actually pretty clearly defined and the hurdles actually seemed real — something that’s pretty rare in the filings:
We’re used to seeing companies say that they’re tying compensation to performance, but we’re not used to seeing them deliver with such aggressive goals and metrics as AutoZone put in place.
With the stock currently trading at $330.19 and the diluted earnings per share number for 2011 at $19.47 (disclosed in the 10-K that AutoZone also filed yesterday – a jump from the diluted earnings per share number of $14.97 for fiscal 2010), we can’t quibble with the proxy’s claim that “AutoZone sets challenging financial and operating goals, and a significant amount of an executive’s annual cash compensation is tied to these objectives and therefore ‘at risk’ — payment is earned only if performance warrants it.”
Most of the other named executive officers also got turbo-charged boosts to their compensation, although their increases tended to be in the range of $350,000 to $450,000 and come from a combination of raises, cash bonuses and stock options. The exception was Robert Olsen, Corporate Development Officer, whose salary actually dropped a few thousand dollars. But Olsen got a bonus of more than $66,000, and he got nearly $1.2 million in stock awards. The proxy explained that last January, the compensation committee gave Olsen 4,800 restricted shares, which will vest equally on the second and third anniversaries of the grant, so long as he’s still working for the company.
AutoZone’s stock is trading more than 40% higher than it did a year ago, a number that’s sure to please shareholders in light of the market’s tumultuous year. Consequently, they may not care about the sudden acceleration in executive compensation, so long as the company’s profits and stock price keep climbing. We’ll find out for sure after the votes are tallied at the upcoming annual meeting, set for December 14.
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