Abstract
The purpose of this work is to analyze the proxy statement of Nike and provide details about what comprises the executive compensation plan of the company. It also includes the amount of compensation received by the CEO, Mark Parker, and how it compares to the median salary earned by a regular Nike employee.
Over the course of history, various government agencies of the United States tried to force public companies to provide more information about their executive compensation strategies in order to ensure investors have transparent information. Among vital acts is the Dodd-Frank Act, which requires companies to enclose a compensation ratio of the CEO and a median employee and hold regular shareholder meetings with the “Say on Pay” vote. The paper also touches on the composition of executive compensation.
Executive Compensation Philosophy of Nike
The compensation philosophy of Nike, like the outlook of the majority of companies, is concerned about attracting and keeping talented executives at the corporation. Current executive compensation policies of the company are designed to motivate employees by rewarding business accomplishments and maximization of shareholder value (Nike, 2019). To ensure that both executives and shareholders agree on the terms of compensation, the program is performance-based and considers the incentives of both parties (Nike, 2019). In other words, the executives are rewarded for meeting business objectives and agreeing on retention (Nike, 2019).
The philosophy also aligns with the overall business strategy of the corporation, because incentive targets are set based on both annual and long-term clearly stated objectives, and the methods for measuring performance are disclosed.
To mitigate risks, Nike enforces a clawback policy under which the company can revoke the compensation for violation of terms. To ensure that performance measures are objective, the incentives are based on multiple business targets (Nike, 2019). During annual meetings, shareholders are able to give their opinion on the executive compensation program – if there are any parts that do not align with the interests of the stock owners, the board will consider their viewpoint to make any required changes (Nike, 2019). Therefore, current philosophy is entirely suitable for the company because it prioritizes the corporation’s short-term and long-term objectives while providing proper conditions for executives.
High-Level Overview of Nike’s CEO Compensation
Despite having a lavish base salary, much of the CEO’s compensation is at-risk, as stated in 2019 Total Direct Compensation Mix. The base wage comprises only 10% of the total possible compensation, while 90% is based on performance – 20% for meeting annual goals and 70% for achieving long-term targets (Nike, 2019). Because the significant part of the potential earnings relies on whether the executive reaches company goals, it can be concluded that the CEO compensation is not too high. The chief officer is accountable for the overall company productivity, and therefore, decisions the CEO makes come with significant responsibilities, unlike the choices made by other employees.
Executive Performance Metrics
Annual Assessments
Because there are both annual and long-term cash incentives, the performance of the CEO is measured according to appropriate metrics that consider the yearly and long-term objectives of the company. Annual awards are based on the Executive Performance Sharing Plan (PSP) (Nike, 2019). Nike pays more if the goals are exceeded and less if the goals are not met. Under certain circumstances, the company may not pay at all. In 2019, the company’s performance was based on earnings before interest and taxes (EBIT) (Nike, 2019). Previously, Nike used income before taxes (PTI) as the primary metric of executive productivity (Nike, 2019).
The EBIT – based parameter is enforced for all eligible employees – the objective is to gather all workers under a single plan and inform the executives that their common goal is to maximize shareholder value and ensure holistic company growth (Nike, 2019). For the performance evaluation of the company whose success is determined by the revenue it makes, relying on EBIT is reasonable because it provides an annual snapshot of how well the corporation is functioning. The CEO is responsible for overseeing the company as a whole and making decisions that affect the firm holistically; therefore, it is prudent that the CEO is assessed according to yearly EBIT.
PSP states that EBIT calculation does not include economic effects that may come from mergers, acquisitions, restructurings, or any other changes that take place infrequently (Nike, 2019). For fiscal 2019, the target EBIT was set at 4.685 billion dollars, and the minimum threshold was at 4.310 billion (Nike, 2019). The company also sets a maximum to be 150% above the target – the executive may receive up to 150% of the target award.
Long-Term Assessments
Long-term performance metrics are provisioned under the Long-Term Incentive Plan (LTIP). The executives are assessed on overall financial performance over the course of three years – revenue growth and diluted earnings per share (EPS) (Nike, 2019). The overall measure is 50% based on revenues and 50% on EPS (Nike, 2019). These two metrics were chosen because the company wants to encourage executives to deliver performance appropriate for sustainable and profitable growth. These performance metrics are appropriate for Nike because they are targeted at ensuring sustainable growth and maximizing profit and shareholder value.
Because the CEO is responsible for overall company performance, these measures are appropriate for the executive’s appraisal. As with short-term incentives, long-term productivity does not include the results that come from acquisitions and other unusual activities (Nike, 2019). For the 2019-2021 fiscal period, the cumulative target revenue is 122.826 billion dollars, and the EPS objective is 8.11 dollars (Nike, 2019). The threshold values are 118.162 billion and 7.51 dollars, respectively (Nike, 2019). If the executives do not reach both EPS and revenue targets, then no compensation is paid out by the company.
Equity-based compensation is based on the price of Class B stocks. Nike calls it true pay-for-performance because the executives are paid only if the market price of shares rises (Nike, 2019). Because the price gain results in an increase in company value, such a strategy aligns with shareholders’ interests. The True Shareholder Return (TSR) principle is similar to what Nike uses (Investopedia, 2019). However, the company only emphasizes the market value of the corporation when determining whether there are going to be equity-based payouts (Nike, 2019). Therefore, Nike does not use TSR but instead focuses explicitly on the value of Class B stocks.
In fact, TSR may not be appropriate for assessing CEO performance. Recent research shows that incorporating TSR does not lead to long-term improvements in productivity and growth (Swinford, Meyer, & Partners LLC, 2015). The authors claim that relying on a single metric, such as TSR, does not lead to significant benefits while incurring costs (Swinford et al., 2015). Therefore, companies should use metrics that depend on primary financial metrics. Nike is one company following this philosophy because both PSP and LTIP are based on transparent and understandable parameters, such as cumulative revenue.
Recent Payouts to the CEO
Annual Awards
The executive awards are based on the base salaries for a given fiscal year. The award is paid as a percentage of the base salary (Nike, 2019). For instance, if the base salary is 1 million dollars, and the target award is 200% of that amount, then, for reaching 100% of the performance goal, the CEO receives 2 million dollars as bonus compensation. Mark G. Parker, Nike’s CEO, has a base salary of 1.7 million dollars and the target award of 200% of that wage (Nike, 2019).
In fiscal 2019, his actual performance was at 122% of the goal; therefore, he received 122% of his target award (Nike, 2019). When summed up, Parker’s executive compensation for 2019 was 4.148 million dollars, and the overall income was 5.848 million (Nike, 2019). This compensation is warranted because the PSP dictates that payouts may not occur only if the executives do not reach the performance threshold.
Long-Term Awards
Unlike annual compensation amounts, the long-term award targets are not based on base salaries – they have fixed values. The most recent payout for a three-year performance occurred in 2019 for the 2017-2019 period. The target award for Nike’s CEO was 5 million dollars (Nike, 2019). However, because the company did not reach the threshold point both in EPS and cumulative revenue, Parker did not receive any cash compensation.
Stock options are also a part of long-term compensation mix – in 2018, Parker received 175 000 option shares. The proxy statement for 2019 does not indicate what percentage of total compensation is equity-based because the number of option shares granted depends on the actual number of shares. However, in fiscal 2019, Parker received 57% of his total compensation in the form of equity, which is worth around 8 million dollars (Salary.com, 2019).
Deductible Compensations
Under the provisions of Section 162(m) of the Internal Revenue Code, there is a 1-million-dollar limit on the amount of deductible compensation paid to some employees (Internal Revenue Service, 2018). Before 2017, the section did not include the benefits that are awarded for performance-based goals set preliminarily by shareholders (McLoughlin, Aizen, & Davis Polk & Wardwell LLP, 2018). However, after the enaction of Tax Cuts and Jobs Act, which is active since December 22, 2017, pay-for-performance compensations cannot be excluded when calculating the deducted amount (Internal Revenue Service, 2018).
Therefore, the Internal Revenue Service places a limit of 1 million dollars on any type of award paid by the companies. Any amount in excess of the established number is taxable under the present provisions of 162(m) (McLoughlin et al., 2018). For this reason, Nike has not adopted a policy under which compensations are only tax-deductible (Nike, 2019).
Impact of Dodd-Frank Act
A median employee in Nike is a retail store worker in the US. Section 953 of Dodd-Frank Act requires all public companies in the U.S. to disclose information regarding Under these provisions, Nike included the ratio of the CEO’s compensation compared to the salary of retail store workers – it is 550 to 1 (Nike, 2019). This enclosure will allow both median employees and shareholders to construct objective opinions on the fairness of executive compensation, thus impacting the value of awards set by the company. The same act also requires the companies to hold shareholder meetings with the “Say on Pay” vote (Larcker & Tayan, 2017).
It has several benefits in terms of controlling executive compensation because shareholders will be more accountable and propose plans based on performance indicators. However, talented employees may leave the company for more competitive advantages as a result of transparency in compensation packages (Larcker & Tayan, 2017). In fact, Nike’s proxy statement in 2019 was distributed at an annual shareholder meeting where the company asked stockholders to participate in the voting process. However, the votes are considered advice, and not a requirement set by the shareholders.
Conclusion
The paper analyzed the proxy statement of Nike and provided a brief overview of the company’s executive compensation plans. With a ratio of 550 to 1, the CEO of the company receives an enormous amount of compensation, whereas a median Nike worker is deprived of such benefits. Many people might consider this to be unfair and claim that executives should not receive generous bonuses. However, executives bear more responsibilities and have to think about all parts of the corporation. Therefore, I believe that such high amounts of compensation are required for retaining significant talent at the company.
Prior to working on this assignment, I had limited knowledge about what comprises CEO and executive salaries. After learning about what proxy statements are and elements of compensation packages, I appreciate the complexity of contemporary corporate finance. The most significant benefit was reading about how the government influences executive compensation and how it promotes transparency in public companies in the United States.
References
Investopedia. (2019). True shareholder return.
Internal Revenue Service. (2018). Notice 2018-68.
McLoughlin, J. M., Aizen, R. M., & Davis Polk & Wardwell LLP. (2018). IRS guidance on Section 162(m) Tax Reform.
Nike. (2019). Notice of annual meeting. Web.
Larcker, D., & Tayan, B. (2017). Say on pay.
Salary.com. (2019). Nike executive salaries & other compensation. Web.
Swinford, D. N., Meyer, P., & Partners LLC. (2015). The limits of using TSR as an incentive measure.
U.S. Securities and Exchange Commission. (2015). Section 953. Web.