The top two executives at Jakks Pacific Inc., under fire from Wall Street analysts over their pay and the company’s performance, received salary increases this year of 14% and 17.5%, according to a regulatory filing Wednesday.
The raises, which exceeded the Malibu-based toy maker’s 2002 profit and stock performance, came after a tough year for shareholders. The company’s earnings per share fell 5.5% last year, and its stock lost 29%, as the firm struggled to integrate acquisitions and increase the market share of its core brands, including World Wrestling Entertainment action figures.
Compensation experts said Wednesday’s filing revealed several unusual perks for Chief Executive Jack Friedman and Chief Operating Officer Stephen G. Berman, including guaranteed annual raises of $25,000 each.
In addition, the filing failed to elaborate on Jakks’ previously announced plans to change how it determines bonuses for the top two officers.
The company said in the filing that under the new bonus plan, which goes into effect next year, it would base bonuses on earnings-per-share growth targets, but it didn’t say what the targets would be.
They will be set annually by the board’s compensation committee and could range from nothing to 200% of Friedman’s and Berman’s annual salaries, Jakks said in the Securities and Exchange Commission filing.
“Unless they tell us what the targets are -- and the analysts and the stockholders are satisfied that they’re sufficiently challenging -- then we’re never going to find out whether the incentive pay is aligned with stockholder interests,” said Paul Hodgson, senior research analyst with Corporate Library, a corporate-governance information service. “They could be setting themselves meaningless [targets] of a couple of percent a year.”
Jakks officials declined to comment.
For 2003, Friedman and Berman each will take home a salary of $965,000, a 14% increase for Friedman and a 17.5% boost for Berman.
Under the bonus plan that is in effect through the end of this year, the two will receive 4% of pretax profit, not to exceed $2 million. Jakks has said its pre-tax profit this year would be flat; if that is the case, each would get a bonus of about $1.4 million.
Legally, the company doesn’t have to disclose the new bonus formula, Hodgson noted, and corporate leaders have argued that releasing growth targets would offer proprietary information to competitors.
But Arvind Bhatia, an analyst with Southwest Securities in Dallas, said the meagerness of the information shared by Jakks raised questions.
“When a company underperforms, these questions are a bigger deal and investors don’t want to give management the benefit of the doubt,” Bhatia said. “The management here is certainly one of the highest paid in their industry, no question about it. That’s an objection investors have always had.”
Compensation experts said Wednesday’s SEC filing showed that Friedman and Berman, who founded Jakks in 1995, were on tap to receive uncommon financial rewards: Each will get restricted stock grants totaling 1.08 million shares over the life of newly signed eight-year employment contracts, provided annual profit at Jakks exceeds $2 million.
At the stock’s current value, the grants would be worth $12.5 million.
When they signed the new contracts in March, Friedman and Berman received 240,000 shares apiece. Each will get an additional 120,000 shares every year “in consideration for modifying and replacing the pretax income formula for determining his annual bonus and for entering into the amended agreement,” according to the filing.
The compensation experts said the two officers didn’t need any consideration because the two probably would have little to lose from the new bonus plan.
“It wouldn’t seem appropriate to have to offer this additional incentive to get them to sign,” Hodgson said.
He and others said that the length of the new employment contracts was unusual. Todd Meyer, an independent compensation consultant based in Los Angeles, called eight years “a bit excessive.”
“The board is locking the two top executives in for a long time, and they’re locking them in at very high total compensation levels,” he said.
Of the companies that make up the Standard & Poor’s 500 index, only about two dozen offer executives contracts longer than three years, Hodgson said.
The experts also said that guaranteed salary increases were rare.
“If they perform well and deserve a salary increase, then they should get one,” Hodgson said. “But if they get a salary increase for turning up in the morning, that’s not an appropriate use of stockholder money.”
Shares of Jakks closed down 15 cents at $11.57 on Nasdaq.