La-Z-Boy’s cushy compensation decisions…

July 7, 2010

Much like the ubiquitous recliner itself, La-Z-Boy Inc.’s stock (LZB) has been rocking back and forth lately. But when we read the proxy that it filed July 6, we found our interest most piqued by some executive compensation changes.

The filing noted that, in the wake of 2008’s economic meltdown, La-Z-Boy’s executives did not get a raise from FY 2009 to FY 2010. Since then, though, they—ve made up for it in a couple of ways. The first was with equity (stock and option) awards and non-equity incentive plan compensation. And the second was with raises for FY 2011.

From those first categories, company president and CEO Kurt Darrow got $1,777,293 in extra compensation, and his base salary rose by $50,000, to $775,000 per year.

Senior Vice President and CFO Louis Riccio, Jr. picked up an extra $623,770 in equity awards and non-equity incentive plan compensation, as well as a $25,000 raise.

Senior Vice President and Chief Retail Officer Mark Bacon, Sr. got $642,145 in extra compensation, and he also got a $25,000 raise.

The last two NEOs didn—t get raises, but they both got nice boosts to their total compensation packages through the equity awards and non-equity incentive plan compensation payouts. Senior Vice President and President, Casegoods Product Steven Kincaid received $631,120, and Senior Vice President and President, Non-Branded Upholstered Product Otis Sawyer got $594,370.

Like other companies that manufacture consumer products, La-Z-Boy’s sales took a hit after the market stumbled. According to the annual report that it filed June 14, 2010, the company’s FY 2010 net sales were down 3.9 percent from FY 2009. But the consolidated operating margin improved in FY 2010, thanks to measures such as a conversion to cellular manufacturing system, the consolidation of two plants, store closures, and by reducing selling and administrative costs. The 10-K also notes that the company transferred —…almost 90% of our domestic fabric cut and sew operations— to our facility in Mexico, with the balance expected to be transitioned during fiscal 2011. We also expect to transition our leather cut and sew operations to our facility in Mexico during fiscal 2011. Simultaneously, the company increased its cash position and reduced its debt.

In the newly filed proxy, the company states that its ——2010 company financial performance results were above target levels, reflecting the effectiveness of the strategic initiatives and cost structure adjustments. It justified the executives’ extra compensation awards and raises on those operational changes.

Yet we can—t help but notice that while the above-mentioned steps are helpful to the company’s bottom line, many of them offer a one-time benefit. Now that the cutting and sewing operations are in Mexico, for example, the company doesn—t get any new benefit from cheaper labor and facilities costs unless it then moves from Mexico to another country where salaries are even lower. And it can only restructure so many times, in so many different ways.

In an interview that The Joplin [Mo.] Globe published in late June, the article quoted Darrow as saying:

—While our results and other public data points indicate the beginning of improved industry conditions, we remain cautious going into fiscal 2011—. Sales growth and cost savings initiatives will need to be balanced against various macroeconomic factors, including relatively low consumer confidence levels, ongoing high unemployment and volatility within the housing market, as well as headwinds relating to raw material price increases versus last year.

Caution apparently was a less important factor when the board made its executive compensation decisions.

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