Proxy published: 4/6/2015 Meeting date: 5/21/2015

At the 2014 annual meeting only 46% of shares supported the advisory vote on pay at Hasbro.  This year, total compensation for CEO Brian Goldner fell from $27.4 million to $14.6 million.  The major decline was in the value of stock awards, which fell from $21 million to $7 million, but that was not based on a decision made by the compensation committee this year. The prior proxy statement included large grants under a 2012 revision of Goldners employment agreement.  For 2014, non-equity incentive pay rose from $1.8 to $2.3 million, and the change in pension value was up significantly.

Following the dismal level of support last year the “disappointed” board and CEO “mutually decided that they would take the unusual step of amending certain of the terms contained in Mr. Goldner’s existing employment agreement.”  The agreement, signed in 2012, was at the root of shareholder concern, it offered a high magnitude of pay, and provided for the award of aggregate of 587,294 restricted stock units.

Changes made this year to the agreement included decreasing the potential long term equity grant target level from 5 times to 4 times salary and eliminating the total shareholder return performance multiplier on the contingent stock performance awards granted to Goldner in 2013 and 2014. The company also added Return on Invested Capital (ROIC) as an additional performance metric under the contingent stock performance awards granted in 2015 to Goldner and other executives.

These changes did not address the primary concern As You Sow had with the agreement.  That concern, going beyond the sheer magnitude, was one that other shareholders also reportedly noted with the company: “stock price hurdles for the one-time restricted stock unit grant that could be achieved at a single point in time.”  Under the 2012 agreement four stock price thresholds ($45, $52, $56 and $60 per share) when met, resulted in earning a quarter of the special RSU awards. Such vesting can inspire risk taking. An executive is incentivized to do anything one can to raise the price, even if it is not sustainable over the long term.

The proposal by As You Sow that appears in the current proxy statement calls on the company to adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs until two years following the termination of their employment (through retirement or otherwise), and to report to shareholders regarding the policy before Hasbro’s annual meeting of shareholders.

The board in defense of the proposal notes that. Goldner, “holds (inclusive of his wife’s holdings and shares held in trusts for his children) shares of Hasbro stock with a value almost eight times his annual base salary.”  Eight times Goldner’s salary is $10.4 million. This figure pales in comparison to the stock Goldner has sold: according to Equilar data, Goldner has sold over $53 million dollars’ worth of Hasbro shares in the past three years. Based on figures reported in proxy statements, at the end of the fiscal year, Goldner owned 1.7 million shares; two years ago he owned more than 2 million shares.

Equity compensation is designed to create long-term alignment between executives and shareholders.  Given Goldner’s propensity to sell shares, the RSU grants seemed unlikely to achieve that goal over the long term. While these shares do not fully vest until the agreement’s current end date in 2017, they had the potential to inspire short term thinking.

The recent revision of the employment agreement did make one change to the awards that had not yet reached the triggering price.  For the final two tranches of shares earned under the special restricted stock unit awards “if the Company achieves the $56 and $60 stock price hurdles will be adjusted if the trading price of the Company’s common stock is below those respective thresholds during the thirty-day trading period ending just prior to December 31, 2017, or the earlier termination of Mr. Goldner’s employment in certain situations.” A look at the employment agreement reveals that even if the stock price falls such that its average over those thirty days is less than $50 per share, Goldner would still receive half the awards earned when the stock price hit $60.  According to my calculations, then, even if the stock falls significantly below that level he would still receive stock awards worth approximately $14.5 million.

The long term impact of a poorly designed compensation program is difficult to ascertain.  For example, the company notes other contingent stock awards, available to a broader set of executives, failed to meet cumulative revenue and cumulative EPS targets so no shares were earned by any officers or employees under any of those awards. While this appears to be appropriate, it also highlights the disparity between compensation received by Goldner and the other officers, which may be an issue in succession planning.

Shareholders may appreciate the reforms the board has made to the employment agreement, while simultaneously continuing to have concerns about wisdom of the agreement in the first place.