Saks DEF 14A 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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12 East 49th Street
New York, New York 10017
April 27, 2012
You are cordially invited to attend the Annual Meeting of Shareholders of Saks Incorporated to be held at 11:30 a.m. Eastern Time, on Wednesday, May 30, 2012, at the University Club, located at 1 West 54th Street, New York, New York 10019.
The Notice of Annual Meeting of Shareholders and Proxy Statement accompanying this letter describe the specific business to be acted upon. At this years meeting, you will have an opportunity to vote on the election of the eight directors named in the accompanying Proxy Statement, the selection of PricewaterhouseCoopers LLP as Saks Incorporateds independent registered public accounting firm, and the approval of the Saks Incorporated 2012 Senior Executive Bonus Plan. You also will be asked to vote on a proposal by a shareholder that we adopt cumulative voting in the election of our directors.
Your vote is very important. We ask that you vote over the Internet, by telephone or by mail by returning your proxy card in the postage-paid envelope as soon as possible.
I hope you will be able to join us, and I look forward to seeing you.
Chairman and Chief Executive Officer
12 East 49th Street
New York, New York 10017
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of Saks Incorporated:
Notice is hereby given that the Annual Meeting of Shareholders of Saks Incorporated (Saks or the Company) will be held at 11:30 a.m. Eastern Time, on Wednesday, May 30, 2012, at the University Club, located at 1 West 54th Street, New York, New York 10019 for the following purposes:
Shareholders of record at the close of business on April 3, 2012 are entitled to notice of, and to vote at, the meeting.
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders To Be Held on May 30, 2012. The Proxy Statement, the form of Proxy, Form 10-K and Form 10-K/A, and 2011 Annual Report are available free of charge at www.saksincorporated.com on the Investor Relations or Contacts tab.
Shareholders are cordially invited to attend the meeting in person; however, to assure your representation at the annual meeting, you are urged to cast your vote over the Internet, by telephone or by mail as promptly as possible. Any shareholder of record attending the annual meeting also may vote in person, even if she or he has voted over the Internet, by telephone or returned a completed proxy card.
By order of the Board of Directors,
April 27, 2012
Table of Contents
12 East 49th Street
New York, NY 10017
This document is the proxy statement of Saks Incorporated, a Tennessee corporation, that is being furnished to our shareholders in connection with the solicitation of proxies to be used at our Annual Meeting of Shareholders (the Annual Meeting) to be held at 11:30 a.m. Eastern Time, on Wednesday, May 30, 2012, at the University Club, located at 1 West 54th Street, New York, New York 10019. A form of proxy card is being furnished with this document.
Why am I receiving a proxy statement?
You are receiving this document because you were one of our shareholders on April 3, 2012, the record date for our 2012 Annual Meeting. We are sending this proxy statement and the form of proxy card to you and/or making these documents available to you on the Internet in order to solicit your proxy (i.e., your permission) to vote your shares of Saks common stock upon certain matters at the Annual Meeting. This Notice of Annual Meeting and Proxy Statement and form of proxy or voting instruction card are being mailed starting on or about April 27, 2012.
Who is soliciting my proxy and will anyone be compensated to solicit my proxy?
The solicitation of proxies is being made on behalf of our Board of Directors. Additionally, our directors, officers and employees may solicit proxies by telephone, Internet, facsimile, mail or personal contact. We will not pay our directors, officers or other regular employees any additional compensation for their proxy solicitation efforts; however, we may reimburse them for any out-of-pocket expenses in connection with any solicitation. We also have retained D.F. King, Inc., New York, New York, to assist with the solicitation of proxies for a fee estimated not to exceed $25,000, plus reimbursement of out-of-pocket expenses.
Who is paying the costs of the proxy statement and the solicitation of my proxy?
Saks will pay all expenses of this solicitation, including the cost of preparing and mailing this proxy statement, our 2011 annual report to shareholders and our other proxy materials and all costs of any proxy solicitor we employ. We also will reimburse brokers, nominees and fiduciaries for their costs in sending proxies and proxy materials to our shareholders so you can vote your shares.
What information is available on the Internet?
Our proxy statement, proxy card and annual report to shareholders are available at the Investor Relations section of our corporate website, www.saksincorporated.com and also at www.proxyvote.com.
You can submit a request for a copy of the proxy statement, form of proxy and annual report for any future shareholder meetings, including the shareholder meeting to be held on May 30, 2012, to our Investor Relations Department at 1-865-981-6243, at the Investor Relations or Contacts tab at www.saksincorporated.com, or to our principal executive offices at Saks Incorporated, Attention: Investor Relations, 12 East 49th Street, New York, New York 10017. You may also contact us at the telephone number, website or mailing address set forth above to request directions to the location of the annual meeting of shareholders so that you may attend the meeting and vote in person.
Our proxy statement, Annual Report on Form 10-K/A and other financial documents are available free of charge at the Securities and Exchange Commissions (SEC) website, www.sec.gov.
What does it mean if I receive more than one set of proxy materials?
If you receive multiple proxy statements or proxy cards, that means that you have more than one account with brokers or our transfer agent. Please vote all of your shares. We also recommend that you contact your broker and our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is Computershare, which may be contacted at 1-866-455-3121 (toll free) or www.bnymellon.com/shareowner/equityaccess.
Is Saks householding for shareholders sharing the same address?
Yes. The SECs rules regarding the delivery of proxy materials to shareholders permit us to deliver a single copy of these documents to an address shared by two or more of our shareholders with the same last name. This method of delivery is called householding, and it can significantly reduce our printing and mailing costs. It also reduces the volume of mail you receive. This year, we are delivering only one set of proxy materials to multiple shareholders with the same last name sharing an address, unless we receive instructions to the contrary from one or more of the shareholders. We will still be required, however, to send you and each other Saks shareholder at your address an individual proxy voting card. If you would like to receive more than one set of proxy materials, we will promptly send you additional copies upon written or oral request directed to our transfer agent at 1-866-455-3121 (toll free), or to our Investor Relations Department or Corporate Secretary at Saks Incorporated, 12 East 49th Street, New York, New York 10017. The same phone number and address may be used to notify us that you wish to receive a separate set of proxy materials in the future or to request delivery of a single copy of our proxy materials if you are receiving multiple copies.
Is there any other information that is available or that I should be receiving?
Yes. You should receive a copy of our 2011 annual report to shareholders, which contains financial and other information about the Company and our most recently completed fiscal year, which ended on January 28, 2012. References in this document to a year (e.g., 2011), unless the context clearly requires otherwise, mean and will be deemed a reference to our fiscal year that ended on the Saturday closest to January 31.
Who may attend the Annual Meeting?
The Annual Meeting is open to all of our shareholders. To attend the meeting, you will need to register upon arrival. We also may check for your name on our shareholders list and ask you to produce valid identification. If your shares are held in street name by your broker or bank, you should bring your most recent brokerage account statement or other evidence of your share ownership. If we cannot verify that you own Saks shares, it is possible that you may not be admitted to the meeting.
May shareholders ask questions at the Annual Meeting?
Yes. Our management will respond to shareholder questions at the end of the meeting. In order to give a greater number of shareholders the opportunity to ask questions, we may impose certain procedural requirements.
What if I have a disability?
If you are disabled and would like to participate in the Annual Meeting, we can provide reasonable assistance. Please send any request for assistance to Saks Incorporated, 12 East 49th Street, New York, New York 10017, Attention: Corporate Secretary, at least two weeks before the meeting.
Where is Saks Incorporated common stock traded?
Our common stock is traded and quoted on the New York Stock Exchange under the symbol SKS.
How can I find the voting results of the Annual Meeting?
We will include the voting results from the Annual Meeting in a Current Report on Form 8-K, which we expect to file with the SEC on or about June 5, 2012.
What am I voting on?
You will be voting on the following:
Who is entitled to vote?
You may vote if you owned shares of our common stock at the close of business on April 3, 2012. As of April 3, 2012, there were 158,796,449 shares of our common stock outstanding.
How many votes must be present to hold the Annual Meeting?
In order to lawfully conduct the Annual Meeting, a majority of our issued and outstanding shares of common stock must be present, either in person or by proxy. This is called a quorum. Your shares are counted as present at the meeting if you attend the meeting and vote in person or if you properly return a proxy by one of the methods described below under the question How do I vote before the meeting? Abstentions and broker non-votes (as explained below under the question What is a broker non-vote?) also will be counted for purposes of establishing a quorum.
How many votes do I have, and can I cumulate my votes?
You have one vote for every share of our common stock that you own. Cumulative voting is not allowed.
May I vote my shares in person at the Annual Meeting?
Yes. You may vote your shares at the meeting if you attend in person, even if you previously voted by Internet or telephone or submitted a proxy card. Whether or not you plan to attend the meeting, however, in order to assist us in tabulating votes at the Annual Meeting, we encourage you to vote by voting on the Internet at the website listed both below and on your proxy card, by calling the toll-free number set out both below and on your proxy card, or by returning your proxy card.
How do I vote before the meeting?
Your vote is extremely important. We appreciate you taking the time to vote promptly. After reading the proxy statement, please vote, at your earliest convenience in one of the following three ways:
Please use only one of the three ways to vote. Please follow the directions on your proxy card carefully. If you hold shares in the name of a broker, your ability to vote those shares by Internet or telephone depends on the voting procedures used by your broker, as explained below under the question, How do I vote if my broker holds my shares in street name?
How do I vote if my broker holds my shares in street name?
If your shares are held in a brokerage account in the name of your bank or broker (this is called street name), those shares are not included in the total number of shares listed as owned by you on the enclosed proxy card. Instead, your bank or broker will send you a request for directions for voting those shares. Many (but not all) brokerage firms and banks participate in a program provided through Broadridge Financial Solutions, Inc. that offers Internet and telephone voting options.
Will my shares held in street name be voted if I do not provide my proxy?
If your shares are held in street name, your shares might be voted even if you do not provide the brokerage firm with voting instructions. On certain routine matters, brokerage firms have the discretionary authority to vote shares for which their customers do not provide voting instructions. The proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm is considered a routine matter for this purpose. The Company proposals to elect directors and approve the Companys 2012 Senior Executive Bonus Plan, and the shareholder proposal to adopt cumulative voting are not considered routine matters and, therefore, your shares will not be voted on those matters unless you instruct your brokerage firm to vote in a timely manner.
Can I change my mind and revoke my proxy?
Yes. To revoke a proxy given pursuant to this solicitation, you must:
How will my proxy be voted?
If you properly vote over the Internet, by telephone or complete and mail your proxy card, your shares will be voted at the Annual Meeting in the manner that you direct.
What if I return my proxy card or vote by Internet or telephone but do not specify my vote?
In the event you complete the Internet or telephone voting procedures or return a signed proxy card but do not specify how you want your shares to be voted, we will vote them as follows:
What is a broker non-vote?
If you own shares through a broker in street name, you may instruct your broker how to vote your shares. Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspectors of election appointed for the meeting. A broker non-vote occurs when you fail to provide your broker with voting instructions on a particular proposal at least 10 days before the Annual Meeting and the broker does not have discretionary authority to vote your shares on that particular proposal because the proposal is not a routine matter under applicable rules. Brokers will not have discretionary voting power with respect to the Company proposals to elect directors (Proposal 1) or approve the Saks Incorporated 2012 Senior Executive Bonus Plan (Proposal 3), or the shareholder proposal with respect to cumulative voting in the election of directors (Proposal 4). See How will abstentions and broker non-votes be treated? and Will my shares held in street name be voted if I do not provide my proxy?
How will abstentions and broker non-votes be treated?
Abstentions and broker non-votes will be treated as shares that are present and entitled to vote for purposes of determining whether a quorum is present, but will not be counted as votes cast either in favor of or against a particular proposal.
What vote is required to approve each proposal?
You may either vote FOR or WITHHOLD authority to vote for each nominee for election to the Board of Directors. The number of nominees proposed by the Board of Directors to be elected as directors at the Annual Meeting is the same as the number of directors to be elected, and no shareholder has utilized the procedures provided in the Companys Amended and Restated Bylaws (the Bylaws) to nominate an additional person or persons for election to the Board of Directors at the Annual Meeting (see May other matters be raised at the Annual Meeting; how will the meeting be conducted?). As a result, in accordance with the Tennessee Business Corporation Act, each nominee proposed for election at the Annual Meeting who receives an affirmative vote at the Annual Meeting in person or by proxy will be elected. This method of voting is called a plurality. Failing to vote or voting your proxy to withhold authority for all or some of the nominees will have no impact on the election of directors. However, as described below under Corporate Governance, in 2010, our Board amended our Corporate Governance Guidelines to implement a majority voting policy pursuant to which each nominee has submitted a conditional resignation letter that will be acted upon and may become effective in the event that nominee fails to receive the affirmative votes of a majority of the votes cast at the Annual Meeting (not including abstentions and broker non-votes).
Shareholder approval for the appointment of our independent registered public accounting firm is not required, but the Board is submitting the selection of PricewaterhouseCoopers LLP for ratification in order to obtain the views of our shareholders. This proposal will be approved if the votes cast FOR the proposal exceed the votes cast AGAINST the proposal. If you submit a properly executed proxy card or use the Internet or telephone to indicate ABSTAIN on this proposal, your vote will not be counted as cast. Broker non-votes likewise will not be treated as cast. Accordingly, neither abstentions nor broker non-votes will have any legal effect on whether this matter is approved. If the appointment of PricewaterhouseCoopers LLP is not ratified, the Audit Committee will reconsider its selection.
Shareholder approval is required with respect to the Saks Incorporated 2012 Senior Executive Bonus Plan. This proposal will be approved if the votes cast FOR the proposal exceed the votes cast AGAINST this proposal. If you submit a properly executed proxy card or use the Internet or telephone to indicate ABSTAIN on this proposal, your vote will not be counted as cast. Broker non-votes likewise will not be treated as cast. Accordingly, neither abstentions nor broker non-votes will have any legal effect on whether this matter is approved.
This proposal will be approved if the votes cast FOR the proposal exceed the votes cast AGAINST this proposal. If you submit a properly executed proxy card or use the Internet or telephone to indicate ABSTAIN on this proposal, your vote will not be counted as cast. Broker non-votes likewise will not be treated as cast. Accordingly, neither abstentions nor broker non-votes will have any legal effect on whether this matter is approved.
How do you recommend that I vote on these proposals?
The Board of Directors recommends that you vote:
FOR the election of the eight director nominees named in this proxy statement;
FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for our 2012 fiscal year;
FOR the approval of the Saks Incorporated 2012 Senior Executive Bonus Plan; and
AGAINST the shareholder proposal to adopt cumulative voting for directors.
Will my vote be confidential?
Yes. We will continue our practice of keeping the votes of all shareholders confidential. Shareholder votes will not be disclosed to our directors, officers, employees or agents, except:
May other matters be raised at the Annual Meeting; how will the meeting be conducted?
We have not received proper notice of, and are not aware of, any business to be transacted at the Annual Meeting other than as indicated in this proxy statement. Under Tennessee law and our governing documents, no other business aside from procedural matters may be raised by shareholders at the Annual Meeting unless proper notice has been given to us by the shareholders. If any other item or proposal properly comes before the Annual Meeting, the proxies received will be voted on such matter in accordance with the discretion of the proxy holders.
The Chairman has broad authority to conduct the Annual Meeting so that the business of the meeting is carried out in an orderly and timely manner. In doing so, he has discretion to establish reasonable rules for discussion, comments and questions during the meeting.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of our common stock owned, as of April 3, 2012, by each of our directors, by our executive officers who are named in the Summary Compensation Table on pages 46-47 of this proxy statement (the Named Executive Officers), by all directors and executive officers of the Company, and by those persons who were known by us to beneficially own more than 5% of our common stock. Percentage computations are based on 158,796,449 shares of our common stock outstanding as of April 3, 2012. Except as otherwise noted, our directors and executive officers may be contacted at our executive offices and each of the persons named in the table below has sole voting and investment power with respect to the shares indicated.
ELECTION OF DIRECTORS
What is the structure of the Board of Directors?
Pursuant to our Charter and our Bylaws, our Board of Directors must consist of at least one but no more than 18 directors, but the exact number is set by the Board. Currently, the Board of Directors has fixed the size of the Board at eight; however, the Board of Directors, in accordance with the Companys Charter and Bylaws, may increase or decrease the size of the Board of Directors in the future. At our 2010 annual meeting of shareholders, shareholders approved amendments to our Charter to provide for the declassification of the Board and the annual election of directors. As such, following the annual meeting of shareholders in 2012, our Board of Directors will no longer be classified.
What are the terms of directors?
At this Annual Meeting, each of our eight directors will stand for election for one-year terms and will thereafter stand for election for one-year terms at each successive annual meeting.
Who are the nominees this year?
At the Annual Meeting, the Board of Directors proposes the election of Robert B. Carter, Michael S. Gross, Donald E. Hess, Marguerite W. Kondracke, Jerry W. Levin, Nora P. McAniff, Stephen I. Sadove, and Jack L. Stahl.
The eight directors standing for election will comprise the Board of Directors. Each director will hold office for one-year terms and until the directors successor is elected and qualified. Unless otherwise instructed by the shareholder, the persons named in the proxy card intend to vote for the election of Messrs. Carter, Gross, Hess, Levin, Sadove, and Stahl, and Ms. Kondracke and Ms. McAniff. Proxies cannot be voted for a greater number of persons than the number of nominees named and standing for election at the Annual Meeting.
What are the backgrounds of this years nominees and those directors whose terms are continuing?
The Board believes the Companys directors should be able to contribute knowledge, experience, and skills in at least one of the following competencies:
We have provided information about the nominees and other directors below, including key knowledge, experience and skills our directors and director nominees possess that are specifically important to Saks.
What if a nominee is unwilling or unable to serve?
If a director nominee becomes unwilling or unable to serve, proxies may be voted for a substitute nominee designated by our Board of Directors.
Are there any family relationships between any of the nominees?
There are no family relationships between any of the nominees or executive officers.
What does the Board of Directors recommend?
Our Board of Directors recommends that you vote FOR the election of these nominees.
What fees have been paid to the independent registered public accounting firm during the last two fiscal years?
The following table sets forth certain fees billed to us by PricewaterhouseCoopers LLP (PwC) in connection with various services provided to us throughout 2011 and 2010:
AUDIT COMMITTEE REPORT
This Audit Committee report shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 (the Securities Act) or the Securities Exchange Act of 1934 (the Exchange Act), except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under the Exchange Act.
What is the Audit Committee and what does it do?
The primary function of the Audit Committee is to assist the Board of Directors in its oversight and monitoring of the Companys financial reporting and audit processes, the Companys system of internal control, and the Companys process for monitoring compliance with laws, regulations and policies. The Audit Committees functions are described in greater detail on page 22 of this proxy statement. Among other things, the committee recommends to the Board that our audited financial statements be included in our annual report.
Are the members of the committee independent?
Yes. The committee is comprised of five directors, all of whom are independent as determined in accordance with the NYSEs listing standards and our Corporate Governance Guidelines. They also are independent within the meaning of Rule 10A-3 under the Exchange Act.
Is a member of the committee an audit committee financial expert?
Yes. The Board has determined that all members of the Audit Committee satisfy the attributes of an audit committee financial expert, as defined by SEC regulations. In reaching this determination, the Board of Directors considered, among other things, their relevant experience as described under Election of Directors.
What steps did the Audit Committee take in recommending that our audited financial statements be included in our annual report?
What is the Audit Committees pre-approval policy and procedure with respect to audit and non-audit services provided by our auditors?
The Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by PwC. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. PwC and management are required to periodically report to the Audit Committee regarding the extent of services provided by PwC in accordance with this pre-approval and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
Who has furnished this report?
This report has been furnished by the members of the Audit Committee:
C. Warren Neel, Committee Chair
Michael S. Gross
Marguerite W. Kondracke
Jerry W. Levin
Jack L. Stahl
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Who has the Audit Committee retained as our independent registered public accounting firm?
The Audit Committee has retained PwC as the Companys independent registered public accounting firm for 2012.
Are we required to submit the ratification of PwC to shareholders?
No, but we are asking the shareholders to ratify the Audit Committees appointment of PwC in order to obtain the views of our shareholders.
What happens if shareholders fail to ratify the appointment of PwC as our independent registered public accounting firm?
If the shareholders fail to ratify the appointment of PwC, the Audit Committee will reconsider the appointment but in its discretion may still direct the appointment of PwC. Also, if the appointment of PwC is approved, the Audit Committee in its discretion may still direct the appointment of a different independent registered public accounting firm at any time and without shareholder approval if the Audit Committee believes that such a change would be in our best interests.
How long has PwC served as our independent registered public accounting firm?
PwC (or its predecessor firm Coopers & Lybrand) has audited the financial statements of the Company since 1991.
Will representatives of PwC attend the Annual Meeting?
Representatives of PwC have been requested to attend the Annual Meeting and will have the opportunity to make a statement, if they so desire, and are expected to be available to respond to appropriate questions.
What does the Board recommend?
Our Board recommends that you vote FOR the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2012.
General Board Practices
Our Board of Directors has adopted Corporate Governance Guidelines and has also adopted a Code of Business Conduct in compliance with New York Stock Exchange (NYSE) and Securities and Exchange Commission (SEC) standards. Our Chief Executive Officer, Principal Financial Officer, other employees of the Company and members of the Board must comply with the Code of Business Conduct and are required to confirm annually that they have read and understand the Code of Business Conduct. The Code of Business Conduct and the Corporate Governance Guidelines are posted on the Companys web site at www.saksincorporated.com and are available in print to any person who sends a written request to the Companys Corporate Secretary at 12 East 49th Street, New York, New York 10017. Waivers and amendments to the policies and procedures set forth in the Code of Business Conduct will be disclosed on www.saksincorporated.com if required by law or the Code of Business Conduct.
The Board and its committees review their own performance annually, and the Board regularly reviews and plans for succession of the Companys executive team.
Director Independence Standards
The Companys Corporate Governance Guidelines provide that a significant majority of the Board should be composed of independent directors as required under the NYSE Corporate Governance Standards. The Board of Directors has adopted categorical independence standards that supplement the NYSE Corporate Governance Standards. Under the Boards standards, which are available at www.saksincorporated.com, (i) no director will qualify as independent unless the Board of Directors affirmatively determines that the director does not have a material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company), and (ii) no director will be independent if the director has any of the following relationships:
Who are our independent directors?
The Board reviewed all relevant relationships between the Company and each of our non-employee directors. The Board affirmatively determined that none of our non-employee directors has a material relationship with the Company directly or as a partner, shareholder or officer of an organization that has a relationship with the Company. The Board also concluded that none of our non-employee directors has any of the disqualifying relationships identified above. In determining that Mr. Carter is an independent director, the Board considered Mr. Carters employment as Executive Vice President of FedEx Information Services and Chief Information Officer of FedEx Corporation. During 2011, FedEx provided the Company overnight package delivery and related services for which we paid fees that we believe were not greater than the fees we would have paid to comparable firms to obtain similar services. Consequently, the Board has determined that all of the non-employee directors are independent within the meaning of the NYSE Corporate Governance Standards and the Boards categorical standards.
What role does the Board play in the oversight of risk management?
The Board implements its risk oversight function both as a whole and through Board committees. Throughout the year, the Board and the committees to which it has delegated responsibility dedicate a portion of their meetings to review and discuss specific risk topics. At each regularly scheduled Board meeting, the Board is also provided with legal and compliance updates.
Management communicates routinely with the Board and Board committees on significant risks and how they are being managed, and directors are free to communicate directly with senior management. Management believes the Company has robust internal processes in place and a strong internal control environment to identify and manage risks.
The Audit Committee has primary responsibility for overseeing the Companys risk assessment. It oversees risks related to the Companys financial statements, the financial reporting process, accounting, and legal and regulatory matters. The Audit Committee oversees the internal audit function and the Companys ethics and compliance programs. The Human Resources and Compensation Committee (the HRCC) evaluates the risks and rewards associated with the Companys compensation philosophy and programs. Additional details regarding the risks related to the Companys compensation policies and practices are set forth on pages 42-43. The Corporate Governance Committee oversees risks associated with its areas of responsibility, including, along with
the Audit Committee, the Companys Code of Business Conduct. The committee chairs report to the full Board at every regular meeting of the Board on the proceedings of the committees, including matters involving risk oversight. In addition, the Board is routinely informed of developments at the Company that could affect the Companys risk profile and business in general.
What is the Boards Leadership Structure?
Our current Board leadership structure is comprised of a combined position of Chairman of the Board and Chief Executive Officer, an independent director serving as Lead Director and six other independent directors. Stephen I. Sadove serves as Chairman of the Board and Chief Executive Officer, and Donald E. Hess serves as Lead Director.
The Chairman of the Board presides over meetings of the Board of Directors, presides over annual meetings of shareholders, consults and advises the Board of Directors and its committees on the business and affairs of the Company, and performs other duties and responsibilities as may be assigned by the Board from time to time. The Chief Executive Officer is in charge of both overseeing the Companys day-to-day operations and establishing and leading the execution of the Companys long-term strategic objectives, subject to the overall direction and supervision of the Board of Directors and its committees.
The Lead Director is charged with presiding at all meetings of non-employee directors, leading the evaluation of the performance of the Chief Executive Officer and the Board and its committees, encouraging and facilitating active participation of all directors in Board meetings, consulting with the Chief Executive Officer and other members of the Board on meeting topics and agendas, acting as a liaison between shareholders and the Board where appropriate, and performing other duties requested by the other non-employee directors from time to time.
As part of each regularly scheduled Board meeting, the non-employee directors meet without the Chief Executive Officer or any other members of management present. These meetings are led by Mr. Hess and allow non-employee directors to privately discuss issues of importance to the Company, including general business matters or management issues.
Each of the Board committees is chaired by independent directors. At each regularly scheduled committee meeting, the non-employee committee members meet in executive session under the leadership of the committee chair, without the Chief Executive Officer or any other members of management present.
The Board believes that this leadership structurea combined Chairman of the Board and Chief Executive Officer, an independent Lead Director, independent non-employee directors and committees led by independent directorsis the optimal structure for the Company at this time. Since the Chief Executive Officer has the most extensive knowledge of the various aspects of our business, the Board has concluded that he is in the best position to lead most effectively and to serve in the key position of Chairman of the Board. In addition, since the Chief Executive Officer is directly involved in managing both the day-to-day operations and long-term strategic initiatives of the Company, having a Chairman who also serves as the Chief Executive Officer allows efficient and effective communication with the Board on important business matters in light of the complexity of our industry and our business. In addition, the Board believes that having a single, highly-regarded and capable individual in both roles enables the Company to be represented by a single voice to outside constituencies, especially its vendor community. The Board believes that leadership of both the Board and the Company by Mr. Sadove is the best structure to lead the Company in the achievement of its goals and objectives. The Board also believes there is a very effective balance between strong, capable executive leadership and appropriate oversight by non-employee directors.
What are the committees of the Board and what do they do?
The Board of Directors has established Audit, Human Resources and Compensation, Corporate Governance, and Finance Committees. The Board determined that all members of the Audit, Human Resources and Compensation, Corporate Governance and Finance Committees are independent within the meaning of the NYSE rules and the Boards categorical standards.
Each of the Audit, Human Resources and Compensation, and Corporate Governance Committees operates under a written charter that meets the requirements of the NYSE corporate governance listing standards. Each charter is available at www.saksincorporated.com and in print to any person who sends a written request to the Companys Corporate Secretary, at 12 East 49th Street, New York, New York 10017. Each committee conducts an annual performance self-evaluation.
The Board and each of its committees has access, at the Companys expense, to outside accounting, legal, corporate governance and other advisors as and when Board or committee members determine advisor retention is advisable.
The Audit Committee consists of Dr. Neel (Chair), Messrs. Gross, Levin, and Stahl, and Ms. Kondracke. The Audit Committee met nine times during 2011. The primary duties of the Audit Committee are to (i) assist the Board in its oversight of (a) the integrity of our financial statements, (b) legal and regulatory matters, (c) the qualifications and independence of our independent registered public accounting firm, (d) ethics and compliance programs, and (e) the performance of our internal auditors and the independent registered public accounting firm; and (ii) prepare the report of the Audit Committee required to be included in our annual proxy statement.
No member of the Audit Committee may serve on more than two other audit committees of public companies.
See Audit Committee Report on pages 16-17 of this proxy statement for additional information about the Audit Committee.
Human Resources and Compensation Committee
The HRCC consisted of Ms. McAniff (Chair), Messrs. Carter, Hess and Christopher J. Stadler and Ms. Kondracke during 2011. In January 2012, Mr. Stadler resigned from the Board and the HRCC. The HRCC met six times during 2011. The primary duties of the HRCC are to (i) assist the Board in its responsibilities relating to compensation of the Companys directors and executive officers; (ii) review and recommend to the Board human resources plans, policies and programs; (iii) approve individual executive officer compensation intended to attract, motivate, retain and appropriately reward associates in order to motivate their performance in the achievement of the Companys business objectives and align their interests with the long-term interests of the Companys shareholders; (iv) review the Compensation Discussion and Analysis and recommend that it be included in our proxy statement and Annual Report on Form 10-K; and (v) prepare the report of the HRCC required to be included in our annual proxy statement.
See Report of the Human Resources and Compensation Committee at page 45 of this proxy statement for additional information regarding the HRCC.
The Corporate Governance Committee consists of Messrs. Hess (Chair) and Carter, Ms. McAniff and Dr. Neel. The Lead Director assumes the role of Chair of the Corporate Governance Committee. The committee
met five times during 2011. The primary duties of the Corporate Governance Committee are to (i) identify, evaluate and recommend to the Board individuals qualified to be directors of the Company for either appointment to the Board or to stand for election at a meeting of the shareholders, and (ii) develop and recommend to the Board corporate governance guidelines for the Company. The Corporate Governance Committee also makes recommendations to the Board with respect to shareholder proposals.
The Finance Committee consisted of Messrs. Gross (Chair), Ronald de Waal, Levin and Stadler during 2011. In January 2012, Messrs. Stadler and de Waal resigned from the Board and the Finance Committee. The committee met three times during 2011. The Finance Committees primary duties are to (i) ensure that our capital structure is consistent with our long-term value-creating strategy, (ii) advise management on specific elements of our capital structure strategy, and (iii) approve, based on authority delegated from the Board, or recommend to the Board for approval, specific terms and parameters of certain financing transactions.
Summary of Board Committees and Members During Fiscal Year 2011
How often did the Board meet in 2011?
The Board met 10 times during 2011. At each regular Board meeting, the non-employee directors also meet separately with Mr. Sadove and then without him. Our Lead Director, Mr. Hess, presides over non-employee director sessions.
The Board expects that all directors will devote sufficient time to the full performance of their Board duties and responsibilities, including attending all Board meetings and all meetings of committees on which the director serves. Any director who attends less than 75% of Board and committee meetings in a fiscal year is required to provide an explanation of his or her absences to the Chair of the Corporate Governance Committee immediately following the fiscal year end. A candidate accepting nomination to the Board is assumed to understand his or her obligations under the Companys Corporate Governance Guidelines and acknowledges that adherence to the Guidelines will be taken into consideration when the Corporate Governance Committee nominates candidates for election to the Board. An excessive number of absences, excused or non-excused, may be grounds for not re-nominating an incumbent director.
The overall average percentage for meeting attendance of the Companys current directors at Board and committee meetings during 2011 was 95%, with each director attending at least 86% of meetings.
Are the members of our Board required to attend the Annual Shareholder Meetings?
Directors are encouraged, but not required, to attend annual meetings of shareholders. Nine of our 10 directors attended the Companys June 2011 annual meeting (Mr. de Waal was able to attend the meeting by webcast).
How are directors nominated?
The Corporate Governance Committee is responsible for identifying and recommending to the Board persons to be nominated to serve as a director of Saks. Our Board is responsible for nominating the slate of directors for the Annual Meeting, upon the Corporate Governance Committees recommendation.
How are nominees identified?
The Corporate Governance Committee does not have any single method for identifying director candidates, but will consider candidates suggested by a wide range of sources. Generally, when there is a vacancy to be filled on the Board of Directors, the Corporate Governance Committee retains a third-party search firm to assist in identifying candidates to fill the vacancy. The search firm reports directly to the Corporate Governance Committee. The main functions served by a search firm include identifying potential candidates who meet the qualification and experience requirements described below, as well as compiling information regarding each candidates qualifications, experience and independence and conveying the information to the Corporate Governance Committee.
The Corporate Governance Committee will consider director candidates timely submitted by our shareholders in accordance with the notice provisions as discussed below under Can shareholders recommend nominees for directors? The Corporate Governance Committee applies the same criteria to the evaluation of shareholder-nominated director candidates as it applies to other director candidates.
How are nominees evaluated; what are the minimum qualifications?
The Corporate Governance Committee identifies, recruits and recommends to the Board only those candidates that the committee believes are qualified to become Board members consistent with the criteria for selection of new directors adopted from time to time by the Board. The Corporate Governance Committee recommends candidates, including those submitted by shareholders, only if the committee believes the candidates knowledge, experience and expertise would strengthen the Board and that the candidate is committed to representing the long-term interests of all of our shareholders. A majority of the Board must consist of independent directors (as defined by the NYSEs listing standards and our Corporate Governance Guidelines).
The Corporate Governance Committee assesses a candidates independence, background and experience, as well as the skills and diversity of the current Board. With respect to incumbent directors selected for re-election, the committee also assesses each directors contributions, attendance record at Board and applicable committee meetings and the suitability for continued service.
The Board believes that there are general requirements for service on the Companys Board of Directors that are applicable to all directors and that there are other skills and experience levels that should be represented on the Board as a whole but not necessarily by each director. The Board and the Corporate Governance Committee consider the qualifications of directors and director candidates individually and in the broader context of the Boards overall composition and the Companys current and future needs.
Individual directors and any person nominated to serve as a director should:
The Board believes that the combination of the various qualifications, skills and experiences of the 2012 director nominees will contribute to an effective, collaborative and well-run Board. The Board and the Corporate Governance Committee believe that, individually and as a whole, the directors possess the necessary qualifications to provide effective oversight of the business and high-quality interaction with and counsel to Company management.
What role does diversity play in the selection of members of the Board?
The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. The Board believes that diversity is important because various points of view contribute to a more effective, engaged Board and better decision-making processes. The Companys Corporate Governance Guidelines state that the Board believes in a governing style that emphasizes, among other things, respect for diversity in perspective and includes individuals from diverse backgrounds. The Companys Corporate Governance Guidelines also note that the size of the Board allows for diversity of contribution while promoting timely action on critical and time-sensitive issues.
Can shareholders recommend nominees for directors?
The Corporate Governance Committee will consider nominees to the Board recommended by shareholders if shareholders comply with the Companys advance notice requirements. See SHAREHOLDERS PROPOSALS OR NOMINATIONS FOR 2013 ANNUAL MEETING on page 64. Our Bylaws provide that a shareholder who wishes to nominate a person for election as a director at a meeting of shareholders must deliver written notice to our Corporate Secretary. This notice must contain, as to each nominee, all of the information relating to such person as would be required to be disclosed in a proxy statement meeting the requirements of Regulation 14A under the Exchange Act, and certain other information, including the name and address of the shareholder delivering the notice as it appears on the stock records of the Company, the number and class of shares held of record by such shareholder, information about derivative securities holdings of such shareholder, any arrangement or understanding pursuant to which such shareholder has a right to vote or has granted a right to vote any shares of the Companys stock, whether such shareholder has a short interest in any of the Companys securities, whether such shareholder is entitled to a fee based on the value of the Companys securities, a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate such nominee, and a certification that such shareholder has complied with all applicable federal, state and other legal requirements in connection with such shareholders acquisition of the Companys securities and such shareholders acts or omissions as a shareholder of the Company. The foregoing summary does not include all requirements a shareholder must satisfy in order to nominate a candidate to the Board. Shareholders of the Company who wish to recommend a nominee to the Board should read carefully the Companys Bylaws, which are available on our website at www.saksincorporated.com.
In order to be eligible to be a nominee for election as a director of the Company by a shareholder, such potential nominee must deliver to our Corporate Secretary a written questionnaire providing the requested information about the background and qualifications of such person and a written representation and agreement that such person is not and will not become a party to any voting agreements, any agreement or understanding with any person with respect to any compensation or indemnification in connection with service on the Board, and would be in compliance with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Company.
Shareholder nominations must be submitted in accordance with the deadlines set forth under the caption SHAREHOLDERS PROPOSALS OR NOMINATIONS FOR 2013 ANNUAL MEETING located on page 64 of this proxy statement. Shareholder nominations should be sent to the Corporate Governance Committee, c/o the Corporate Secretary at Saks Incorporated, 12 East 49th Street, New York, New York 10017.
How can I communicate with the Board?
Our Board has adopted a policy and process for shareholders and other interested parties to communicate with the Board or an individual director, including our Lead Director Mr. Hess, or with the non-employee directors as a group. Shareholders and other interested parties may communicate with the Board collectively, or with any of its individual members, by writing to them c/o the Corporate Secretary at 12 East 49th Street, New York, New York 10017. The Corporate Secretary, upon the advice of the Companys General Counsel, has discretion to determine whether shareholder communications are proper for submission to the intended recipient. Examples of shareholder communications that would be considered presumptively inappropriate for submission include communications regarding the Companys pricing of products or services; personal grievances; solicitations; communications that do not relate, directly or indirectly, to the Company; and communications that are duplicative of previously submitted communications or are frivolous in nature. Additional information concerning the Companys process regarding communications with the Board of Directors may be found at www.saksincorporated.com.
What is the purpose of Compensation Discussion and Analysis?
This section, called Compensation Discussion and Analysis has been prepared to provide information regarding the compensation programs and practices as they relate to the total pay for the Companys Named Executive Officers for 2011. This section includes information regarding, among other things, the overall objectives of the Companys compensation programs and practices, the rationale for the level and mix of rewards provided and a discussion of the manner in which the various elements of executive pay support the Companys business objectives. If we believe it to be material, we also have indicated how our process has changed with respect to how we have established the compensation for our executive officers during 2012.
How did the Company perform in 2011 and how did we compensate our executives?
The year 2011 was a year of great progress for Saks that allowed us to deliver significantly improved financial results to our shareholders. The Company recorded net income of $74.8 million, or $.45 per share, in 2011 compared to $47.8 million, or $.30 per share, in 2010. This improvement was largely driven by strong sales growth and gross margin rate performance even as we also continued to make necessary long-term investments in the business.
Our customers responded to our differentiated merchandise assortments, our enhanced service levels, whether shopping in-store or online, and our creative and compelling marketing strategies. As a result:
In addition, we took several actions that further strengthened the Company and its foundation for future growth:
Based on our performance, how did we compensate our executives?
The compensation paid to our executives for 2011 was a direct result of our significantly improved performance in 2011 and, as a result, the Annual Bonus Program and the Long-Term Incentive Plan both provided above-target awards. The 2011 Annual Bonus Program was designed to reward the Named Executive Officers for achievement of the Companys earnings before interest, taxes, depreciation and amortization (EBITDA) and key corporate objectives including outsized sales growth of Saks Direct, improved customer service scores, increased marketing effectiveness and increased product differentiation. The 2011 Long-Term Incentive Plan was designed to reward the Named Executive Officers for the achievement of EBITDA and comparable store sales growth. The design of the 2011 executive compensation program was consistent with the 2010 design as the HRCC continued to believe that EBITDA, combined with other strategic measures, were appropriate measures of managements performance against goals and objectives designed to ensure balance between short- and long-term focus in order to create sustained performance and shareholder value.
In addition to rewarding performance and maintaining competitiveness in the market, our compensation programs provide the opportunity for executive officers to establish and maintain meaningful levels of share ownership, which is intended to align the economic interests of the Companys shareholders, the Named Executive Officers and the Companys other executive officers.
What were the results and corresponding response to our 2011 Say-on-Pay vote?
We had an overwhelmingly positive Say-on-Pay vote for fiscal year 2010 of 92%. In recognition of this positive shareholder feedback, the HRCC did not make material changes to our programs for 2011 and 2012. We believe that our shareholders appreciate and recognize the relationship between compensation and our Companys performance.
Our shareholders voted in favor of a Say-on-Pay vote every three years at the Annual Meeting of Shareholders held on June 1, 2011; therefore, the next advisory Say-on-Pay vote will occur at the Annual Meeting of Shareholders to be held in 2014.
What does the HRCC do?
The responsibilities of the HRCC include approving the Companys compensation programs and individual awards to the Named Executive Officers under such programs. A detailed description of the HRCCs specific responsibilities is contained in the HRCCs Charter, which can be viewed at www.saksincorporated.com.
Does the HRCC use the services of an independent consultant?
Yes. To assist the HRCC in its consideration of executive compensation, the HRCC retained Frederic W. Cook & Co., Inc. (Cook), a nationally recognized executive compensation consulting firm, as the HRCCs independent compensation consultant. Cook is hired by and reports directly to the HRCC and does not provide advice or services to management. Cook provides the HRCC with analysis and recommendations on the compensation for the Chief Executive Officer and other executive officers as requested by the HRCC and provides services relating to director compensation. Cook also provides the HRCC with compensation trend information, legislative and regulatory updates, annual bonus plans and equity plan design review, and review of plan language. We believe that Cook is independent of management and provides the HRCC with objective advice. The HRCC also reviews information from The Hay Group, the compensation consultants retained by the Companys management, to establish compensation for the Companys executive officers other than the Chief Executive Officer. The Hay Group provides survey information detailing the pay practices of a select group of retailers, including information on base salary, annual incentives and long-term incentives. Management also works with Towers Watson throughout the year to keep abreast of competitive retail compensation practices.
What are the Objectives of our Compensation Policies?
The objectives of the Companys compensation policies applicable to the executive officers are to:
The HRCC seeks to ensure that a substantial portion of total compensation awarded to the Named Executive Officers is performance-based and comprises both short-term annual bonus and long-term equity and performance unit incentives as outlined in the table below. The mix of compensation is set such that base salary represents a much smaller portion of total target compensation than is represented by performance-based incentives.
The HRCC believes an appropriate balance is achieved through the use of annual cash bonuses and long-term incentives consisting of restricted stock, performance shares and performance units within the limits established by our incentive compensation plans. Performance-based compensation is directly linked to the achievement of clearly defined financial measures, and in some cases, corporate objectives with defined metrics, thresholds and milestones. The majority of the value of the long-term incentive award is linked to the price of our common stock. The HRCC believes that the Companys achievement of the specified financial and operations measures and the Named Executive Officers achievement of key corporate objectives should reward the Companys shareholders through the creation of long-term value. If the Company does not meet the established financial and operations measures or corporate objectives, performance-based compensation would be appropriately reduced or entirely forfeited depending on the extent to which the performance measures are not achieved.
The targeted level of compensation for Mr. Sadove is higher than that of the other Named Executive Officers, reflecting the different scope and nature of his role and the differences in market rates for these positions. The compensation mix reinforces the Companys philosophy that the portion of at risk compensation as a percentage of total compensation opportunity should increase as one moves higher in the organization. The Company does not have a set differential that it establishes between various positions but rather determines the compensation for each role based upon scope of responsibility and market rates of compensation, among other factors.
What are the Elements of our Compensation Program? Why Do We Choose to Pay Each Element?
The Company uses a mix of compensation elements that recognizes the scope and complexity of job responsibility, reinforces performance, rewards achievement of annual goals and objectives, encourages the enhancement of shareholder value and rewards achievement of performance goals. The Company seeks to maintain a competitive level of total target compensation. The specific elements of the compensation package and the corresponding performance measures, however, are specifically tailored to meet the Companys strategic objectives and culture.
Outlined below is the rationale for each element of the compensation package provided to executive officers:
Base salary: fixed element of compensation designed to recognize the level of job scope and complexity, and the skills, experience, leadership and sustained performance required by the executive.
Annual bonus: variable element of compensation designed to reward the achievement of key financial metrics and accomplishment of key corporate objectives that are shorter term in nature but are critical to generating longer term Company success; focus on profitability and strategic initiatives to support current performance while improving the Companys ability to create shareholder value.
Long-term incentives: variable element of compensation comprising (i) performance shares and performance units to reward financial performance, such as the achievement of EBITDA targets and other key financial measures and strategic corporate initiatives, and (ii) restricted stock to attract and retain top talent and to further reinforce alignment between the interests of management and shareholders. The mix of long-term incentive awards granted for 2011 was more heavily weighted toward performance shares and performance units (66.3%), with restricted stock comprising a smaller portion (33.7%) of total long-term incentive opportunities. On occasion, the HRCC will grant additional time-based restricted stock awards outside of the annual grants in order to motivate, reward and retain key executives. The HRCC did not grant any additional restricted stock awards to executive officers in 2011.
The HRCCs general practice has been to grant long-term incentive and retention awards to executive officers during the Companys first fiscal quarter. Our Policy and Procedures for the Granting of Equity Awards, in general, provides that:
Medical, disability and life insurance coverage: The Company provides comprehensive benefits coverage to its executive officers intended to be competitive and to provide flexibility in the type and/or level of coverage available to such executive officers. These benefits are intended to minimize the potential financial exposure to the executive caused by the occurrence of a catastrophic health event to the executive or his or her family. Executive officers are eligible to participate in the same benefits offered to all other eligible employees. In addition to the base benefits package, certain executives are covered under individual, supplemental long-term disability policies intended to supplement the coverage offered under the base, group long-term disability program offered to all full-time associates of the Company. The Company pays the full cost of this coverage.
Perquisites: Each of the Named Executive Officers is eligible for reimbursement for financial and tax planning and preparation services. In addition, each of the Named Executive Officers is eligible for reimbursement for the expense associated with an annual physical examination. These perquisites are in line with competitive practices and provide the Named Executive Officer with appropriate support to plan for his or her financial security, enable the executive to devote more of his or her time to business matters, and benefit from Company-sponsored compensation and benefit programs. In addition, Mr. Sadove is provided with a car and driver. While the primary purpose of this benefit is business-related, Mr. Sadove has access to the car and driver for commuting. Mr. Frasch is reimbursed for the cost of a driver to assist with commuting. Subject to the approval of the Chief Executive Officer, the other Named Executive Officers may use the Company-provided aircraft for personal use (which would be included in their annual compensation). The rationale for providing perquisites to executive officers is to enhance the attractiveness and competitiveness of the overall compensation program and, in the case of Company-provided transportation, to provide greater security and convenience. For additional information regarding perquisites see Summary Compensation Table.
What do our Compensation Programs Reward?
Our compensation programs contain several elements designed to reward executives for the accomplishment of both financial and non-financial performance objectives. For 2011, the HRCC determined that it was appropriate to continue to use Company EBITDA excluding certain non-recurring items as a key performance measure for the payment of annual cash bonuses and performance awards. The HRCC believed that the use of EBITDA was appropriate as it reflected the operating results of the Company and measures performance against pre-determined goals and objectives. In 2011, in addition to EBITDA, the annual bonus included measurement on the achievement of key corporate objectives. The payout under the key corporate objectives was partially dependent on the Companys performance against EBITDA and target payout for these measures could not be reached unless the Company achieved its EBITDA target.
Long-term incentive awards reward sustained financial performance and serve as a vehicle for executives to establish and maintain meaningful levels of share ownership which align the interests of executives to those of the Companys shareholders. The performance measures, as discussed further below, for the 2011 long-term incentive awards were the Companys performance against a predetermined EBITDA and comparable store sales targets.
How do we Determine the Competitive Position of Pay?
The Company has historically relied on two sets of pay information to assist the HRCC in determining the competitive landscape for executive talent. The HRCC, with the assistance of Cook, reviews the peer groups each year to ensure their continued reasonableness. The two sets of pay information that the HRCC uses are as follows:
One of the major differences in the above peer sets is that the proxy data contain publicly traded companies while the proprietary survey includes private companies as well as public companies.
The table below outlines the companies used in both peer groups:
The HRCC does not target a specified level of compensation among the peer sets but rather considers a broad range around median compensation of that group. Importantly, the goal of obtaining benchmark data is to provide the HRCC with a general litmus test for the market place for executive talent. The HRCC uses this information along with numerous other factors (including the executives tenure, individual and Company performance, expected future contributions to the Company, historical pay levels, hire-away risk, etc.) in arriving at what is appropriate compensation for a particular executive at Saks.
How Does the Company Determine the Amount of Each Element of Pay?
We review competitive data provided by The Hay Group to benchmark the total level of compensation paid by our competitors. Once the total market pay for each position is determined, we target the mix and level of base salary, annual bonus and long-term incentives such that total pay approximates the median of competitive practices. We provide awards that represent a mix of cash and equity-based awards to provide attractive incentives and facilitate the alignment of the interests of management and shareholders through equity-based compensation and share ownership.
In determining the compensation of the executive officers reporting to the Chief Executive Officer, the HRCC seeks the assessment of our Chief Executive Officer and the Executive Vice President, Human Resources relating to the performance and contributions of these executive officers and the Chief Executive Officers recommendations regarding individual compensation actions. These recommendations are supported by market data for executives at other retailers provided by The Hay Group. The HRCC consults independently with Cook regarding competitive pay practices and appropriate compensation for the Chief Executive Officer. Neither the Chief Executive Officer nor the Executive Vice President, Human Resources, plays a role in determining the Chief Executive Officers compensation.
Outlined below is a discussion of each specific element of total compensation provided to the executive officers.
What were the key determinations for each element of compensation?
Base salary reflects the scope of job responsibility and the day-to-day performance of the executive officer relative to his or her duties and responsibilities. The performance and contributions of each executive officer are reviewed annually and based upon this review the executive officer may be eligible to receive a merit increase. The Companys annual merit increase guideline for executive officers is based on competitive practices and overall Company performance. These increases reflect the Companys operating results and individual contributions to overall performance and are consistent with competitive merit increases at the executive-officer level. The HRCCs current practice is to review the performance of the senior management team annually for a salary increase effective May 1.
Upon the recommendation of management, as part of the Companys expense reduction initiatives in 2009 and in light of the difficult economic environment, the HRCC reduced base salaries for the Named Executive Officers and all other executives by 3% to 7%. For 2010, upon the recommendation of management, the HRCC did not award any merit increases to the Named Executive Officers and resumed merit increases in 2011. For 2012, the HRCC approved a compensation design that includes merit increases of 3% for the Named Executive Officers effective May 1.
Annual Cash Bonuses
At the start of each fiscal year, the HRCC establishes performance measures and target incentive levels for the Companys annual bonus program for executive officers. Following the close of the fiscal year and based, in general, on the Companys consolidated results of operations for the fiscal year, the HRCC assesses the Companys actual performance against the pre-established performance objectives and determines the amount, if any, of the target bonus earned by the executive officers.
2011 Annual Bonus Program
For 2011, the annual bonus plan targets for each Named Executive Officer were as follows:
Under the 2011 annual cash bonus program, the HRCC used the following performance measures to determine bonus payments for the Named Executive Officers, except for Ms. Incandela: (i) EBITDA (75% weight) and (ii) the accomplishment of key corporate objectives (25% weight). The HRCC established the following measures for Ms. Incandela: (i) EBITDA (25% weight); (ii) the accomplishment of key corporate objectives (25% weight); (iii) operating profit for Saks Direct (25% weight); and (iv) comparable store sales for Saks Direct (25% weight).
The EBITDA performance measure established by the HRCC for the 2011 annual cash bonus program was based on the achievement of the 2011 operating plan which included significant gross margin rate improvement. The HRCC believed that the successful execution of the operating plan likely would result in a significant year-over-year improvement in EBITDA, which the HRCC expected would lead to enhanced shareholder value. When the HRCC established the 2011 EBITDA and key corporate objectives measures, the HRCC believed that these performance measures were challenging yet achievable. The 2011 EBITDA actual performance and payout are as follows:
The key corporate objectives for the 2011 annual bonus program included:
At the beginning of the fiscal year, the HRCC established that the bonus payout opportunity for achievement of the key corporate objectives performance measure (for the portion of target bonus attributable to such measure) should range from 0% for meeting no objectives to 100% for meeting objectives as outlined in the table below.
The payout for the achievement of the key corporate objectives was capped at the target opportunity, with no upside earning potential for this performance measure alone. If the Company achieved EBITDA in excess of
the target EBITDA level, the bonus opportunity for the achievement of the corporate objectives performance measure could increase up to a maximum payout of 150%. Conversely, if the Company achieved less than target EBITDA, the payout would decrease to a minimum payout of 75% as outlined in the table below.
Achievement against the key corporate objectives multiplied by the EBITDA achievement determined the total payout opportunity for the key corporate objectives measure. As such, total payout opportunity under the 2011 bonus program ranged from 0% to 150% of target-level performance. For 2011, the HRCC determined that the Company achieved a level of Meets Objectives for performance against the key corporate objectives. This rating was determined by the HRCC because the Company met or exceeded each of the key corporate objectives measures. This rating coupled with the achievement level of EBITDA equaled a payout of 125% with respect to the key corporate objectives measures.
In addition to EBITDA achievement and achievement of key corporate objectives, Ms. Incandela was measured on the achievement of operating profit and comparable store sales for Saks Direct. The specific targets relating to operating profit for Saks Direct, which accounted for 25% of Ms. Incandelas performance measures, are not disclosed because they involve confidential commercial and financial information, the disclosure of which would result in competitive harm for the Company. These targets were designed to be challenging but achievable. The table below sets forth the performance measures for Ms. Incandela relating to comparable store sales for Saks Direct.
Both of the Saks Direct financial performance measures were governed by Company performance against the overall EBITDA goal. If the Company achieved less than the EBITDA target level, the payout on the Saks Direct financial measures would decrease to a minimum payout of 75% as outlined in the table below.
Based on the Companys performance against each of the established performance measures for the 2011 annual cash bonus program as discussed above, the Named Executive Officers were paid bonuses as follows:
Under the terms of the 2007 Senior Executive Bonus Plan, the HRCC, in its sole discretion, may reduce or eliminate the amount of any bonus award. From time to time, the HRCC has exercised its discretion to decrease bonus payouts or to provide, when warranted, supplemental bonuses. Any supplemental bonus payouts approved by the HRCC would be considered discretionary and the additional amount would not be deductible for U.S. federal income tax purposes if the executive to whom it was paid was covered by Section 162(m) of the Code and the payment exceeded the limits applicable to that Code section. In 2011, the HRCC did not make any negative adjustments to bonus payouts.
2012 Annual Bonus Program
For the 2012 annual cash bonus program for executive officers, the HRCC established the following performance measures for all Named Executive Officers: EBITDA, at specified levels (75% weight) and the accomplishment of key corporate objectives (25% weight). The key corporate objectives payout can be adjusted upward to a maximum of 150% based on the Companys performance against the EBITDA target level.
The HRCC set the payout for the 2012 annual cash bonus program for the achievement of the EBITDA performance measure (for the portion of target bonus attributable to such performance measure) for each of the Named Executive Officers as follows:
Key Corporate Objectives
For 2012, the HRCC approved the following key corporate objectives for the 2012 annual bonus program to ensure that our executives are focused on the most critical initiatives to our business. Specific measures and milestones are used to evaluate the performance against each of these key objectives:
Based on the results of the annual executive compensation reviews by The Hay Group and Cook, the HRCC also approved increases in the target bonus opportunity (expressed as a percentage of base salary) for certain executives to better align the executives target bonus and overall total direct compensation with competitive practice. The table below sets forth the bonus targets for our Named Executive Officers for 2011 and 2012.
No other material changes were made to the bonus program for 2012.
Long-Term Incentive Awards
The Company provides long-term incentives principally in the form of performance share, performance unit, stock option and restricted stock awards. The HRCC believes that a combination of performance share awards, performance unit awards and restricted stock awards as part of the annual grant encourages the Companys executive officers to focus on achievement of key financial and strategic objectives, facilitates share ownership and reinforces the alignment of managements interests with that of shareholders, while also rewarding and retaining key executive officers and employees. While stock options have been granted in the past, the HRCC did not grant any stock options in 2011.
2011 Annual Awards under the Long-Term Incentive Program
On February 24, 2011, the Named Executive Officers received a mix in value of performance shares, performance units and restricted stock awards as part of the annual grants made to executive officers as outlined in the table below. These awards were approved by the HRCC and granted in accordance with our Policy and Procedures for the Granting of Equity Awards.
For the 2011 performance share and performance unit programs for the executive officers, the HRCC established the following performance measures: EBITDA for 2011, at specified levels (75% weight) and comparable store sales for 2011, at specified levels (25% weight). The 2011 EBITDA and comparable store sales actual performance and payout are as follows:
The HRCC believes that EBITDA, combined with other financial measures, are appropriate measures of managements performance against goals and objectives designed to create sustained performance and shareholder value. Each performance share and performance unit award was granted in accordance with the 2009 Long-Term Incentive Plan. Any earned performance shares are payable 100% on February 24, 2014, provided the executive remains in the continuous employ of the Company. Any earned performance units will be settled in cash only and will be payable 50% on November 5, 2012 and 50% on November 5, 2013.
The HRCC awarded the target number of performance shares indicated in the table below to the Named Executive Officers under the 2011 performance share program subject to the achievement of the specified performance measures noted above. Provided that at least a threshold level of performance was achieved, the actual number of performance shares earned by the Named Executive Officers ranged from the threshold number of performance shares to the maximum number of performance shares determined based on the Companys performance against the specified performance measures during 2011.
The following table sets forth the threshold, target and maximum levels as well as the actual payout based upon the achievement levels discussed above:
The HRCC also awarded the target number of performance units, valued at $1.00 per unit and to be settled in cash only, subject to the achievement of the established performance measures noted above. Provided that at least a threshold level of performance is achieved, the actual number of performance units earned by the Named Executive Officers ranged from the threshold number of performance units to the maximum number of performance units determined based on the Companys performance against the specified performance measures during 2011. The following table sets forth the threshold, target and maximum levels as well as the actual payout based upon the achievement levels discussed above:
As part of the annual equity grants approved by the HRCC in 2011, the Named Executive Officers were also awarded time-based restricted stock. These restricted stock awards were intended to provide the Named Executive Officers with the opportunity to build additional share ownership and to aid in the retention of those executive officers. The awards vest 100% on the third anniversary of the grant date. These awards were approved by the HRCC and granted in accordance with our Policy and Procedures for the Granting of Equity Awards.
2012 Annual Awards under the Long-Term Incentive Program
On February 22, 2012, the Named Executive Officers received a mix in value (generally consistent with our approach in 2011) of performance shares, performance units and restricted stock awards as part of the annual grants made to executive officers as outlined in the table below. These awards were approved by the HRCC and were awarded under the 2009 Long-Term Incentive Plan and in accordance with our Policy and Procedures for the Granting of Equity Awards.
In establishing long-term incentive targets for 2012, the HRCC reviewed survey data but also took into consideration emerging trends.
For the 2012 performance share and performance unit programs for executive officers, the HRCC established the following performance measures: EBITDA, at specified levels (75% weight) and comparable store sales, at specified levels (25% weight). The HRCC continues to believe that EBITDA, combined with other financial measures, are appropriate measures of managements performance against goals and objectives designed to create sustained performance and shareholder value. Each performance share and performance unit award was made in accordance with the 2009 Long-Term Incentive Plan. Consistent with vesting of prior years awards, any earned performance shares are payable 100% on February 22, 2015, provided the executive remains in the continuous employ of the Company. Any earned performance units will be settled in cash only and will be payable 50% on November 5, 2013 and 50% on November 5, 2014.
The HRCC awarded the target number of performance shares indicated in the table below to the Named Executive Officers under the 2012 performance share program subject to the achievement of the specified
performance measures noted above. Provided that at least a threshold level of performance is achieved, the actual number of performance shares earned by the Named Executive Officers will range from the threshold number of performance shares to the maximum number of performance shares to be determined based on the Companys and the Named Executive Officers performance against the specified performance measures during 2012.
The HRCC awarded the target number of performance units, valued at $1.00 per unit and to be settled in cash only, indicated in the table below to the Named Executive Officers under the 2012 performance unit program subject to the achievement of the established performance measure noted above. Provided that at least a threshold level of performance is achieved, the actual number of performance units earned by the Named Executive Officers will range from the threshold number of performance units to the maximum number of performance units to be determined based on the Companys performance against the specified performance measures during 2012.
As part of the annual equity grants approved by the HRCC in 2012, the Named Executive Officers were also awarded time-based restricted stock. These restricted stock awards are intended to provide the Named Executive Officers with the opportunity to build additional share ownership and to aid in the retention of such executive officer. These awards were approved by the HRCC and granted on February 22, 2012 in accordance with our Policy and Procedures for the Granting of Equity Awards. The restricted stock awards vest 100% in three years from the grant date.
The HRCC granted the following restricted stock awards to the Named Executive Officers:
Each award was made in accordance with the 2009 Long-Term Incentive Plan. Consistent with 2011, the shares of restricted stock will vest 100% on the third anniversary of the grant date.
In addition to the annual equity grant, several Named Executive Officers were granted an additional time-based restricted stock grant for 2012. The intent of these grants is to assist in the retention of these key executives. Our CEO and President were not granted any special equity grants for 2012.
Each award was made in accordance with the 2009 Long-Term Incentive Plan. The shares of the special restricted stock will vest one-third on the third anniversary of the grant date, one-third of the fourth anniversary of the grant date and one-third on the fifth anniversary of the grant date. This vesting schedule is longer than the vesting schedule for annual restricted shares granted to the Named Executive Officers in order to reinforce the retentive value of the special grants.
The table below sets forth the value of the total annual awards (excluding the special restricted stock grant in 2012 set forth in the table above) granted in 2009, 2010, 2011 and 2012. The annual grants from 2009 through 2011 during the economic downturn were relatively flat and were below market median. In 2012, the HRCC determined these grants should start to approach the market median, reflecting the improved economy and the Companys improved performance.
Termination or Change in ControlRationale for Triggers
The Company has entered into employment agreements with each of the Named Executive Officers and with certain other executive officers. These agreements generally provide for payments and other benefits if the officers employment terminates for a qualifying event or circumstance, such as being terminated without cause or leaving employment for good reason, as these terms are defined in the employment agreements. For the Named Executive Officers, upon a Change in Control (as defined in the agreements) of the Company, each Named Executive Officer may terminate his or her employment for good reason. Additional information regarding the employment agreements is found under the heading Employment Agreements below and a quantification of benefits that would have been received by the Named Executive Officers had termination occurred on January 28, 2012 is found under the heading Potential Payments upon Termination or Change-in-Control below. See Potential Payments upon Termination or Change in Control.
The HRCC believes that these agreements are an important part of a competitive overall compensation arrangement for the Named Executive Officers. The HRCC also believes that these agreements will help to
secure the continued employment and dedication of the Named Executive Officers and mitigate concern that they might have regarding their continued employment prior to or following a change in control, thereby allowing the executive to focus his or her undivided attention to serving the interests of the Company and our shareholders. The HRCC also believes that these agreements are important as a recruitment and retention device, as many of the companies with which the Company competes for executive talent have similar agreements in place for their senior executives. Finally, the HRCC believes that these agreements are beneficial to the Company because, in consideration for these severance arrangements, the executives agree to non-competition and non-solicitation covenants for a period of time following termination of employment.
The payment of multiples of base salary and bonus and the accelerated vesting of stock options and payments under outstanding long-term awards are consistent with competitive practices for positions at the level of the Named Executive Officers. The potential amount of severance benefits an executive may receive in the event of a change in control did not influence the HRCCs decisions regarding other compensation elements. The HRCC annually reviews the potential cost of these programs and closely evaluates the termination provisions in its equity awards; however, the potential amount of severance benefits an executive may receive has not influenced the HRCCs decisions regarding setting compensation levels for a given year.
Does Saks have stock ownership guidelines for its executive officers?
Yes in addition to rewarding performance and maintaining competitiveness in the market for top talent, our compensation programs provide the opportunity for executive officers to establish and maintain meaningful levels of share ownership, which is intended to align the economic interests of the Companys shareholders, the Named Executive Officers and the Companys other executive officers. To that end, we currently have in place the following share ownership guidelines, which are expressed as a multiple of annual base salary:
In determining compliance with these guidelines, share ownership includes shares owned outright by the executive (or by immediate family members) and unvested restricted stock as well as shares (or equivalent interests) held in our 401(k) Retirement Plan (the 401(k) Plan), Employee Stock Purchase Program and Deferred Compensation Plan (DCP).
There is no set time frame for achieving the targeted level of share ownership. However, until the ownership guidelines are satisfied, executives are required to hold 75% of the net shares (after satisfying withholding for taxes and the exercise price for stock option exercises) from the Companys equity-based compensation programs. To monitor compliance with these guidelines, the Corporate Governance Committee annually reviews the share ownership of the Companys executives.
All of our executive officers are in compliance with the Companys share ownership guidelines.
Does Saks have a policy relating to hedging of Company stock by directors and employees?
The Companys Securities Transaction Compliance and Blackout Policy for Directors, Executive Officers, Policy Committee Members and Other Designated Employees prohibits our directors, executive officers and other employees from hedging the economic risks of share ownership resulting from the Companys equity compensation programs.
Do the Companys compensation policies and practices present a material risk to the Company?
We regularly assess the Companys compensation policies and practices to determine whether those policies and practices are reasonably likely to result in a material adverse effect upon the Company. Based upon a review by the HRCC and management of our compensation policies and practices, we have concluded that no such effect would be anticipated from our current compensation policies and practices.
The HRCC designs compensation policies and practices with features that mitigate risk without diminishing the incentive nature of the compensation. With respect to specific elements of compensation:
Does the Company provide for the forfeiture of equity-based awards?
Yes. The Companys equity award agreements provide that if an associate engages in any business or activity that, in the opinion of the HRCC, is in conflict or adverse to the interest of the Company or engages in any business or activity that is competitive with any business or activity conducted by the Company, the associate will forfeit all unearned or unpaid equity awards. The Companys equity award agreements also provide that if, within six months following an associates termination of employment, an associate engages in any business or activity determined by the HRCC to be competitive with any business or activity conducted by the Company, the associate shall pay to the Company an amount in cash equal to the value, determined at the date of vesting, of any award that vested on or after or within six months prior the associates termination of employment.
What is the effect of accounting and tax treatments on compensation?
Although the accounting and tax treatment of executive compensation generally has not been a factor in the HRCCs decisions regarding the amounts of compensation paid to our executive officers, it has been a factor in the compensation mix as well as the design of compensation programs. As further described below, for example, we have attempted to structure our compensation to maximize the tax benefits to the Company (e.g., deductibility for tax purposes). We also do not expect accounting treatment of differing forms of equity awards to vary significantly, and, therefore, accounting treatment is not expected to have a material effect on the HRCCs future selection of differing types of equity awards.
Section 162(m) of the Code limits the tax deductibility of compensation in excess of $1 million paid to those Named Executive Officers who are covered employees, unless the compensation constitutes qualified performance-based compensation, both terms as defined in Section 162(m). It is the HRCCs intention to utilize performance-based compensation in order to maximize the deductibility of executive compensation. However, the HRCC believes that, to remain competitive, it must maintain a compensation program that will continue to attract, retain and reward the executive talent necessary to maximize shareholder return. As a consequence, the Company has in the past, and will in the future, pay compensation, such as salary and time-vested restricted stock awards, to one or more of the Named Executive Officers, that exceeds $1 million and does not constitute qualified performance-based compensation when the HRCC deems such payments to be in our best interests and those of our shareholders.
As noted above, we provide our Named Executive Officers with agreements that provide for certain payments and benefits that are triggered upon a change in control of Saks. These agreements also provide for tax protection in the form of a gross-up payment to reimburse the executive for excise tax under Internal Revenue Code Section 4999 above a certain threshold as well as any additional income and employment taxes resulting from such reimbursement. Code Section 4999 imposes a 20% non-deductible excise tax on the recipient of an excess parachute payment received upon a change in control and Code Section 280G disallows the tax deduction to the payor of such excess parachute payment. A payment as a result of a change in control must equal or exceed three times the executives base amount in order to be considered a parachute payment. The excise tax is then imposed on the excess of the parachute payments over the executives base amount. The agreements provide for a gross-up payment for the excise tax to the extent the parachute payments exceed 330% of the executives base amount. The intent of the tax gross-up is to provide a benefit without tax penalty to certain executives who are displaced in the event of a change in control. We believe that the provision of tax protection for certain of our executive officers was consistent with market practice at the time those agreements were entered into, is often a valuable executive talent retention provision and is consistent with the objectives of our overall executive compensation program. See Employment Agreements and Potential Payments upon Termination or Change in Control.
REPORT OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE
This report shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under the Exchange Act.
What is the HRCC and what does it do?
The HRCC establishes the salaries and other compensation of the Chairman and Chief Executive Officer, the other executive officers named in the Summary Compensation Table and other selected senior executives of the Company. The HRCC also is charged with the responsibility to review and approve our executive compensation and benefits plans and policies, and the administration of all executive compensation programs, incentive compensation plans and equity-based plans currently in place at the Company. As it deems necessary, the HRCC engages independent compensation consultants and counsel to advise the HRCC on all matters related to Chief Executive Officer and other executive compensation. The HRCC engages an independent consultant to conduct a competitive review of executive compensation, including long-term incentive compensation levels.
The HRCC met six times in 2011. All of the HRCC meetings included an executive session with no Company employees present.
Are the members of the HRCC independent?
Yes. The HRCC is comprised of four directors, all of whom are independent as determined in accordance with the NYSEs listing standards and our Corporate Governance Guidelines.
What has the HRCC done in recommending that our Compensation Discussion & Analysis (CD&A) be included in our proxy statement and Annual Report on Form 10-K/A?
The HRCC has reviewed and discussed the CD&A with management. Based on its review and discussions of the CD&A with management, the HRCC has recommended to the Board of Directors that the CD&A be included in this proxy statement and incorporated by reference into our Annual Report on Forms 10-K and 10-K/A for 2011.
Who has furnished this report?
This report has been furnished by the members of the HRCC:
Nora P. McAniff, Chair
Robert B. Carter
Donald E. Hess
Marguerite W. Kondracke
Human Resources and Compensation Committee Interlocks and Insider Participation
None of the members of the HRCC serves or has ever served as an executive officer of the Company, and no relationships exist requiring disclosure under applicable regulations of the SEC. In addition, none of our executive officers has served on the board of directors or on the compensation committee of any other entity whose executive officers served either on our Board or on our HRCC.
Summary Compensation Table
The following table sets forth for 2011, total compensation for Stephen I. Sadove, Chief Executive Officer (Principal Executive Officer), Kevin G. Wills, Executive Vice President of Finance and Chief Financial Officer (Principal Financial Officer), and for the three most highly compensated executive officers other than the Principal Executive Officer and the Principal Financial Officer. As used in this proxy statement, the term executive officer has the meaning set forth in Rule 3b-7 under the Exchange Act.
Grants of Plan-Based Awards2011
The following table provides information regarding grants of awards and possible payouts under the Companys annual bonus program and long-term incentive program in 2011.
Awards in 2011
As discussed in Compensation Discussion and Analysis, the Company emphasized performance-based awards in 2011.
The Estimated Possible Payouts Under Non-Equity Incentive Plan Awards columns of the Grants of Plan-Based Awards2011 table include the threshold, target, and maximum-level payments of the 2011 annual cash bonuses associated with the annual bonus plans and performance units that are to be settled in cash. For the 2011 annual cash bonus, the HRCC established the following performance measures for each of the Named Executive Officers, except Ms. Incandela: (i) EBITDA, at specified levels (75% weight); and (ii) the achievement of key corporate objectives (25% weight). The HRCC determined the following measures for Ms. Incandela: (i) EBITDA (25% weight); (ii) the accomplishment of key corporate objectives (25% weight); (iii) operating profit for Saks Direct (25% weight); and (iv) comparable store sales for Saks Direct (25% weight). The payout of the 2011 annual cash bonus is capped at 150% of target. Based on the Companys performance against the established performance measures for the 2011 annual cash bonus program, each Named Executive Officer except for Ms. Incandela, received 126% of their target bonus award. Ms. Incandela received 126% of her target bonus award based on established performance measures and a discretionary bonus in recognition of her contributions in her expanded role as Chief Marketing Officer in addition to her role as President of Saks Direct. For additional information regarding the 2011 annual cash bonuses, see Executive CompensationCompensation Discussion and AnalysisAnnual Cash Bonuses. For the 2011 performance units to be settled in cash, the HRCC established the following performance measures for each of the Named Executive Officers: EBITDA, at specified levels (75%); and comparable store sales, at specified levels (25% weight). The payout of the performance unit awards for
achievement of each measure is capped at 125% of target. Based on the Companys performance against the established performance measures, each Named Executive Officer earned 116% of the units granted. The performance units vest in two equal installments on November 5, 2012 and November 5, 2013. For additional information regarding the 2011 performance units to be settled in cash, see Executive CompensationCompensation Discussion and AnalysisLong-Term Incentive Awards2011 Annual Awards under the Long-Term Incentive Program.
The Estimated Possible Payouts Under Equity Incentive Plan Awards columns of the Grants of Plan-Based Awards2011 table show the potential payouts of the performance share awards granted under the 2009 Long-Term Incentive Plan for each of the Named Executive Officers according to the level of performance achieved in 2011. The HRCC approved the same performance measures discussed above for the 2011 performance units to be settled in cash. The payout of these awards for achievement of each measure is capped at 125% of target. Based on the Companys performance against the established performance measures, each Named Executive Officer earned 116% of the performance shares granted for the 2011 performance period. The performance shares earned are subject to an additional two-year restriction period and will vest on February 24, 2014. For additional information regarding the 2011 performance shares, see Executive CompensationCompensation Discussion and AnalysisLong-Term Incentive Awards2011 Annual Awards under the Long-Term Incentive Program.
Outstanding Equity Awards at Fiscal Year-End2011
The following table provides information regarding stock options, restricted stock, and performance shares held by each of the Named Executive Officers as of January 28, 2012. For information regarding performance share awards earned in 2011, see Executive CompensationCompensation Discussion and AnalysisLong-Term Incentive Awards.
Option Exercises and Stock Vested2011
The following table provides information regarding the exercise of stock options by the Named Executive Officers during 2011 and the vesting of restricted stock awards held by the Named Executive Officers during 2011.
The following table provides information, as of January 28, 2012, with respect to the present value of accumulated benefits payable to the Named Executive Officers under the Saks Fifth Avenue Pension Plan (the SFA Pension Plan), which is a qualified retirement plan. The SFA Pension Plan is a defined benefit cash balance plan, which was converted from a traditional defined benefit pension plan in 1998. The calculation of a participants pension benefit is determined, in part, by the number of years of credited service earned by such Named Executive Officer. The values reflected below represent the greater of the present value of the grandfathered traditional defined benefit annuity or the participants cash balance account, determined using interest rate and mortality rate assumptions consistent with those used in the Consolidated Financial Statements included in the Companys Annual Report on Form 10-K and Form 10-K/A for 2011. Other assumptions used in the calculation of the amounts under the SFA Pension Plan are included in Note 8 to the Consolidated Financial Statements included in the Companys Annual Report on Forms 10-K and 10-K/A for 2011. The SFA Pension Plan provides for an immediate lump sum payment of benefits upon termination from the Company or payments in the form of a monthly annuity at age 65 or as early as age 55 if the participant satisfies the SFA Pension Plans early retirement provisions. The monthly annuity can be paid for the participants lifetime or the joint lifetime of the participant and his or her designated beneficiary. During 2006, the Company froze benefit accruals for all participants, except for those who had attained age 55 and completed 10 years of service as of December 31, 2006 and who continued to be non-highly compensated employees as defined under the SFA Pension Plan. In January 2009, the Company suspended future benefit accruals for the remaining participants in the SFA Pension Plan effective March 13, 2009.
Nonqualified Deferred Compensation2011
For the Named Executive Officers participating in the Saks Incorporated Deferred Compensation Plan (DCP), the following table provides information regarding executive and Company contributions, plan earnings, withdrawals and distributions during 2011, and aggregate DCP balances at January 28, 2012.
The DCP is a nonqualified deferred compensation plan pursuant to which a full-time salaried employee, who is designated as eligible to participate by the HRCC, may elect to defer, on a pre-tax basis, up to 90% of his or her base salary and up to 90% of his or her annual bonus. Non-employee directors of the Company are also eligible to participate in the DCP and may elect to defer, on a pre-tax basis, up to 100% of their retainers and attendance fees. The HRCC, in its discretion, may also permit a participant to defer compensation payable in the form of a grant of common stock. The Company may, at the discretion of the HRCC, also make matching employer contributions and other employer contributions (including crediting lost company match contributions which are intended to make up for the matching contribution limits imposed under our 401(k) Plan due to the application of deferral or compensation limits under the Internal Revenue Code) to the DCP on behalf of participants. The DCP allows participants to defer compensation and/or stock grants into either a retirement class share (payable at retirement) or in-service class share (payable while employed, based on the beginning payout date selected) account. Participants can elect to have payments from either of these accounts made in either a one-time lump sum distribution or annual installments. Participants elect the year in which in-service class share installments are to commence.
Amounts deferred under the DCP are credited with earnings associated with hypothetical investment alternatives elected by the participant from a variety of investment funds. Deferred grants of shares of common stock are credited with gains and losses as if such amounts were invested in shares of common stock. Any dividends that would be credited to shares of common stock are deemed to be reinvested in additional shares. Participants have a one-time election opportunity to transfer amounts that are deemed to be invested in shares of common stock to other investment options available under the plan.
Under the DCP, distributions cannot commence sooner than twelve months from the end of the period in which the income has been deferred. In the event of a financial hardship, a participant can elect to receive a distribution in advance of the previously elected distribution date. Distributions are generally made as soon as possible after January 31 and are based on the account value as of the last business day in January. Distributions of a participants entire account balance will occur in the event of termination of employment, permanent disability, or death.
The DCP is unfunded for tax purposes. As a consequence, participant account balances maintained under the DCP are merely bookkeeping entries that measure the Companys obligation to the plan participants.
During 2011, all of the Named Executive Officers were employed pursuant to agreements with the Company. On July 31, 2007, the Company entered into employment agreements with Messrs. Sadove and Frasch. Mr. Sadoves employment agreement, as amended, continues until terminated in accordance with its terms and provides for a salary of not less than $985,800 per year, an annual bonus having a target value of not less than 150% of salary, an annual long-term equity incentive award having a target value of not less than $3,375,000 and other benefits, including transportation services, reimbursement for financial and tax planning services and annual physical examinations and five weeks of paid vacation per calendar year. Mr. Fraschs employment agreement, as amended, which continues until terminated in accordance with its terms, provides for a salary of not less than $976,500 per year, an annual bonus having a target value of not less than 75% of salary, an annual long-term equity incentive award having a target value of not less than $1,000,000, other benefits similar to those of Mr. Sadove and two special equity awards. The special equity awards consist of: (i) 75,000 shares of restricted stock vesting in three equal annual installments commencing on the third anniversary of the date of grant and (ii) 75,000 performance shares vesting in three installments commencing on the third anniversary of the date of grant based on the average annual compound growth rate of the price of the common stock (50,000 performance shares of which were forfeited because the performance criteria were not met and the remaining 25,000 being outstanding and for which performance will be measured in July 2012).
On April 17, 2007, the Company and Mr. Wills entered into an employment agreement. The employment agreement, as amended, which continues until terminated in accordance with its terms, provides for a base salary of not less than $584,250 per year and an annual bonus having a target value of not less than 60% of base salary. Under the agreement the Company awarded Mr. Wills, among other things, 13,125 stock options. The stock options vest in four equal consecutive annual installments of whole shares beginning on May 4, 2008. The Company may terminate Mr. Wills employment agreement at any time without cause, and Mr. Wills may terminate the employment agreement for good reason (as those terms as defined in the agreement).
Each of the other Named Executive Officers has employment agreements with the Company which, as amended, continue until terminated in accordance with their terms and set forth the Named Executive Officers minimum base salary; annual target bonus potential (expressed as a percentage of base salary); entitlement to participate in the Companys benefit plans, equity awards, and severance benefits; and change-in-control protections. The minimum base salaries for the other Named Executive Officers specified in their employment agreements are: Ms. de Winter, $427,500 and Ms. Incandela, $374,894. Ms. de Winters and Ms. Incandelas employment agreements provide for an annual bonus opportunity having a target value of not less than 50% of base salary. Ms. de Winters and Ms. Incandelas bonus targets were increased to 65% of base salary in February 2012. The bonus targets for Messrs. Frasch and Wills were increased in February 2012 from 85% to 90% and 75% to 80%, respectively.
In addition to the compensation and benefits described above, each of the Named Executive Officers are entitled to reimbursement (up to specified amounts) for annual financial and tax planning services and tax preparation services, payment for the cost of annual physical examinations, participate in each employee benefit plan and receive each benefit that the Company provides to senior executives at the level of each Named Executive Officers position. Mr. Sadove is also entitled to transportation or a transportation allowance.
Each of the employment agreements of Messrs. Sadove and Frasch and Ms. de Winter and Ms. Incandela provides that if the executives employment is terminated by the Company without cause or by the executive for good reason (as defined in each of the employment agreements), the executive would be entitled to receive:
Each of the employment agreements also provides that if the executives employment is terminated without cause or for good reason in anticipation of, upon or following a change in control (as defined in each of the agreements), the executive would be entitled to receive the payments and benefits described above, except:
Equity awards also would vest in full in the event of termination due to retirement on or after age 65, death or disability, except for Mr. Fraschs special equity awards which would vest pro rata.
If Mr. Wills employment agreement is terminated without cause or he terminates the agreement for good reason as defined under the agreement, the Company will pay Mr. Wills an amount equal to two times his base salary and one times his target bonus potential in a lump sum, and all unvested stock options and unvested restricted stock awards will vest on a pro rata basis and all earned but unvested performance share awards will fully vest. If termination without cause occurs in anticipation of, or upon or following, a change in control or Mr. Wills terminates his employment for good reason as a result of a change in control, the Company will pay Mr. Wills an amount equal to two times his base salary and one times his target bonus potential in a lump sum, and all unvested stock options, unvested restricted stock, earned but unvested performance share awards, and the target amount of unearned and unvested performance share awards, will fully vest. If Mr. Wills employment is terminated without cause or for good reason, Mr. Wills is also entitled to (i) participate in the Companys medical plan with family coverage for 18 months from the date of termination and, if he has not obtained equivalent medical coverage at the end of the 18-month period, the Company will pay to him a lump sum amount, not to exceed $250,000, sufficient to enable him to obtain equivalent medical coverage for an additional 18-month period, and (ii) outplacement services for a six-month period. In addition, Mr. Wills would be entitled to receive the normal associate discount in effect from time to time applicable to active associates of the Company or its successors for his lifetime.
For information concerning the benefits to which a Named Executive Officer may become entitled to receive after a change in control, see Executive CompensationPotential Payments upon Termination or Change in Control. The determination of the payment amounts and benefits to the Named Executive Officers upon termination or change in control is based upon an analysis of competitive practices for such payments for positions at the level of the Named Executive Officers.
Each of the employment agreements also provides for specified gross-up payments for excise taxes incurred under Section 4999 of the Code to the extent the parachute payments exceed 330% of the executives base amount as determined under Section 280G of the Code. The employment agreements also provide for a confidentiality obligation, non-disparagement, non-solicitation and non-competition obligations for 12 months following termination of employment, the advancement of attorneys fees in the event of a dispute under the employment agreement and an obligation to cooperate with the Company following termination of employment in consideration for the payment of $4,000 per day ($375 per hour in the case of Mr. Wills).
Potential Payments upon Termination or Change in Control
The following table quantifies benefits that would have been payable to each Named Executive Officer under the scenarios set forth below as if the Named Executive Officers employment had terminated on January 28, 2012.