Layering the pay at Armstrong World Industries …

It’s a cinch to pay an executive millions of dollars: Just write a big bonus check, or spread it out over the year in the form of salary. What takes real skill is constructing the fancy layers of pay that companies and compensation consultants have devised over the years.

Take Armstrong World Industries (AWI), maker of cabinets and materials for floors and ceilings, which named Matthew J. Espe as chief executive and president on Friday, effective late next month.

At first his pay — laid out in an 8-K filing on Friday — looks fairly modest: $980,000 a year in salary, plus a bonus target of that much again — and possibly as much as a $1.96 million bonus if he and the company surpass various targets. But then it starts to remind us of the nicely tiled ceramic kitchen floor we had to replace once: Underneath was asphalt tile. Under that was cardboard-like underlayment. Under that was carpet. And under that was badly scarred hardwood, and then the subflooring.

In this case, the next layer is a “one-time replacement grant” of $4.552 million in cash that Espe gets if he stays employed until Nov. 1 this year. That comes with $1.1 million in restricted stock units vesting over the next three years.

Then comes an “inducement grant” made up of a one-time slug of stock options vesting over three years and valued at $3.5 million. And finally, $1.5 million in restricted stock units, this time linked to performance measures: He gets 50% of it if the stock price reaches $55 on Dec. 31, 2012, and the rest if it hits $70 by Dec. 31, 2013. (He also gets $4,500 a year for financial planning, and unspecified benefits and perks that the company considers standard for executives.)

So what’s the bottom line for Armstrong shareholders? If he makes it through three years and hits all the performance targets and his bonus targets (but no better), he stands to collect a cool $16.5 million, or $5.5 million a year. (That’s in addition to any stock appreciation that exceeds what’s baked into the option-valuation formulas.) Maxing out his bonus would bring that to $19.4 million, or about $6.5 million a year, on average.

But what if he just manages to keep his job for three years, entirely missing both the RSU performance benchmarks and his bonus targets? Assuming the board doesn’t swoop in with some sort of retention incentive, he still makes $7.8 million over three years. And most of that is front-loaded: Just making it through his first year is likely to bring at least $5.9 million, assuming no bonus or performance RSUs, and with his options under water. The base case, with a bonus at target, brings him closer to $8 million in year one.

Not half bad for a guy making a salary of a little under $1 million a year.

Image source: team.brown via Flickr


Rite Aid update: We blogged last week about the raucous annual meeting at Rite Aid (RAD). The company filed the 8-K officially reporting the results, and the stockholder say-on-pay proposal — proposed by the AFL-CIO Office of Investment on behalf of the New York City Employees’ Retirement System — went down 383 million shares to 107.5 million shares, or about 71% to 24% once abstentions are counted in. Pretty good, considering that insiders and major shareholders control north of 25% of the company’s shares.


Want to see more of what’s hidden in corporate filings? Check out FootnotedPro, where we highlight unusual opportunities and potential problems well in advance of the market. For more information or to inquire about a trial subscription, email us at