Some ingredients in Martha Stewart’s proxy…

April 12, 2011

Proxy season is still in full bloom, and one of the filings we’re always eager to read is the one filed by footnoted perennial Martha Stewart Living Omnimedia, Inc. (MSO).

In the past, Martha’s proxies and other filings have made for some pretty unforgettable reading. There was this post (about the company’s agreement to pay $2 million per year to use Martha’s various homes as the set for her TV show, plus thousands more to pay for expenses), or this one (about the $3 million retention bonus Martha got in May, 2009), as well as others that you can find by searching the ticker “MSO” in our archives.

So what hidden treasures did the proxy hold this year? Some of the interesting ones have already been reported by publications such as Crain’s (more than $606K for salaries paid to Martha’s daughter and sister-in-law; nearly $30K for Martha’s personal trainer; $200K for household expenses; and almost $56K for her weekend driver). But there were other interesting disclosures, as well.

For example, the topic of bonuses included this note:

“At the start of 2010, the Compensation Committee determined that bonuses for 2010 for the NEOs would be based primarily on the Company’s achievement of an adjusted consolidated income (loss) before interest income or expense, taxes, depreciation and amortization, impairment, non-cash compensation expense and other expense (adjusted EBITDA) target of $8.8 million…. The adjusted EBITDA target provided for 2010 was not achieved.”

The filing then explains that in 2010 there were “strenuous efforts undertaken to reduce costs and to work with reduced staff,” efforts to stabilize the Publishing segment, some success in replacing some of the revenues that used to flow from the K-Mart channel (that relationship ended in January, 2010), and the television show’s hop over to the Hallmark channel.

Veteran proxy readers, you know what’s coming, right? This is the part of the filing where a company explains that even though it didn’t meet the previously-stated goals, there are compelling reasons to give the bonuses and/or equity awards anyway.

So we braced ourselves for what would follow… only to find that the company used uncharacteristic restraint. It gave “recognition awards” to three named executive officers (NEOs), each between $35,000 and $50,000, and neither Martha Stewart nor Executive Chairman and Principal Executive Officer Charles Koppelman took an award.

But shortly thereafter – while admiration of the aforementioned restraint wafted in the air like a freshly-baked batch of Martha’s Cherry-Almond brownies – the company did it again, except this time with respect to the long-term incentive compensation and with less restraint.

In the past few years, the NEOs got options and performance-based RSUs (PRSUs) that would vest over time if the company met its adjusted EBITDA performance target. The filing states that “None of the PRSUs were to vest if less than 80% of the performance target was achieved.”

Simply put, it failed to meet that target. But the company explains that the “continuing economic downturn, among other things” caused its performance to fall “far short of what proved to be aggressive adjusted EBITDA targets.” So the company changed the rules, explaining as follows:

“As a result, in December 2010, the Compensation Committee approved the removal of the performance targets from the PRSUs held by existing employees, such that the PRSUs will vest on March 1, 2013, subject generally to continued employment.”

It also removed the performance targets from PRSUs it had granted in prior years.

Poof! The scent of admiration vanished, and our minds snapped back to reality… the place where the company’s stock – currently trading at $3.59 a share – is down more than 40 percent from its trading price a year ago.

Image source: Martha Stewart Living Omnimedia’s website

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