UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO.     )

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RENT-A-CENTER, INC.

(Name of Registrant as Specified In Its Charter)

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PROXY STATEMENT FOR
AND
NOTICE OF
2007 ANNUAL MEETING OF STOCKHOLDERS

 

 

PLEASE VOTE — YOUR VOTE IS IMPORTANT

Prompt return of your proxy will help reduce the costs of re-solicitation.

 

 

TABLE OF CONTENTS

 

 

 

 

Name		Independent				Transactions/Relationships/Arrangements
Mr. Berg			Yes			Family relationship with investment banking firm — immaterial
Ms. Burton			Yes			None
Mr. Copses			Yes			None
Mr. Gade			Yes			None
Mr. Jackson			Yes			None
Mr. Lentell			Yes			Banking relationship with Intrust — immaterial
Mr. Roberts			Yes			Charitable contributions by us to Students in Free Enterprise — immaterial

 

 

 

 

By telephone:		By mail:		By e-mail:
1-800-275-2696 Ext. 1140		Rent-A-Center, Inc. Attn: Compliance Officer 5501 Headquarters Drive Plano, Texas 75024		complianceofficer@racenter.com

 

 

		2006				2005
Audit Fees(1)			$802,454				$723,256
Audit-Related Fees(2)			$50,253				$25,940
Tax Fees(3)			$45,110				$69,640
All Other Fees(4)			$0				$0

 

 

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE
RATIFICATION OF GRANT THORNTON AS OUR REGISTERED INDEPENDENT AUDITORS.

 

In accordance with its written charter adopted by the Board of Directors, the Audit Committee assists the Board in fulfilling its oversight responsibilities by, among other things, reviewing the financial reports and other financial information provided by the Company to any governmental body or the public.

 

In discharging its oversight responsibilities, the Audit Committee obtained from the independent registered public accounting firm a formal written statement describing all relationships between the firm and the Company that might bear on the auditors’ independence consistent with Independent Standards Board Standard No. 1, discussed with the independent auditors any relationships that may impact their objectivity and independence, and satisfied itself as to the auditors’ independence. The Audit Committee also discussed with management, the internal auditors and the independent auditors the integrity of the Company’s financial reporting processes, including the Company’s internal accounting systems and controls, and reviewed with management and the independent auditors the Company’s significant accounting principles and financial reporting issues, including judgments made in connection with the preparation of the Company’s financial statements. The Audit Committee also reviewed with the independent auditors their audit plans, audit scope and identification of audit risks.

 

The Audit Committee discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, and, with and without management present, discussed and reviewed the results of the independent auditors’ examination of the consolidated financial statements of the Company.

 

The Audit Committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2006 with management and the independent auditors. Management is responsible for the Company’s financial reporting process, including its system of internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934), and for the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles. The independent auditor is responsible for auditing those financial statements, and expressing an opinion on (1) management’s assessment of the effectiveness of internal control over financial reporting and (2) the effectiveness of internal control over financial reporting. The Audit Committee’s responsibility is to monitor and review these processes. The members of the Audit Committee are “independent” as defined by SEC and Nasdaq rules, and, although our Board has determined each member of the Audit Committee is an “audit committee financial expert” as defined by SEC rules, none of the members of the Audit Committee represent themselves to be, or to serve as, accountants or auditors by profession or experts in the field of accounting or auditing.

 

The Audit Committee discussed with the Company’s internal and independent auditors the overall scope and plans for their respective audits, including internal control testing under Section 404 of the Sarbanes-Oxley Act. The Audit Committee periodically meets with the Company’s internal and independent auditors, with and without management present, and in private sessions with members of senior management to discuss the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Audit Committee also periodically meets in executive session.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board subsequently approved the recommendation) that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, for filing with the Securities and Exchange Commission. The Audit Committee has also appointed the Company’s independent auditors for 2007.

 

 

AUDIT COMMITTEE
Mary Elizabeth Burton, Chairperson
Michael J. Gade
J.V. Lentell

 

The Board appoints our executive officers at the first Board meeting following our annual stockholders meeting and updates the executive officer positions as needed throughout the year. Each executive officer serves at the behest of the Board and until their successors are appointed, or until the earlier of their death, resignation or removal.

 

The following table sets forth certain information with respect to our executive officers as of March 19, 2007:

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Historical Overview

 

Historically, our executive compensation program for our named executive officers has been relatively uncomplicated and consistent with our “no-frills” culture, consisting of cash compensation comprised of base salary and a cash bonus, as well as awards of options to purchase shares of our common stock upon hiring or promotion. Prior to 2006, we generally had not entered into employment agreements with our named executive officers and we did not have a formal severance plan structure. In addition, our executive compensation program has historically included few perquisites.

 

As our business has grown in recent years, our ability to attract and retain executives who possess the specific skills and experience which we believe are important to the continued growth and success of our business has become increasingly important. In conjunction with this increasing emphasis which we placed on our ability to attract and retain such executive talent, our management, at the request of our Board, began to evaluate our historical compensation practices, including our compensation structure and policies with respect to our senior executives, including our named executive officers. As part of this evaluation, our management undertook an examination of our compensation structure and philosophy with respect to such individuals. Based upon both conversations with executive candidates, as well as its review of data with respect to the compensation arrangements offered by similarly-situated public companies in the retail industry, our management believed that our compensation arrangements were placing us at a competitive disadvantage with respect to our ability to attract and retain such executive talent.

 

In response to the concerns regarding our compensation arrangements, in September 2005 the Compensation Committee retained Hewitt Associates LLC, an executive compensation consulting firm, to assist it in conducting a more formal evaluation of our compensation arrangements for our senior executives, including our named executive officers. The results of that review reinforced the beliefs of our management that our compensation arrangements with respect to our senior executives, including our named executive officers, were not competitive in several respects with those offered by similarly-situated public companies in the retail industry, and that total compensation paid to our senior executives was below the lower 25% quartile of amounts paid to senior executives at similarly-situated public companies in the retail industry. In an effort to increase our ability to attract and retain executive talent and to more closely align the interests of our named executive officers with us and our stockholders, Hewitt made recommendations to our Chief Executive Officer, Mr. Speese, and the Compensation Committee with respect to such compensation. Recognizing that we were at a significant competitive disadvantage, but that immediate adjustments to the compensation of our senior executives to a more competitive position would result in a substantial percentage increase in compensation, the Compensation Committee made initial adjustments to target total compensation to be paid to our named executive officers for the 2006 fiscal year at the lower 25% quartile of the total compensation paid to executive officers with comparable duties and responsibilities at similarly-situated public companies in the retail industry, recognizing that the total compensation paid to our named executive officers could increase over a period of years to the 25%-50% range, if warranted by performance.

 

Compensation Objectives

 

The Compensation Committee has identified four primary objectives for our executive compensation program. These objectives govern the decisions the Compensation Committee makes with respect to the amount and type of compensation payable to our named executive officers. The objectives of our executive compensation program are to:

 

 

In applying these objectives, the Compensation Committee primarily relies upon:

 

 

 

Key factors affecting the Compensation Committee’s judgment include our financial performance within each named executive officer’s sphere of influence, Mr. Speese’s input as to the individual contribution of each named executive officer relative to his role and responsibilities with us and, with respect to Mr. Speese’s compensation, the Compensation Committee’s evaluation of his performance.

 

Compensation Process

 

The Compensation Committee typically begins the process of determining the amount and mix of total compensation to be paid to our senior executives, including our named executive officers, in December of each year and finalizes such amounts in the following January. This enables the Compensation Committee to examine and consider our performance during the previous year in establishing the current year’s compensation.

 

The Compensation Committee has traditionally relied heavily on the input and recommendations of our Chief Executive Officer, Mr. Speese, who reviews and makes recommendations to the Compensation Committee with respect to our executive compensation programs, including the compensation arrangements with our named executive officers. The Compensation Committee believes Mr. Speese’s unique insight into our business, his role as a founder of our company, his day-to-day interaction with our senior executives, as well as his 28 years of experience in the rent-to-own industry provides a valuable resource to the Compensation Committee with respect to our executive compensation programs. However, Mr. Speese does not participate in the discussions among the members of the Compensation Committee with respect to his own compensation. Prior to providing his input and recommendations to the Compensation Committee, Mr. Speese typically conducts an informal position-level review of our compensation programs company-wide, which includes a review of our named executive officers’ compensation, for internal consistency relative to our other officers and employees and attempts to achieve consistency between the relative difference between the compensation of our named executive officers and the compensation of our other officers and employees. In addition, various members of the Compensation Committee have significant professional experience in the retail industry, as well as with respect to the executive compensation practices of large publicly-traded companies, which provide such individuals with a frame of reference within which to evaluate our executive compensation program for our senior executives, including our named executive officers.

 

When the Compensation Committee considers the total compensation for our named executive officers, it reviews a tally sheet which contains information regarding, among other things:

 

 

Forms of Compensation

 

The following forms of compensation are currently utilized by the Compensation Committee in compensating our named executive officers:

 

 

 

Base Salary.  The base salary for each of our named executive officers represents the guaranteed portion of their total compensation. Base salary is intended to reward the performance of each named executive officer during the fiscal year relative to his position with us. The base salary for each of our named executive officers is determined annually by the Compensation Committee. In establishing the base salary for each of our named executive officers, the Compensation Committee reviews:

 

 

In evaluating each named executive officer’s historical performance in his position with us, the Compensation Committee relies primarily on the input received from Mr. Speese, who evaluates the performance of each named executive officer in his position with us relative to such named executive officer’s performance in previous years, based on certain subjective factors. These factors typically include whether or not the named executive officer achieved the goals set under the MBO program discussed below, the financial performance within the area of responsibility of the named executive officer and other subjective factors. Consistent with the Compensation Committee’s evaluation of the total compensation of our named executive officers, Mr. Speese and the Compensation Committee targeted the base salary for each of our named executive officers for the 2006 fiscal year at or near the lower 25% quartile of the base salaries paid to executive officers with comparable duties and responsibilities at similarly-situated public companies in the retail industry, recognizing that the base salary paid to each of our named executive officers could increase over a period of years to the 25%-50% range, if warranted by performance.

 

In determining Mr. Speese’s base salary for 2006, the Compensation Committee considered our financial performance in 2005 and the level of compensation paid to the highest paid executive at similarly situated public companies in the retail industry. The Compensation Committee specifically noted that Mr. Speese’s base salary for 2005 remained below the lower 25% quartile of base salaries paid to the highest paid executive at similarly situated public companies in the retail industry. Based on these factors, the Compensation Committee established Mr. Speese’s base salary for 2006 at $740,000, which was an 8.0% increase from his 2005 base salary level. This adjustment was made to place Mr. Speese’s base salary at the lower 25% quartile of base salaries paid to the highest paid executive at similarly situated public companies in the retail industry.

 

In determining the base salary for each of our other named executive officers for 2006, the Compensation Committee relied primarily on the recommendations of Mr. Speese. In formulating such recommendations, Mr. Speese considered various subjective factors, including whether or not the named executive officer achieved the goals set under the MBO program discussed below, the financial performance within the area of responsibility of the named executive officer, the amount that the named executive officer had previously been paid and where such amount compared to the lower 25% quartile of base salaries.

 

The Compensation Committee believes that the base salaries paid to our named executive officers are appropriate to facilitate our ability to attract, retain and motivate our named executive officers with annual compensation minimums that are competitive with those offered by similarly situated public companies in the retail industry. For a description of the base salaries paid to our named executive officers for 2006, you should read the Summary Compensation Table on page 22 of this proxy statement.

 

Bonus.  Bonuses are typically awarded to our named executive officers, other than Mr. Speese, annually based on our management bonus opportunity program, which we refer to as our “MBO program.” Under our MBO program, cash bonuses are typically established at a pre-determined percentage of the named executive officer’s base salary, with such percentage amount set in accordance with the eligible named executive officer’s position and responsibilities with us.

 

Of the maximum cash bonus amount an eligible named executive officer may earn pursuant to our MBO program, a pre-determined percentage of that amount is typically contingent on our achievement of a target amount of financial performance. In setting the target amount of financial performance, the Compensation Committee typically reviews with Mr. Speese our financial projections as well as the market’s expectations with respect to our financial performance for the applicable year. Our MBO program contains provisions such that each named executive officer (other than Mr. Speese) is typically eligible to receive (i) an additional cash bonus equal to a pre-determined percentage of such named executive officer’s base salary, with such percentage amount set in accordance with the eligible named executive officer’s position and responsibilities with us, in the event that we exceed the financial performance measure, and (ii) a portion of the amount such named executive officer would otherwise be entitled to receive upon our achievement of the target level of financial performance in the event that we approach, yet fail to achieve, the full target level of financial performance.

 

The remaining percentage of the maximum cash bonus amount is typically contingent upon the achievement by the eligible named executive officer of certain individual goals and objectives within such named executive officer’s sphere of influence. Typically, as a result of a collaborative process between each named executive officer and Mr. Speese, approximately three to five distinct individual goals and objectives are established for each named executive officer, some of which may be linked to our performance within the named executive officer’s sphere of influence, and some of which may be more personal in nature, depending on the facts and circumstances applicable to each named executive officer. Such individual goals and objectives may include the management of expenses within a named executive officer’s area of responsibility, the professional development of personnel which report directly to a named executive officer, and the implementation of certain initiatives.

 

In January of each year, Mr. Speese meets with each named executive officer to review the named executive officer’s performance with respect to such individual goals and objectives. In the event that an eligible named executive officer approaches, yet fails to achieve, all of the individual goals and objectives, such named executive officer is typically eligible to receive a portion of the maximum amount otherwise payable upon the achievement of the individual goals and objectives. To the extent that the achievement of such individual goals and objectives is not objectively quantifiable, the portion of the maximum amount otherwise payable upon the achievement of the individual goals and objectives which is ultimately awarded to a particular named executive officer reflects Mr. Speese’s subjective determination, based upon his collaboration with such named executive officer, as to the named executive officer’s performance with respect to any such individual goals and objectives.

 

For 2006, our MBO program was structured as follows:

 

 

The 60%/40% allocation for our MBO program represents the Compensation Committee’s determination that, although a substantial portion of the cash bonus opportunity for our named executive officers should be dependent upon our overall financial performance, the individual performance of each named executive officer may be more accurately measured in a number of ways which are not necessarily reflected in our overall financial performance, which may be largely dependent on a variety of factors over which an individual named executive officer may not exercise control. The Compensation Committee determined that consolidated net income was the appropriate basis upon which to measure our performance in this context based in part upon input received from Hewitt regarding the performance measures utilized with respect to similar awards made by similarly-situated public companies in the retail industry. The Compensation Committee also believes that consolidated net income generally represents an accurate indicator of our financial performance over a one-year period of time.

 

The percentage allocation as well as the potential ultimate payouts pursuant to our MBO program for each year are typically approved by the Compensation Committee in January at the same time that all compensation for our named executive officers is approved. This enables the Compensation Committee and Mr. Speese to examine the named executive officer’s performance during the previous year, establish performance goals for our eligible named executive officers relative to such performance, as well as determine financial performance targets for the new fiscal year based in part upon the previous year’s performance. The payment of cash bonuses, if any, to our named executive officers is normally made in a single lump sum, subject to payroll taxes and tax withholdings, in January after the end of the performance period during which the cash bonuses were earned.

 

The Compensation Committee recognizes, however, that there may be instances where the accounting treatment of a matter may have a disproportionate impact on our financial results in any given year, irrespective of whether

or not such accounting impact truly reflects our operating results for that fiscal year, as is the case with changes in our accruals for insurance and legal liabilities. Accordingly, the Compensation Committee uses its discretion in evaluating our financial performance with respect to the MBO program, and may exclude certain accounting measures and extraordinary items in determining whether we met our financial performance target when doing so is consistent with our compensation objectives. In determining bonuses under our MBO program for 2006, the Compensation Committee adjusted consolidated net income to eliminate the effect of legal liability reserves and refinancing charges, as the Compensation Committee determined that the accounting effects of such reserves and charges on our 2006 consolidated net income was not indicative of the performance of our named executive officers during 2006.

 

Mr. Speese does not participate in our MBO program, but the Compensation Committee has retained the ability to award a cash bonus to Mr. Speese in its discretion pursuant to the terms of his employment agreement, which is discussed in greater detail below. In determining whether Mr. Speese is awarded a cash bonus and if so, in what amount, the Compensation Committee will review our financial performance for the relevant fiscal year, Mr. Speese’s past performance, total cash compensation necessary to retain top executive talent, and whether we attained the financial performance measure for the MBO program for our other senior executive officers, including our named executive officers.

 

The Compensation Committee believes that the cash bonuses which our eligible named executive officers are entitled to receive pursuant to the above-described policies are appropriate to promote our interests as well as those of our stockholders by providing our named executive officers with financial rewards upon achievement of specified business as well as individualized objectives, which the Compensation Committee believes will ultimately increase the value of our stock, as well as help us attract and retain our named executive officers by providing attractive compensation opportunities. For a description of the cash bonuses paid to our named executive officers for 2006, you should read the Summary Compensation Table on page 22 of this proxy statement.

 

Long-Term Incentives.  Generally, long-term incentive awards are made to our named executive officers pursuant to (i) the Rent-A-Center, Inc. Long-Term Incentive Plan, which we refer to as the “2006 Plan,” which was adopted in May of 2006 and replaced the previously-existing Rent-A-Center, Inc. Amended and Restated Long-Term Incentive Plan, which we refer to as our “Previous Plan,” and (ii) following our acquisition of Rent-Way, Inc. in November of 2006, the Rent-A-Center, Inc. 2006 Equity Incentive Plan (formerly the Rent-Way, Inc. 2006 Equity Incentive Plan), which we refer to as the “Rent-Way Plan.” Pursuant to the terms of each of the 2006 Plan and the Rent-Way Plan, awards granted thereunder may be made at such times and upon such vesting and other conditions as determined by the Compensation Committee, and may be made in the form of stock options, stock awards, other equity awards, and performance-based equity awards. In addition, pursuant to the 2006 Plan, awards may be made in the form of cash awards.

 

The primary form of long-term incentive award that the Compensation Committee has historically granted to our named executive officers consist of options to purchase shares of our common stock. However, in 2005, as part of the Compensation Committee’s review of our executive compensation program, the Compensation Committee determined that the grant of restricted stock awards could be utilized to provide an additional incentive for our named executive officers to remain in their positions with us by providing them with a form of compensation that is competitive with those offered by similarly situated public companies in the retail industry. Accordingly, in January of 2006, the Compensation Committee granted long-term incentive awards to Messrs. Davis, Fadel, Korst and West which included options, time-based and performance-based restricted stock, as well as a cash award to Mr. Speese subject to similar vesting conditions. For a description of such long-term incentive awards, you should read the Summary Compensation Table on page 22 of this proxy statement and the Grants of Plan-Based Awards Table on page 24 of this proxy statement.

 

In determining the mix and amounts of long-term incentive awards to be granted to our named executive officers, the Compensation Committee relies primarily upon:

 

 

 

The Compensation Committee believes that awarding our named executive officers non-cash, long-term compensation, primarily in the form of long-term incentive awards which may increase in value in conjunction with the satisfaction by us of pre-determined performance measures and/or an increase in the value of our common stock, more effectively aligns their interests with ours. The Compensation Committee also believes that such awards will provide our named executive officers with an incentive to remain in their positions with us, since the determination as to whether a particular measure for our performance and/or an increase in the value of our common stock has been satisfied is typically made over an extended period of time. For a description of the long-term incentive awards granted to our named executive officers for 2006, you should read the Summary Compensation Table on page 22 of this proxy statement and the Grants of Plan-Based Awards Table on page 24 of this proxy statement.

 

The Compensation Committee has generally granted long-term incentive equity awards to our named executive officers in the following forms:

 

Options.  The Compensation Committee, together with management, has established a company-wide option grant program whereby each district manager, regional director, vice president, senior vice president and executive officer is generally awarded a specified number of options, based upon his position with us at the time of promotion to such position. Each quarter, members of our senior management typically compile a list of all such newly-hired or promoted individuals and submit the list to the Compensation Committee, which reviews and ultimately approves the grant of options to such individuals, including our named executive officers, according to such formula on the first day of each fiscal quarter, irrespective of whether our Board or the Compensation Committee is in possession of material non-public information.

 

However, in January 2006, together with the grant of restricted stock which is discussed below, we granted options to Messrs. Davis, Fadel, Korst and West as a portion of a long-term incentive award in connection with our efforts to bring our compensation arrangements with respect to such named executive officers more in line with those offered by similarly situated public companies in the retail industry. In addition, from time to time, the Compensation Committee has also granted options as a portion of a bonus payment, such as in October 2006, with respect to Mr. Speese. The Compensation Committee believes that such option awards are consistent with the objectives of our executive compensation program, as grants of stock options provide an incentive for the creation of stockholder value, since the benefit of the award can only be realized with an appreciation in the price of our common stock. For a description of such long-term incentive awards, you should read the Summary Compensation Table on page 22 of this proxy statement and the Grants of Plan-Based Awards Table on page 24 of this proxy statement.

 

Pursuant to the terms of the 2006 Plan and the Rent-Way Plan, an option to purchase shares of our common stock will generally expire on the tenth anniversary of the date it is granted. In addition, the 2006 Plan and the Rent-Way Plan each provide that the purchase price per share of our common stock covered by an option granted thereunder may not be less than the fair market value per share on the date the option is granted. Under both the 2006 Plan and the Rent-Way Plan, the fair market value per share of our common stock on the date the option is granted is determined by reference to the closing price for shares of our common stock on the Nasdaq Global Select Market on the last market trading day prior to the date the option is granted. The options granted to our named executive officers typically provide for vesting over a four-year period, with one-quarter of each such grant vesting each year. Based upon input previously received from Hewitt, the Compensation Committee believes that the manner in which we determine the duration of the options, the vesting period and the purchase price per share of our common stock underlying such options is commensurate with similar measures utilized by similarly situated public companies in the retail industry.

 

Restricted Stock.  The Compensation Committee also may grant long-term incentive awards under the 2006 Plan and the Rent-Way Plan to our named executive officers in the form of restricted stock units which vest either (i) incrementally over a period of time as determined in the Compensation Committee’s discretion, or (ii) upon the achievement of specified goals for our performance over a period of time, each as specified by the Compensation Committee. We have begun a practice whereby we grant awards of restricted stock units to our named executive officers as a portion of a long-term incentive award in January of each year. The Compensation Committee typically determines the dollar value for each award of restricted stock with time-based vesting and performance-based vesting to each of our named executive officers, based upon the input received from Hewitt and Mr. Speese with respect to the dollar value of similar awards paid to executive officers with comparable duties and responsibilities at similarly-situated public companies in the retail industry. As described in greater detail below,

the annual awards of restricted stock units to our named executive officers are typically structured so that half of the value of such restricted stock awards is granted in the form of restricted stock units with time-based vesting, and the other half of the value of the restricted stock awards is granted in the form of restricted stock units with performance-based vesting.

 

Restricted Stock With Time-Based Vesting.   In connection with the evaluation of our compensation arrangements for our senior executives, including our named executive officers, the Compensation Committee, based upon input received from Hewitt and Mr. Speese with respect to forms of compensation paid to executive officers with comparable duties and responsibilities at similarly-situated public companies in the retail industry, determined that an award of restricted stock with time-based vesting to certain of our named executive officers would both provide such individuals with a minimum level of value while also providing an additional incentive for such individuals to remain in their positions with us. Accordingly, the Compensation Committee awarded such restricted stock units to Messrs. Davis, Fadel, Korst and West in January 2006, and at that time selected a three-year period of time as the period for which each such named executive officer was required to remain in his position with us in order to realize the award. The Compensation Committee selected the three-year period based upon both the previous input received from Hewitt regarding the time-period utilized with respect to similar awards made by similarly-situated public companies in the retail industry, as well as upon its belief that a three-year period was an appropriate length of time in order to encourage our named executive officers to remain in their positions with us to realize the award.

 

Once the percentage of the total dollar value of a long-term incentive award which is to be allocated to the award of restricted stock with time-based vesting is determined, the number of shares of time-based restricted stock to be granted is determined by dividing that dollar value by the closing price for shares of our common stock on the Nasdaq Global Select Market as of the date immediately preceding the grant date for such award. That number is then typically added to the number of restricted stock units with performance-based vesting to be granted pursuant to such award, which are determined in the manner described below, and such total is then divided by two to determine the number of restricted stock units with time-based vesting to be granted pursuant to each such award.

 

Restricted Stock With Performance-Based Vesting.  In connection with the evaluation of our compensation arrangements for our senior executives, including our named executive officers, the Compensation Committee, based upon input received from Hewitt with respect to forms of compensation paid to executive officers with comparable duties and responsibilities at similarly-situated public companies in the retail industry, determined that an award of restricted stock with performance-based vesting to certain of our named executive officers would both provide an additional incentive for our named executive officers to remain in their positions with us in order to realize the benefit of such award and would also focus our named executive officers on a performance parameter which the Compensation Committee considers beneficial to increasing the value of our stock, and consequently, increases stockholder value. Accordingly, the Compensation Committee awarded such restricted stock units to Messrs. Davis, Fadel, Korst and West in January 2006, and at that time selected $1.0998 billion as the target for our EBITDA over a three-year period as the measure of our performance which determines whether such restricted stock units vest.

 

The Compensation Committee determined that EBITDA was the appropriate basis upon which to measure our performance in this context based in part upon input received from Hewitt regarding the performance measures utilized with respect to similar awards made by similarly-situated public companies in the retail industry. The Compensation Committee also believes EBITDA represents an accurate indicator of our performance over an extended period of time, as an EBITDA measure incorporates certain factors which the Compensation Committee believed were important to an understanding of our performance over such period, such as an increase in revenue as well as the management of our expenses, while not incorporating other factors which the Compensation Committee did not believe were important to an understanding of our performance over such period, such as any repurchases of our outstanding shares which would affect an earnings per share measurement. In setting the target amount of EBITDA over such three-year period, the Compensation Committee reviewed with Mr. Speese our financial projections as well as the market’s expectations with respect to our financial performance over such period. The Compensation Committee selected a three-year period over which to measure EBITDA based upon both input received from Hewitt regarding the time-period utilized with respect to similar awards made by similarly-situated public companies in the retail industry, as well as upon its belief that a three-year measurement period was appropriate to place an emphasis on our operating results over an extended period of time, as opposed to the single year measure which is typically utilized in our MBO program.

 

In addition, the awards of restricted stock with performance-based vesting to certain of our named executive officers in January 2006 contained provisions with respect to our achievement of the target EBITDA, such that each eligible named executive officer may receive (i) an additional payout pursuant to such award in the event that we exceed the target EBITDA over such period, and (ii) a portion of the target payout pursuant to such award in the event that we approach, yet fail to achieve, the target level of financial performance. The Compensation Committee believed that such adjustments were appropriate to operate as an additional incentive for our named executive officers in the event that we either exceed or approach, yet fail to achieve, the target EBITDA.

 

Once the percentage of the total dollar value of a long-term incentive award which is to be allocated to the award of restricted stock with performance-based vesting is determined, the number of shares of performance-based restricted stock to be granted is determined by dividing that dollar value by an amount equal to 75% of the closing price for shares of our common stock on the Nasdaq Global Select Market as of the date immediately preceding the grant date for such award. That number is then typically added to the number of restricted stock units with time-based vesting to be granted pursuant to such award, which are determined in the manner described above, and such total is then divided by two to determine the number of restricted stock units with performance-based vesting to be granted pursuant to each such award. The Compensation Committee selected this approach to ease the administration and communication to the recipients of such awards, and discussed such approach with Hewitt, who advised that such approach was similar to those utilized by similarly-situated public companies in the retail industry. The 25% discount factor represents the Compensation Committee’s determination of the appropriate reduction to the value of such awards based upon both the previous input received from Hewitt regarding the discount factors utilized with respect to similar awards made by similarly-situated public companies.

 

By way of example, consider the situation where the Compensation Committee grants a long-term incentive award to an individual with a portion of such award consisting of restricted stock with time-based vesting and another portion of such award consisting of restricted stock with performance-based vesting. Under this scenario, assume that the Compensation Committee allocates a dollar value of $12,500 to each type of restricted stock award, and that the closing price for shares of our common stock on the Nasdaq Global Select Market as of the date immediately prior to such grant was $30.00. To determine the number of shares to be allocated to each type of restricted stock award, the Compensation Committee would first consider the restricted stock with time based-vesting by dividing $12,500, the dollar value allocated to such type of award, by $30.00, the closing price of our common stock on the date prior to the grant date, which equals 416.67. Next, the Compensation Committee would consider the restricted stock with performance-based vesting by dividing $12,500 by $22.50, which is 75% of the closing price of our common stock on the date prior to the grant date, which equals 555.56. The Compensation Committee would then add 416.67 and 555.56, which equals 972.23. Lastly, in order to determine the number of shares to be allocated to each type of award, the Compensation Committee would divide 972.23 by two, which equals 486.12, and would then round up to 487 in order to avoid the issuance of fractional shares. Accordingly, the award would consist of 487 restricted stock units with time-based vesting and 487 restricted stock units with performance-based vesting.

 

The determination of the amount of restricted stock units to be granted is illustrated as follows:

 

Time Based

 

 

Severance Arrangements.  Prior to September 2006, we did not have in place a formalized severance plan structure. In connection with the evaluation of our compensation arrangements, the Compensation Committee and our Board, based upon data compiled by Hewitt and input received from Mr. Speese, determined that it was in our best interests to implement a company-wide severance plan structure, whereby severance benefits would be paid in certain events to members of our executive and senior management, including our named executive officers, and operational level employees.

 

The Compensation Committee determined that the adoption of a severance plan structure which is competitive with those offered by similarly situated public companies in the retail industry would advance the objectives which the Compensation Committee has established for our executive compensation program by assisting us in recruiting and retaining top-level talent. In addition, the Compensation Committee believed that formalizing our severance practices benefits us by providing us with certainty in terms of our obligations to an eligible executive in the event that our relationship with any such executive is severed.

 

The Compensation Committee relied in large part upon both data provided by Hewitt, input from Mr. Speese as well as our Human Resources department with respect to the severance practices of similarly situated public companies in the retail industry as well as input from our outside legal counsel in order to determine which events would trigger a payment obligation under the severance plan structure. The selection of the measures used to determine the amounts payable upon the happening of certain events as well as the selection of the types of events which trigger payment, represent the determination by the Compensation Committee and our Board regarding the best position for us to be in should any such event occur in light of the objectives which have been established for our executive compensation program. The severance plan structure also benefits us by virtue of the non-competition, non-solicitation and release provisions in our loyalty agreements, which inure to our benefit in the event that an eligible executive severs employment with us.

 

As discussed above, as part of its annual review of the amount and mix of total compensation to be paid to our senior executives, including our named executive officers, the Compensation Committee reviews a tally sheet which contains information regarding, among other things, the severance payments to which each named executive officer would be entitled to receive on the occurrence of each event specified pursuant to our severance plan structure, based upon such named executive officer’s proposed compensation for the new fiscal year. The Compensation Committee considers such information a relevant factor in analyzing proposed compensation arrangements, including salary increases, bonus opportunities and grants of long-term incentive awards.

 

For a more detailed description of the severance arrangements which apply to our named executive officers, you should read the narrative discussion on page 29 of this proxy statement.

 

Fringe Benefits and Perquisites.  Our named executive officers are eligible to participate in the benefit plans generally available to all of our employees, which include health, dental, life insurance, vision and disability plans, all of which the Compensation Committee believes are commensurate with plans of other similarly situated public companies in the retail industry.

 

Our named executive officers are also eligible to participate in our 401(k) plan, which represents the only retirement benefit which we provide to our named executive officers. We may make discretionary matching cash contributions to the 401(k) plan in the amount of 50% of the named executive officer’s contributions, up to an amount not to exceed 4% of the named executive officer’s compensation (subject to highly compensated employee limits). In determining such limits, we rely on the recommendations of our Human Resources department, as well as on data provided by Intrust, the administrator of our 401(k) plan, with respect to the practices employed by similarly situated public companies in the retail industry with 401(k) plans which are similar to ours.

 

In addition, we own and operate a corporate jet for use by management for business purposes. From time to time, the corporate aircraft is available for non-business use to our Chief Executive Officer, President and Chief Operating Officer, Chief Financial Officer, Senior Vice President — General Counsel, Senior Vice President — Operational Services, and Executive Vice President. Use of the corporate aircraft by these executives for non-business use is subject to availability. None of the aforementioned executives is permitted to charter the corporate aircraft for non-business use more than once per calendar quarter, unless such executive first submits a request to our Chief Executive Officer, who must consult with the Chairperson of the Audit Committee in determining whether to approve such additional non-business use. Once a reservation of the corporate aircraft for non-business use is made, the executive must pay to us, in advance, 110% of the estimated total cost of the requested use of the corporate aircraft. If the actual cost for the non-business use of the corporate aircraft exceeds the advance deposit made by the requesting executive, the additional amount is deemed compensation

for the requesting executive and reflected on his W-2 earnings statement for the year. During 2006, Mr. Fadel received compensation in the amount of $265 as a result of non-business use of the corporate aircraft.

 

Our executive compensation program is relatively free of perquisites. The Compensation Committee’s charter requires the approval by the Compensation Committee of all perquisites and other personal benefits awarded to our named executive officers.

 

The Compensation Committee has determined it is beneficial to offer the above-described fringe benefits and perquisites in order to attract and retain our named executive officers by offering compensation opportunities that are competitive with those offered by similarly situated public companies in the retail industry. In determining the total compensation payable to our named executive officers for a given fiscal year, the Compensation Committee will examine such fringe benefits and perquisites in the context of the total compensation which our named executive officers are eligible to receive. However, given the fact that such fringe benefits and perquisites which are available to our named executive officers represent a relatively insignificant portion of their total compensation, the availability of such items does not materially influence the decisions made by the Compensation Committee with respect to other elements of the total compensation to which our named executive officers are entitled or awarded.

 

The foregoing discussion describes the compensation objectives and policies which were utilized with respect to our named executive officers during 2006. In the future, as the Compensation Committee continues to review each element of the executive compensation program with respect to our named executive officers, the objectives of our executive compensation program, as well as the methods which the Compensation Committee utilizes to determine both the types and amounts of compensation to award to our named executive officers, may change.

 

Section 162(m)

 

In general, Section 162(m) of the Internal Revenue Code imposes a $1,000,000 limit on the amount of compensation we can deduct in any year with respect to our Chief Executive Officer and each of our four other most highly compensated executive officers. The limit does not apply to so-called “performance-based compensation,” which includes compensation attributable to stock options granted pursuant to our 2006 Plan. The Compensation Committee believes that our executive compensation deduction for 2006 will not be affected by the Section 162(m) limitations. Although the Compensation Committee generally seeks to avoid the Section 162(m) deduction limitations, it is possible, depending upon the circumstances, that items of future compensation may be non-deductible due to those limitations.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with our management and, based upon such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the proxy statement on Schedule 14A related to the 2007 Annual Meeting of Stockholders, for filing with the Securities and Exchange Commission.

 

COMPENSATION COMMITTEE
J. V. Lentell, Chairman
Peter P. Copses
Michael J. Gade

 

 

 

 

Summary Compensation Table for Fiscal Year End December 31, 2006

 

 

 

 

Grants of Plan-Based Awards for Fiscal Year End December 31, 2006⁽¹⁾

 

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year End December 31, 2006

 

 

 

 

 

Options Exercised and Stock Vested in 2006⁽¹⁾

 

		Option Awards
		Number of Shares				Value
		Acquired				Realized
		on				On
		Exercise				Exercise
Name		(#)				($)
Mark E. Speese			—				—
Robert D. Davis			—				—
Mitchell E. Fadel			25,000				$556,200	(2)
Christopher A. Korst			—				—
David E. West			—				—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Potential Realizable Value(1)
Mark E. Speese			$10,442,187
Robert D. Davis			$1,096,492
Mitchell E. Fadel			$7,163,940
Christopher A. Korst			$1,391,832
David E. West			$209,172