Department store operator David Jones is set to fast-track millions of dollars in long-term bonuses to its top executives ahead of a planned $2.15 billion takeover by South African retail major Woolworths Holdings.
As first revealed by The Australian online yesterday, the DJs’ board plans to use its discretionary powers in relation to long-term incentive payments that are not due to be paid until late next year and 2016, with an aim to prevent staff from quitting before the Woolworths deal can be completed.
“We want executives focused for the next three months on running the business and not taking calls from headhunters who might convince them to leave ... from a human point of view, management want more certainty,” chairman Gordon Cairns told The Australian.
“Woolworths made it clear that they wanted a team in place if they were successful, and for the executives to be focused on the business ... so we came to the view that the best way to do that is that we should exercise any of the discretion that we have in regard to long-term incentives.”
The long-term incentive plan allows for a total of 1.1 million shares to be given free of charge to the members of DJs’ top executive team every year, with the allocation based on a number of individual and company performance indicators.
According to last year’s annual report, the senior executive team already had 1.1 million performance shares allocated between them in July last year, but were not eligible to collect them until late next year.
Mr Cairns said the board had yet to decide how it would use its discretionary powers, but noted it had the right to adjust hurdle rates, bring forward payment dates and pro-rata long-term rewards over shorter time periods.
“We could look at the performance at the end of two years rather than three years, we could pro-rata them — there are a range of discretionary powers open to us,” he said.
With most of the current financial year already over, Mr Cairns’s comments appear to indicate that the board may be prepared not only to fast-track the issue of free shares already allocated, but to issue even more free stock in respect of the current financial year — possibly doubling the payout each would receive.
The biggest winner from the move will be chief executive Paul Zahra, who as of July last year had 300,000 unvested performance shares. DJs shareholders last year agreed to issue Mr Zahra with up to 335,000 more free shares over the next three years, although the issue attracted a significant protest vote of about 35 per cent.
Also in line for windfalls will be the seven executives who report to Mr Zahra directly: chief financial officer Brad Soller, head of retail services Tony Karp, head of merchandise Donna Player, head of operations Cate Daniels, marketing and financial services boss David Robinson, human resources chief Paula Bauchinger and head of strategic planning Matthew Durbin.
The move will see the executives handed millions of free shares they will then be able to sell at $4 apiece to takeover suitor Woolworths Holdings, which has no connection to Australian retailer Woolworths Limited.
As Woolworths Holdings will essentially be footing the bill for the payouts, Mr Cairns said he had cleared the move with the boss of the South African company, Ian Moir.
“He was very relaxed about it, he said that he would expect us to do what is right for the business, both in the short term and the long term, and it met his criteria for having a team in place that would have momentum,” Mr Cairns said.
The chairman stressed that the company was not altering the terms of Mr Zahra’s contract, which was extended in February, four months after the company announced he planned to quit as soon as a replacement could be appointed.
“There are no changes to Paul Zahra’s contract, all we’ve done is within the LTI arrangements we have with people, we have the right as a board to exercise discretion,” he said.
Mr Zahra changed his mind about quitting after then chairman Peter Mason and directors Leigh Clapham and Steve Vamos — three directors with whom he had been feuding — announced plans to step down in February.
Mr Cairns said the DJs board was taking legal advice on the bonuses issue and would set out its plans in documents to be issued to shareholders ahead of a vote on a scheme of arrangement in late June, which will require the support of at least 50 per cent of shareholders by number with at least 75 per cent of the stock in order for the merger to proceed.
“In the unlikely event the scheme doesn’t go ahead, we wouldn’t exercise our discretion and the long-term incentive scheme would remain on foot,” Mr Cairns said.
Analysts are forecasting David Jones’ annual net profit will be about 10 per cent down on last year’s $101.6 million underlying result, suggesting that any bonus allocations are likely to be no higher than those awarded last year.
Mr Cairns did not believe the move to accelerate payment would prompt a backlash from shareholders, saying that he was certain investors would prefer that the board secured the leadership team during a key transitional period.
“I would have thought the last thing shareholders want in this period of uncertainty is for us to become a hunting ground for other retailers wanting to pinch our executives — the worst-case scenario is this doesn’t go through and we’ve lost our key talent,” he said.
Almost 40 per cent of shareholders at last year’s annual general meeting voted against the adoption of the company’s remuneration report, partly in protest at what was seen as excessively generous executive pay at a time when the company’s earnings had plunged by 40 per cent over the previous two years.