Pulling back the veneer on Ethan Allen’s proxy…

One doesn’t generally associate Ethan Allen Interiors, Inc. (ETH) with the concept of “sacrifice,” so we were surprised when we read the company’s October 7 proxy and learned about an ostensible sacrifice by the company’s executives. On closer inspection, though, the move strikes us as a metaphorical veneer carefully glued on top of some less attractive compensation practices.

For example, consider the sacrifice by M. Farooq Kathwari, Ethan Allen’s Chairman of the Board, President, and Principal Executive Officer. We dug back into last year’s proxy and learned that – effective March 1, 2009 – “due to the economic climate and Company sales,” Kathwari “voluntarily took a $100,000 per year salary reduction, such that his base salary as in effect on June 30, 2009 is $1,050,050 per year.” At the same time, the other named executive officers (whose base salaries are far lower, between $221,000 and $295,385) voluntarily cut their salaries by 5 percent. The cuts ended on July 31, 2010.

One could argue that the cuts were basically meaningless, though, because in the same fiscal year (2010), Kathwari got a $150,000 bonus, 1.5 times more than he temporarily gave up. The board reasoned that it should give discretionary incentive bonuses in FY 2010 after considering the company’s performance and cash position, the voluntary salary reductions, and the absence of an Incentive Bonus paid in 2009. The filing states: “All Incentive Bonus payments were made to reward key executives for their performance during this difficult economic and business climate and to keep the managerial staff motivated to continue to deliver positive results and guide the Company to meet its strategic objectives.”

As for the other NEOs, each got a discretionary bonus that ranged from $20,000 to $45,000. In every case, the bonus was two to three times higher than the amount temporarily sacrificed.

Of course, there’s more to an executive’s total compensation than just his base salary and bonus. Looking at the big picture, Kathwari’s FY 2010 total compensation did drop almost $761,000 from his FY 2009 number. But he still got $2,232,240 in total compensation for the year (including $318,053 in stock awards, $630,800 in option awards, and $83,337 in “Other” compensation to pay for insurance premiums, cash dividends on stock, savings plan contributions, and so forth). The company also spent another $74,002 to provide Kathwari with a car, driver, gas, etc., $6,406 to pay for his club membership, and $102,262 for him to fly on the company plane. Ethan Allen’s filing explains that Kathwari only uses these amenities for business purposes, and he reimburses the company any time he uses the plane or club for personal enjoyment.

Perhaps the company got some mileage out of the move by announcing the cuts to employees and shareholders in order to boost morale and create a feeling of shared sacrifice. But did it work? To be sure, Ethan Allen’s stock has nearly doubled from where it was on March 1, 2009, when the salary cuts were put into effect. But – more significantly – it’s down more than 44 percent from where it traded in October 2007, and more than 38 percent from its trading price in October, 2005. If Ethan Allen’s executives and directors want to make some cuts that benefit the company and its shareholders, maybe they should try again?

Image source: gfhdickinson via flickr


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