EXECUTIVE OFFICERS
Officers are appointed annually by the Board of Directors and serve at the discretion of the Board of Directors. Set forth below is
information as of April 26, 2016 regarding the current executive officers of Rite Aid.
|
|
|
|
|
Name
|
|
Age
|
|
Position with Rite Aid
|
John T. Standley(1)
|
|
53
|
|
Chairman and Chief Executive Officer
|
Kenneth A. Martindale
|
|
56
|
|
President of Rite Aid Corporation and CEO of Rite Aid Stores
|
Darren W. Karst
|
|
56
|
|
Senior Executive Vice President, Chief Financial Officer and Chief Administrative Officer
|
Dedra N. Castle
|
|
49
|
|
Executive Vice President, Chief Human Resources Officer
|
Enio Anthony Montini, Jr.
|
|
63
|
|
Executive Vice President, Merchandising & Distribution
|
Jocelyn Konrad
|
|
46
|
|
Executive Vice President, Pharmacy
|
Bryan Everett
|
|
43
|
|
Executive Vice President, Store Operations
|
David Abelman
|
|
56
|
|
Executive Vice President, Marketing
|
Douglas E. Donley
|
|
53
|
|
Senior Vice President and Chief Accounting Officer
|
-
(1)
-
Mr. Standley's
biographical information is provided above in the section identifying the Board of Directors.
Kenneth A. Martindale.
Mr. Martindale was appointed CEO of Rite Aid Stores effective August 3, 2015. Mr. Martindale
continues to
serve as President, the title he has held since June 2013. He has previously served as Rite Aid's Chief Operating Officer since June 2010. From December 2008 until June 2010, he served as Rite Aid's
Senior Executive Vice President and Chief Merchandising, Marketing and Logistics Officer. Mr. Martindale served as Co-President, Chief Merchandising and Marketing Officer for Pathmark
Stores, Inc. from January 2006 until its acquisition by the Great Atlantic & Pacific Tea Company in December 2007. In January 2000, Mr. Martindale joined the Board of Directors of
Intesource, Inc.; became Chairman of the Board in March 2004; and served as President, Chief Executive Officer and Chairman of the Board from November 2004 until January 2006. From September
1999 until November 2004, Mr. Martindale was Principal of Martindale Development Group, L.L.C. From September 1999 until July 2003, Mr. Martindale was Managing Director/CEO of Orchard
Street, Inc., a privately held specialty food retailer which he founded and owned. Mr. Martindale was Executive Vice President of Sales and Procurement with Fred Meyer, Inc. from
January 1998 until September 1999 and was Senior Vice President of Sales and Procurement with Smith's Food & Drug Centers, Inc. from June 1996 until January 1998. Mr. Martindale
currently serves on the Board of Directors of the National Association of Chain Drug Stores.
Darren W. Karst.
Mr. Karst was appointed Senior Executive Vice President, Chief Financial Officer and Chief Administrative Officer
effective
October 25, 2015. Prior to this appointment, Mr. Karst served as Executive Vice President and Chief Financial Officer since August 20, 2014. Prior to joining Rite Aid, from 2002
until 2014, Mr. Karst served as Executive Vice President, Chief Financial Officer and Assistant Secretary with Roundy's, Inc., a Wisconsin-based supermarket chain. From March 1995 until
March 1996, Mr. Karst served as Senior Vice President, Chief Financial Officer, Secretary and Director of Dominick's Supermarkets, Inc. and from March 1996 until the acquisition of
Dominick's by Safeway in 1998, Mr. Karst served as Executive Vice President, Finance and Administration, Chief Financial Officer, Secretary and Director. Mr. Karst was a partner at the
Yucaipa Companies, a private equity investment firm, from 1991 to 2002.
Dedra N. Castle.
Ms. Castle has served as our Executive Vice President, Chief Human Resources Officer since March 24, 2014.
Prior to
joining Rite Aid, from 2012 until 2014, Ms. Castle was a founding member and managing partner of Castle Partners, LLC, a human resources management
23
Table of Contents
services
firm, and Level Mediation, LLC, a multi-state mediation firm. From 2008 until 2012, Ms. Castle worked for the Sam's Club Division of Wal-Mart Stores, Inc., where she
served as the Vice President of Club/Field Support, People, Inclusion, Diversity and Policy. Prior to joining Sam's Club, she held senior human resources positions at Winn-Dixie Stores, Inc.
and Auto Zone Stores, Inc.
Enio Anthony Montini, Jr.
Mr. Montini was appointed Executive Vice President, Merchandising & Distribution effective
August 2015. Prior
to this position, he served as Executive Vice President, Merchandising since April 2011, and from February 2010 to April 2011, he served as Senior Vice President, Category Management. From February
2008 until January 2010 he served as Executive Vice President, Chief Operating Officer with MARC USA, a privately held company. From February 2005 until January 2008, Mr. Montini was Senior
Vice President of Operations with MARC USA and from September 2004 until January 2005, he served as Senior Vice President, Channel Marketing with MARC USA.
Jocelyn Konrad.
Ms. Konrad was appointed Executive Vice President, Pharmacy effective August 3, 2015. Prior positions at Rite
Aid
include Regional Pharmacy Vice President, President of Healthcare Initiatives and most recently, Group Vice President of Pharmacy Initiatives and Clinical Services. Prior to joining Rite Aid,
Ms. Konrad served as a District Manager for Eckerd Pharmacy from 1997 through 2007. From 1992 to 1997, she served as a pharmacist for Thrift Drug Pharmacy. Ms. Konrad is a registered
pharmacist and holds a Bachelor of Science degree from Philadelphia College of Pharmacy and Science.
Bryan Everett.
Mr. Everett was appointed Executive Vice President of Store Operations effective August 3, 2015. Previously,
Mr. Everett served as the Senior Vice President of Store Operations at Target Corporation overseeing the support functions and strategy for all stores. From February 2011 to March 2014,
Mr. Everett served as the Senior Vice President of Target stores in the north region, with responsibility for total operations of 457 stores. Mr. Everett held multiple senior leadership
positions in stores, operations and merchandising at Target since 2002. Prior to joining Target, Mr. Everett held leadership positions in the grocery industry with Aldi Foods and Fleming
Wholesale.
David Abelman.
Mr. Abelman was appointed Executive Vice President of Marketing effective August 3,
2015. Prior to this position, he served as our Senior Vice President of Brand Development & Innovation since April 2014. Prior to joining Rite Aid, Mr. Abelman was CEO and co-founder of
Self Health Nation. Mr. Abelman also served as Executive Vice President and Chief Marketing & Merchandising Officer at AC Moore from May 2009 through December 2011 and Senior Vice
President of Marketing for Michael's from August 2005 through December 2007. He has also held senior marketing positions at Office Depot, Daymon Associates and the Great Atlantic & Pacific Tea
Company.
Douglas E. Donley. Mr.
Donley has served as our Senior Vice President, Chief Accounting Officer since October 2005. He had been Group
Vice President,
Corporate Controller from 1999 to October 2005. Mr. Donley served as the acting principal financial officer of the Company from October 7 to October 8, 2008, and as a financial
analyst for the Company from 1996 to 1999. He was an internal auditor for Harsco Corporation from 1994 to 1996. Prior to joining Harsco, he was an auditor for KPMG Peat Marwick.
24
Table of Contents
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
We encourage you to read this Compensation Discussion and Analysis for a detailed discussion and analysis of our fiscal year 2016
executive compensation program for the individuals named below. We refer to these individuals throughout this Compensation Discussion and Analysis and the accompanying tables as our "Named Executive
Officers."
|
|
|
Name
|
|
Title
|
John T. Standley
|
|
Chairman and Chief Executive Officer
|
Kenneth A. Martindale
|
|
President of Rite Aid Corporation and CEO of Rite Aid Stores
|
Darren W. Karst
|
|
Senior Executive Vice President, Chief Financial Officer and Chief Administrative Officer
|
Enio Anthony Montini, Jr.
|
|
Executive Vice President, Merchandising & Distribution
|
Dedra N. Castle
|
|
Executive Vice President, Chief Human Resources Officer
|
Frank G. Vitrano
|
|
Chief Strategic Business Development Officer
|
Robert K. Thompson
|
|
Special Advisor to President of Rite Aid Corporation
|
Executive Summary
Rite Aid Corporation is the third largest retail drugstore chain in the United States based on revenues and number of stores, operating
4,561 stores as of February 27, 2016 in 31 states and the District of Columbia. In fiscal 2016 we acquired EnvisionRx, a Pharmacy Benefit Management (PBM) provider, as we continued our
transition into a retail health care company. Our goals are to consistently understand and exceed the expectations of our customers by providing them with the best products, services and advice to
meet their unique needs, thereby allowing us to meet our key business objectives and ultimately provide sustainable long-term value to our stockholders.
We
believe that accomplishing these goals starts with our ability to attract, retain and appropriately motivate executive officers who have the knowledge, experience and leadership
ability to manage our business and promote a culture of teamwork and development that inspires each and every one of our associates to give their best effort every day.
We
feel that we have assembled a very strong team of executives, which has in turn resulted in our ability to attract and retain highly talented individuals at all levels of the
organization who are committed to our core values of excellence, integrity and respect for people and have the ability to execute our strategic and operational priorities. This combination of strong
executive leadership and highly talented and motivated team-driven associates played a key role in our strong financial performance in fiscal year 2016, as described below.
We had a successful year in fiscal year 2016, as evidenced by our strong performance in the key areas described
below:
-
-
Our Adjusted EBITDA, which is a key measure we use to assess our performance, was $1,402 million compared to
$1,323 million for fiscal year 2015. See the discussion under the caption "Cash Incentive Bonuses" below for more detail on how we calculate Adjusted
25
Table of Contents
We believe strongly that pay should align with performance and this focus is reflected in our executive compensation programs. We seek
to provide our Named Executive Officers with opportunities to earn total direct compensation (base salary, annual incentives, and long-term incentives) that are generally aligned with compensation
levels provided to peer company executives and executives within similarly-sized retailers more broadly.
Because
of our desire to reinforce a performance-based culture, the Company emphasizes a pay mix that is comprised primarily of variable pay. As a result, base salary makes up the
smallest portion of total direct compensation for the Named Executive Officers, with variable pay in the form of annual and long-term incentives comprising the remaining portion. The mix varies by
position, taking into account each position's ability to influence Company results, as well as competitive practice. See page 31 for a graphical representation of pay mix by executive.
In June 2011, our stockholders voted to hold an advisory vote on executive compensation every year. Consistent with that vote, the
Board resolved to hold an advisory "say-on-pay" vote every year in connection with its annual meeting of stockholders. At our 2015 Annual Meeting approximately 95% of shares voting on the proposal
approved the compensation of our Named Executive Officers on a non-binding, advisory basis. As a result of the overwhelming support of our stockholders in respect of the say-on-pay vote conducted at
our 2015 Annual Meeting, the Compensation Committee determined
26
Table of Contents
that
no material changes should be made to our executive compensation program for our Named Executive Officers in fiscal year 2016. Additionally, the 2015 advisory stockholder proposal on vesting
performance awards, which received support of a majority of votes cast at the 2015 annual meeting, has been substantially implemented as a result of the Agreement and Plan of Merger with Walgreens
Boots Alliance. At our 2016 special shareholder meeting, 89% of votes cast by our stockholders approved, by means of non-binding, advisory vote, compensation that will or may become payable by Rite
Aid to its named executive officers in connection with the Merger (as defined below). As in the past, the Compensation Committee will continue to review the results of future advisory say-on-pay votes
and will consider stockholders' concerns and take them into account in future determinations concerning the compensation of our Named Executive Officers.
We used Adjusted EBITDA as the primary financial metric in our annual incentive plan and long-term performance awards in fiscal year
2016. We believe this was appropriate because EBITDA growth has historically shown a strong positive correlation with three-year and five-year total stockholder return for Rite Aid and its peer group,
and that it represented the best indicator of Rite Aid's operating performance based on our financial situation and corporate structure. With respect to long-term performance awards, the Compensation
Committee replaced the leverage ratio with a return on net asset ratio as the performance metric over the three year performance period. The Compensation Committee believes that return on net assets
is a key indicator of our corporate performance, as it measures how efficiently and effectively we deploy our assets (return on net assets) and focuses management on the need to improve the Company's
financial condition over time. Additionally, with respect to our executive officers, including our Named Executive Officers, the Compensation Committee included a provision subjecting the long-term
performance award to positive or negative modification based on our relative stockholder return versus the Russell 3000 Index over the three-year measuring period.
As
discussed above, our Adjusted EBITDA for fiscal year 2016 was $1,402 million which was above our adjusted annual plan target of $1,385 million. We originally established
an Adjusted EBITDA performance target of $1,285 million for fiscal year 2016. This original plan target of $1,285 million was subsequently adjusted upward to include the impact of the
projected EBITDA results of EnvisionRx, which was acquired after the Adjusted EBITDA target for the fiscal year was first established. Based on performance against the adjusted goal, and as described
in more detail below under "Cash Incentive Bonuses," we paid annual incentives to our Named Executive Officers at 112% of target level.
The
performance targets for the long-term incentive awards granted to our Named Executive Officers in the form of performance stock in fiscal year 2016 are discussed in detail below. See
"Components of Executive Compensation for Fiscal Year 2016Long-Term Incentive Program, Performance Awards" on pages 34-37. Pursuant to the Agreement and Plan of Merger that was
entered into on October 27, 2015, performance awards that are granted after that date will not provide for accelerated vesting in connection with a change in control, and the pending merger
will not constitute the first trigger in connection with any "double trigger" vesting provisions. As a result, the 2015 advisory stockholder proposal on acceleration on vesting of performance awards,
which received the support of a majority of votes cast at the 2015 annual meeting, has been substantially implemented.
Objectives of Our Executive Compensation Program
All of our executive compensation and benefits programs are within the purview of the Compensation Committee, which bases these
programs on the same objectives that guide the Company in establishing all of its compensation programs. The Compensation Committee also administers the Company's equity incentive compensation plans.
In establishing or approving the compensation of our
27
Table of Contents
Named
Executive Officers in any given year, the Compensation Committee is generally guided by the following objectives:
-
-
Compensation should be based on the level of job responsibility, individual performance, and corporate performance, and should foster
the long-term focus required for success in the retail drugstore industry. As associates progress to higher levels in the organization, an increasing proportion of their pay is linked to Company
performance and stockholder returns and to longer-term performance because they are in a position to have greater influence on longer-term results.
-
-
Compensation should reflect the value of the job in the marketplace. To attract and retain a highly skilled, diverse work force, we
must remain competitive with the pay of other employers who compete with us for talent.
-
-
Compensation should reward performance. Our programs should deliver compensation that is related to our corporate performance. Where
corporate performance falls short of expectations, the programs should deliver lower-tier compensation. In addition, the objectives of pay-for-performance and retention must be balanced. Even in
periods of temporary downturns in overall corporate performance, the programs should continue to ensure that successful, high-achieving associates will remain motivated and committed to the Company to
support the stability and future needs of the Company.
-
-
To be effective, performance-based compensation programs should enable associates to easily understand how their efforts can affect
their pay, both directly through individual performance accomplishments and indirectly through contributing to the Company's achievement of its strategic and operational goals.
-
-
Compensation and benefit programs should reward performance relative to consistent measures and goals at all levels of the
organization. While the programs and individual pay levels will always reflect differences in job responsibilities, geographies, and marketplace considerations, the overall structure of compensation
and benefit programs should be broadly similar across the organization.
-
-
Compensation and benefit programs should attract associates who are interested in a career at Rite Aid.
The Compensation Committee's Processes
The Compensation Committee has established a number of processes to assist it in ensuring that the Company's executive compensation
program is achieving its objectives. Among those are:
Assessment of Company performance.
The Compensation Committee uses Company performance measures in two ways. First, in assessing the
linkage between
actual total compensation and performance, the Compensation Committee considers various measures of Company and industry performance, such as comparable store sales growth, EBITDA growth, return on
sales, debt leverage ratios, return on average invested capital and assets and total stockholder return. In determining performance relative to the Company's peer group (as discussed further below),
the Compensation Committee does not apply a formula or assign these performance measures relative weights. Instead, it makes a subjective determination after considering such measures collectively.
Second, as described in more detail below, the Compensation Committee has established specific Company target incentive/award levels and performance measures that determine the size of payouts under
the Company's two formula-based incentive programsthe cash incentive bonus program and performance awards granted under the Company's long-term incentive program.
28
Table of Contents
Assessment of competitive compensation levels.
The Compensation Committee, with the help of its independent compensation consultant
Exequity LLP, assesses the Company's programs relative to a peer group of retail organizations and published survey data. The peer group was originally approved by the Compensation Committee in
January 2015 after a comprehensive review. Because the Company has a limited number of publicly-traded direct competitors and because pharmacy sales (which account for over two-thirds of the Company's
revenue) are governed by third-party contracts, we reviewed potential peers relative to multiple criteria including:
-
-
Competitors for executive talent such as grocery store chains, discount department stores, pharmacy benefits managers, and companies
engaged in pharmaceutical distribution;
-
-
Competitors for investment capital such as companies considered peers by financial analysts, companies with a similar capital
structure or companies whose stock price movement correlated most directly with Rite Aid;
-
-
Companies with which Rite Aid competes for customers that have pharmacy operations or offer similar merchandise as Rite Aid; and
-
-
Companies of similar size based on revenue as well as enterprise value.
The
resulting peer companies, which are considered to be the best representation of our target labor market, are listed below.
Fiscal Year 2016 Peer Group
|
|
|
|
|
Peer Company
|
|
Revenues
($ Millions)
|
|
CVS Caremark Corp.
|
|
|
143,010
|
|
AmerisourceBergen Corp.
|
|
|
128,195
|
|
Walgreen Co.
|
|
|
84,585
|
|
The Home Depot, Inc.
|
|
|
83,176
|
|
Target Corp.
|
|
|
72,618
|
|
Lowe's Companies, Inc.
|
|
|
56,223
|
|
Sears Holdings Corp.
|
|
|
31,198
|
|
The TJX Companies, Inc.
|
|
|
29,078
|
|
Macy's, Inc.
|
|
|
28,105
|
|
Staples Inc.
|
|
|
22,492
|
|
Catamaran Corporation
|
|
|
22,647
|
|
Dollar General Corp.
|
|
|
18,910
|
|
Supervalu Inc.
|
|
|
17,820
|
|
Office Depot Inc.
|
|
|
15,619
|
|
Whole Foods Market, Inc.
|
|
|
14,952
|
|
J.C. Penney Company, Inc.
|
|
|
12,257
|
|
Family Dollar Stores, Inc.
|
|
|
10,628
|
|
Dollar Tree, Inc.
|
|
|
8,602
|
|
-
Note:
-
Revenue
reflects trailing 12 month data through February 2015 as available per Standard & Poor's Research Insight.
The
Compensation Committee compares the compensation levels of Rite Aid's Named Executive Officers to peer company compensation levels in the aggregate, and also compares the pay of
individual executives if the jobs are sufficiently similar to make the comparison meaningful.
In
addition to the peer group data, the Compensation Committee reviews market data based on specific functional responsibility for each executive from published survey data. The survey
analysis
29
Table of Contents
targets
data from similarly-sized retail organizations based on each executive's functional responsibility. The surveys used in the analysis include Mercer's
Global Premium
Executive Remuneration Suite
and Towers Watson's
Survey Report on Top Management Compensation
.
The
Compensation Committee uses the peer group and survey data primarily to ensure that the executive compensation program as a whole is competitive, meaning generally within 25% of the
median range of comparative pay of the market when Rite Aid achieves the targeted performance levels. The Compensation Committee further designed the incentive plans in such a way that executives can
earn above competitive levels for superior performance and below competitive levels if performance is below expectations. The Compensation Committee assesses overall alignment of the compensation
program rather than benchmarking a specific target position with consideration of factors such as Company and individual performance, how executive roles function within Rite Aid, concerns about
executive retention, and availability of equity compensation. The Compensation Committee assesses Rite Aid's performance relative to its peer group on both a one- and three-year basis and observed
alignment of performance with actual total direct compensation levels for the executives in the aggregate.
In
fiscal year 2016, management engaged Mercer, a compensation consultant, to provide management with compensation information for certain executive officers. Pursuant to the terms of
its retention, Mercer reported directly to management, and not to the Compensation Committee, although the Compensation Committee did review recommendations and analysis prepared by management and
Mercer in determining fiscal year 2016 compensation for the Named Executive Officers.
Total compensation review.
The Compensation Committee reviews each executive's base pay, annual bonus, and long-term incentives
annually with the
guidance of the Compensation Committee's independent compensation consultant. Following the fiscal year 2016 review, the Compensation Committee determined that the target level and components of
compensation for fiscal year 2016 were reasonable in the aggregate.
Components of Executive Compensation for Fiscal Year 2016
For fiscal year 2016, the compensation program for our Named Executive Officers consisted of four primary components: (i) base
salary, (ii) a cash incentive bonus opportunity under the Company's annual incentive bonus plan, (iii) long-term incentives consisting of stock options,
restricted stock and performance units and (iv) a benefits package, including a Supplemental Executive Retirement Program ("SERP"). A significant portion of total compensation is variable,
i.e., subject to performance and is comprised of target annual incentives and target long-term incentives.
The
Compensation Committee believes that this program appropriately balances the mix of cash and equity compensation, the mix of currently-paid and longer-term compensation, and the
security of base benefits in a way that best furthers the compensation objectives discussed above. The chart below shows the overall mix of base salary, target annual incentives, target long-term
incentives, and contributions under the SERP for Messrs. Standley, Martindale, Karst and Montini and Ms. Castle.
30
Table of Contents
Target Total Remuneration(1)(2)
Compensation Component as a % of Total Remuneration for Fiscal Year 2016
-
(1)
-
Target
Total Remuneration represents the sum of base salary, target annual incentives, target long-term incentives, and SERP contributions. Value of
broad-based benefits provided to all employees and components of other compensation (except the SERP) have been excluded.
-
(2)
-
The
special awards granted to Messrs. Standley and Martindale, described below under "Performance Awards," are not included in Target Total
Remuneration.
Base Salary
Base salary is one element of an executive's annual cash compensation during employment. The value of base salary reflects the
executive's long-term performance, skill set and the market value of that skill set. In setting base salaries for fiscal year 2016, the Compensation Committee considered the following factors:
Pay levels at comparable companies.
As noted above, the Compensation Committee uses the peer group data to test for the reasonableness
and
competitiveness of base salaries, but it also exercised subjective judgment in view of the Company's compensation objectives.
Internal relativity.
Meaning the relative pay differences for different job levels.
31
Table of Contents
Individual performance.
Except for increases associated with promotions or increased responsibility, increases in base salary for
executives from
year to year are generally limited to minimal adjustments to reflect individual performance.
Consideration of the mix of overall compensation.
Consistent with our compensation objectives, as executives progress to higher levels
in the
organization, a greater proportion of overall compensation is directly linked to Company performance and stockholder returns. Mr. Standley's overall compensation, for example, is more heavily
weighted toward short- and long-term incentive compensation (approximately 85% in the aggregate as shown in the bar chart above) than that of the other Named Executive Officers.
The
Compensation Committee reviewed the Named Executive Officers' base salaries in June of fiscal year 2016 and considered the principles described above under "The Compensation
Committee's Processes" in establishing Named Executive Officers' base salaries for the fiscal year. As reflected in the table below, based on the anticipated business challenges, the Compensation
Committee approved management's proposal to not provide a salary increase for the Named Executive Officers in fiscal year 2016 other than in respect of salary adjustments related to
Mr. Montini's promotion on August 7, 2015. The Compensation Committee also approved salary adjustments, shown below, to reflect the change in the roles of Messrs. Vitrano and
Thompson in October and January, respectively. See the section entitled "Other Post-Employment and Change in Control Benefits; Removal of Excise Tax Gross Ups" for a description of
Mr. Montini's promotion and the change in roles of Messrs. Vitrano and Thompson.
|
|
|
|
|
|
|
|
|
Executive
|
|
Base Salary at
End of FY 2016
|
|
Increase or
Change from
Prior Fiscal Year
|
|
Rationale
|
John T. Standley
|
|
$
|
1,150,000
|
|
|
|
|
|
Kenneth A. Martindale
|
|
$
|
900,000
|
|
|
|
|
|
Darren W. Karst
|
|
$
|
790,000
|
|
|
|
|
|
Enio Anthony Montini, Jr.
|
|
$
|
460,000
|
|
|
5.2
|
%
|
Promotion
|
Dedra N. Castle
|
|
$
|
425,000
|
|
|
|
|
|
Frank G. Vitrano
|
|
$
|
500,000
|
|
|
40.8
|
%
|
Change in position
|
Robert K. Thompson
|
|
$
|
250,000
|
|
|
50.0
|
%
|
Change in position
|
Cash Incentive Bonuses
The Company established an annual incentive plan in order to incentivize the Named Executive Officers to meet the Company's Adjusted
EBITDA target for fiscal year 2016. The Compensation Committee establishes a target percentage of salary for each participant at the beginning of the fiscal year and approves the financial goals
required for the Company to pay an award. Payouts for the Named Executive Officers are then determined by the Company's financial results for the year relative to the predetermined performance
measures. As shown in the Summary Compensation Table under "Non-Equity Incentive Plan Compensation," incentives were paid to Named Executive Officers for fiscal year 2016 performance.
Bonus targets.
Targets for each Named Executive Officer were determined based on job responsibilities, internal relativity, and peer
group and survey
data. The Compensation Committee's objective was to set bonus targets such that total annual cash compensation (including base salary and annual incentive assuming a target payout) was generally
aligned with the market with a substantial portion of that compensation linked to corporate performance. Consistent with our executive compensation philosophy, individuals with greater job
responsibilities had a greater proportion of their total cash compensation tied to Company performance through the incentive plan. The Compensation Committee, as a result, established the following
targets for fiscal year 2016 (expressed as a percentage
32
Table of Contents
of
base salary, including a weighted percentage for Messrs. Karst, Vitrano, and Thompson due to changes in position during the fiscal year):
Annual Incentive Opportunity
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Threshold Payout
(as a % of Salary)
|
|
Target Payout
(as a % of Salary)
|
|
Maximum Payout
(as a % of Salary)
|
|
John T. Standley
|
|
|
200
|
%
|
|
200
|
%
|
|
400
|
%
|
Kenneth A. Martindale
|
|
|
150
|
%
|
|
150
|
%
|
|
300
|
%
|
Darren W. Karst
|
|
|
104
|
%
|
|
104
|
%
|
|
208
|
%
|
Enio Anthony Montini, Jr.
|
|
|
75
|
%
|
|
75
|
%
|
|
150
|
%
|
Dedra N. Castle
|
|
|
75
|
%
|
|
75
|
%
|
|
150
|
%
|
Frank G. Vitrano
|
|
|
107
|
%
|
|
107
|
%
|
|
214
|
%
|
Robert K. Thompson
|
|
|
62.5
|
%
|
|
62.5
|
%
|
|
125
|
%
|
Company performance measures.
The Compensation Committee established the following Company performance goal, which applied to all plan
participants,
in February 2015:
Fiscal Year 2016 Annual Incentive Plan Performance Goal
|
|
|
|
|
Performance Level
|
|
Adjusted EBITDA
Goal (millions)
|
|
Threshold
|
|
$
|
1,385
|
|
Target
|
|
$
|
1,385
|
|
Maximum
|
|
$
|
1,524
|
|
The
Compensation Committee believes that using Adjusted EBITDA as the measure for the annual incentive plan appropriately encourages officers, including the Named Executive Officers, to
focus on improving operating results which ultimately drive stockholder value. EBITDA growth has historically shown a strong positive correlation with three-year and five-year total stockholder return
for Rite Aid and its peer group. The majority of Rite Aid's peer companies use an EBITDA measure in their annual incentive plans. Based on Rite Aid's current financial situation and capital structure,
the Committee believes that Adjusted EBITDA is the best indicator of Rite Aid's operating performance. The measure is tracked regularly, clearly understood by the officers, and the officers can impact
the measure by taking actions to improve the operating performance of our stores. In addition, the Company regularly communicates Adjusted EBITDA to the investment community.
Under
the plan formula, payouts can range from 0% to 200% of bonus targets depending on Company performance. We originally established an Adjusted EBITDA performance target of
$1,285 million for fiscal year 2016. Although this performance level was only slightly below our fiscal year 2015 performance of $1,323 million, we recognized the challenges within our
target related to continued reimbursement rate pressure and more drug cost increases than normal, offset by the benefits of improved generic purchasing as a result of the new McKesson agreement. As a
result of the performance target relationship to prior year, the Compensation Committee set a threshold level of performance equal to the target so that management was only rewarded for performance at
or above target. Our original plan target of $1,285 million was subsequently adjusted upward to include the impact of the projected EBITDA results of EnvisionRx, which was acquired after the
original target for the fiscal year was established. This adjustment was deemed necessary in order to ensure that annual incentive payments would be earned based on performance. The adjusted target
level of Adjusted EBITDA of $1,385 million was based on our annual operating plan and was in line with guidance provided to the investment community.
33
Table of Contents
In
fiscal year 2016, Rite Aid's actual Adjusted EBITDA was $1,402 million, which was above the target performance level, resulting in bonus payments at 112% of the target level.
As discussed in greater detail in our Annual Report on Form 10-K, we define Adjusted EBITDA as net income excluding the impact of income taxes (and any corresponding adjustments to tax
indemnification asset), interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-downs related to store closings, debt
retirements and other items (including stock-based compensation expense, sale of assets and investments and revenue deferrals related to our customer loyalty program). We reference this particular
non-GAAP financial measure not only as a
basis for incentive compensation but also in our corporate decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of
prior periods and external comparisons to competitors' historical operating performance.
Long-Term Incentive Program
Long-term incentive target opportunity.
The purpose of the regular long-term incentive program is to support the long-term perspective
necessary for
continued success in our business and focus our Named Executive Officers on creating long-term, sustainable stockholder value. Our annual long-term incentive targets, at the date of grant
(June 24, 2015), for each Named Executive Officer are shown below:
Long-Term Incentive Targets
|
|
|
|
|
Executive
|
|
Target
(as a % of Salary)
|
|
John T. Standley
|
|
|
500
|
%
|
Kenneth A. Martindale
|
|
|
400
|
%
|
Darren W. Karst
|
|
|
200
|
%
|
Enio Anthony Montini, Jr.
|
|
|
150
|
%
|
Dedra N. Castle
|
|
|
150
|
%
|
Frank G. Vitrano
|
|
|
220
|
%
|
Robert K. Thompson
|
|
|
200
|
%
|
The
Compensation Committee reviewed available peer group data and found that the design of the long-term incentive program is reasonably aligned with general retail industry market
practice. Target grant values for individual executive officers were established based on individual performance and internal relativity. Consistent with the Company's compensation philosophy,
executive officers at higher levels received a greater proportion of total pay in the form of long-term incentives. As a result of Messrs. Karst, Vitrano, and Thompson's changes in position,
Mr. Karst's long-term incentive target will increase to 220% and Messrs. Vitrano and Thompson's will decrease to 75% and 0%, respectively, for future grants.
34
Table of Contents
Long-term incentive mix.
In fiscal year 2016 we used the following types of awards:
|
|
|
|
|
|
Vehicle
|
|
Proportion of 2016
Long-Term
Incentive Target
Opportunity
|
|
Purpose
|
Stock Options
|
|
|
40
|
%
|
Provides a vehicle measured by stock price that rewards increases in stockholder value.
|
Performance Awards
|
|
|
35
|
%
|
Links compensation to multi-year operating results on key measures tied to stockholder value creation.
|
Restricted Stock
|
|
|
25
|
%
|
Supports retention and provides a vehicle with more stability and less risk. Aligns executive and stockholder interests and focuses executives on value creation.
|
In
determining the overall mix of long-term incentive vehicles, the following factors were considered:
-
-
Risk/reward tradeoffs:
Using multiple long-term incentive
vehicles can balance the need for a strong performance-based program against risk to executives.
-
-
Performance measurement:
Using a combination of vehicles
allows the Company to focus executives on both stock price appreciation and achievement of consistent operating results (as indicated by Adjusted EBITDA and other measures) which we believe leads to
creation of value for stockholders.
-
-
Management of share usage and market practice:
Rite Aid
considers market practice concerning both share usage and competitive long-term incentive levels. Rite Aid uses a stock-based performance vehicle which allows the delivery of a long-term incentive
opportunity which is aligned with peer companies and retailers of similar size. The target LTI mix has been selected to align the maximum opportunity for executives and associates with our shareholder
return.
The
Compensation Committee's process for setting grant dates is discussed below. Then, on the approval date, those values are converted to the equivalent number of shares based on the
closing price of the Company's common stock on the date of approval for restricted shares and using the Black-Scholes valuation method for stock options. Performance awards are denominated in shares
(1 unit = 1 share).
Grant timing.
The Compensation Committee has a policy that annual long-term incentive awards (other than special or new hire grants)
will be approved
by the Committee once a year at its annual meeting held in connection with the annual stockholders meeting with a grant date equal to the later of the second business day after release of the
Company's first quarter earnings or the date of approval. Grants are made to the Named Executive Officers at the same time as awards are made to all other associates as part of the annual grant
process. Due to the first quarter 2016 earnings release being released one week prior to the annual meeting, the grant date for the fiscal year 2016 annual long term incentive awards is the date of
the annual meeting.
Special awards.
From time to time, the Company may make grants in addition to the annual equity grant including those to Named
Executive Officers.
Typically these grants include awards to new hires, promotional awards, or retention awards. Special awards can also be utilized to provide special performance incentives in connection with specific
corporate or financial goals of the Company.
Performance Awards
Performance awards granted to the Named Executive Officers under the regular long-term incentive program are in the form of units,
which are denominated in a target number of shares and
35
Table of Contents
payable
in Company stock if the designated Company performance goals are achieved over the prescribed performance period. Payouts can range from 0% to 250% of target. Performance awards are intended
to align interests of executives with those of stockholders through the use of measures the Company believes drive its long-term success. Performance awards are normally granted annually and are
structured as a targeted number of units based on the Company's achievement of specific performance levels with payout occurring after a three-year period.
Prior
to fiscal year 2015 performance awards were denominated in a target cash value and payable in cash if the designated Company performance goals are achieved over the prescribed
performance period.
For
performance award grants, the Compensation Committee based 80% of the award on the achievement of Adjusted EBITDA goals and the remaining 20% on leverage ratio goals for fiscal years
2014 and 2015, and return on net assets for fiscal year 2016; in each case to be measured over three years respectively. In addition, the Compensation Committee also added a provision subjecting the
award to modification based on our relative stockholder return versus the Russell 3000 Index over the respective three year measuring periods, which the Compensation Committee believes would further
align the interests of our executives with those of our stockholders and add an additional incentive for them to create sustainable long-term value for the Company.
2014-2016 Plan.
The 2014-2016 Plan is based 80% on the Adjusted EBITDA goals and 20% on leverage ratio goals to be determined over the
three year
performance period, as the Compensation Committee again determined that these goals appropriately balanced maximizing profitability and improving our financial condition through the reduction of debt
leverage. In addition, in order to further align the interests of our executives with those of our stockholders and add an additional incentive for them to create sustainable long-term value for the
Company, the Compensation Committee also determined to subject the award to modification based on our relative stockholder return versus the Russell 3000 Index over the three year measuring period.
For fiscal years 2014 through 2016, performance has exceeded target levels for both measures. Cumulative Adjusted EBITDA was $4,075 million compared to a target of $3,860 million. The
actual three-year average leverage ratio, adjusted for a full year of adjusted EnvisionRX EBITDA, was 4.60 compared to a target of 4.71 (note that lower leverage ratios represent better performance).
Additionally, our stockholder return is performing in the top one-third of the Russell 3000 Index. Performance over the period resulted in an average cash payout of 165% of target unit value.
2015-2017 Plan.
The 2015-2017 Plan is based 80% on the Adjusted EBITDA goals and 20% on leverage ratio goals to be determined over the
three year
performance period. In addition, in order to further
align the interests of our executives with those of our stockholders and add an additional incentive for them to create sustainable long-term value for the Company, the Compensation Committee also
determined to subject the award to modification based on our relative stockholder return versus the Russell 3000 Index over the three year measuring period. For fiscal years 2015 & 2016,
performance is slightly lower than target for both levels. Adjusted EBITDA was $2,724 million compared to a target of $2,735 million. Actual leverage ratio was 4.57 compared to a target
of 4.44 (note that lower leverage ratios represent better performance). Our stockholder return is performing in the top one-third of the Russell 3000 Index, which if sustained over the performance
period would result in a positive modification of the awards.
2016-2018 Plan.
The 2016-2018 Plan is based 80% on the Adjusted EBITDA goals and 20% on return on net asset goals to be determined over
the three
year performance period. The Compensation Committee set a three-year cumulative target for both metrics. In addition, in order to further align the interests of our executives with those of our
stockholders and add an additional incentive for them to create sustainable long-term value for the Company, the Compensation Committee also determined to subject the award to modification based on
our relative stockholder return versus the Russell 3000 Index over the three year measuring period.
36
Table of Contents
Special Performance Awards for Fiscal Year 2016.
On June 24, 2015, the Company granted special performance awards to
Messrs. Standley
and Martindale to assist with retention and provide focus on key performance components and business integration goals important to the success of the Company. The Committee identified that
Mr. Standley's historical compensation has been below the median level of our peer group and survey data, and his leadership is critical to the success of our company, including the integration
of EnvisionRx. The special award granted to Mr. Standley will vest on the earlier of June 24, 2017 or the date of the Company's 2017 Annual Meeting of Stockholders, subject to his
continued employment through such date, based on the achievement of the successful integration of EnvisionRx and its business units into the Company. Mr. Standley's total compensation,
including Mr. Standley's special award amortized over the vesting period, more closely aligns with the Company's positive performance relative to the peer group.
The
Committee recognized the importance of Mr. Martindale's role in leading our store operations through significant management changes, including executives in pharmacy, store
operations, logistics and marketing. A special award was granted to Mr. Martindale to provide focus on delivery of company net income and to retain him over the three year measurement period.
The special award granted to Mr. Martindale will vest on the earlier of the date of reporting of fiscal year 2018 results or the date of
the Company's 2018 Annual Meeting of Stockholders, subject to his continued employment through such date, based on the achievement of cumulative adjusted net income criteria over the three year
performance period. Mr. Martindale is eligible to receive 200% of the target number of shares awarded if the cumulative adjusted net income meets or exceeds 120% of the target level of
performance. No portion of Mr. Martindale's special award will vest where the achievement is less than 80% of the target level of performance. See Footnote 6 to the Summary Compensation Table
for additional information regarding the special performance awards.
Stock Options
Stock options are intended to reward executives for value creation and they only have value if our stock price increases over time,
which aligns the interests of our executives with our stockholders. The Company's ten-year options, granted at the market price on the date of grant, help focus executives on long-term growth. In
addition, because options vest ratably over a four-year period, they are intended to help retain executives and keep them focused on long-term performance.
Restricted Stock
Restricted stock grants are intended to support retention of executives and focus them on long-term performance because they generally
vest over a multi-year period (three years or longer) and are tied to the value of our stock. The risk profile of restricted stock is aligned with stockholders as it can motivate executives to both
increase and preserve stock price.
Post-Retirement Benefits
Supplemental Executive Retirement Program.
Each of the Named Executive Officers receives benefits under a defined contribution
supplemental executive
retirement plan ("SERP"). Under the SERP, Rite
Aid credits each participant with a specific sum to an individual account established for the participant, on a monthly basis while the participant is employed. The amount credited is equal to 2% of
the executive officer's annual base compensation. The participants are able to select among a choice of earnings indexes, and their accounts are credited with earnings that mirror the investment
results of such indexes. Participants vest in their accounts at the rate of 20% per year for each calendar year of participation in the SERP at a five-year rolling rate with the entire account balance
for each participant vesting upon death or total disability of the participant, termination without cause during the 12-month period following a "change in control" of the Company as defined in the
SERP or upon termination of
37
Table of Contents
employment
at age 60 or greater with at least five years of participation in the SERP. SERP payments may be delayed due to certain tax rules or deferral elections made by the executive.
Other Post-Employment and Change in Control Benefits; Removal of Excise Tax Gross Ups
To attract and retain highly skilled executives and to provide for certainty of rights and obligations, Rite Aid has historically
provided employment agreements to its executive officers, including our Named Executive Officers. The terms of the employment agreements are described in more detail under the caption "Executive
Employment Agreements." Additional information regarding the severance and change in control benefits provided under the employment agreements is described under the section entitled "Executive
CompensationPotential Payments Upon Termination or Change in Control."
During
fiscal year 2016, Rite Aid, upon the recommendation of the Compensation Committee, approved a change in role and related amendments to the employment agreement with
Mr. Vitrano, who previously served as Rite Aid's Senior Executive Vice President and Chief Administrative Officer and now serves as Chief Strategic Business Development Officer. Pursuant to
these amendments, in light of a reduced role, Mr. Vitrano's annual base salary was reduced to $500,000 and his target annual incentive opportunity was reduced to 75% of his annual base salary.
The Company also approved the promotion of Mr. Karst to the additional position of Chief Administrative Officer with, effective August 3, 2015, an increase in his target annual incentive
opportunity to 125% of base salary, but no other increases in fiscal year 2016 compensation. Upon the recommendation of the Compensation Committee, Rite Aid also approved amendments to update the
employment agreements with Messrs. Martindale and Montini as needed in order to reflect such executive officer's current titles, duties and compensation with Rite Aid. As a matter of good
corporate governance, in connection with the employment agreement amendments approved for Messrs. Vitrano, Martindale and Montini, each executive relinquished his excise tax gross up provision,
which was replaced with the requirement that
any change in control payments that become payable will be reduced to the amount that is not subject to such taxes if doing so would result in a greater after-tax payment to the executive.
Deductibility Cap on Executive Compensation
The Compensation Committee is aware that Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), treats
certain elements of executive compensation in excess of $1,000,000 a year payable to our Chief Executive Officer and three other most highly compensated executives (other than our Chief Financial
Officer) as an expense not deductible by the Company for federal income tax purposes. Payments to these individuals in excess of the $1,000,000 limit will be deductible if they meet the definition of
"performance-based compensation" as defined in Section 162(m) of the Code.
While
the Compensation Committee plans to continue taking actions intended to limit the impact of Section 162(m), it also believes that the tax deduction is only one of several
relevant considerations in setting compensation. Therefore, in order to maintain the flexibility to provide compensation programs for our Named Executive Officers that will best incentivize them to
achieve our key business objectives and create sustainable long-term shareholder value, the Compensation Committee reserves the right to pay compensation that may not be deductible to the Company if
it determines that doing so would be in the best interests of the Company. Based on the Company's current tax situation, compliance with Section 162(m) of the Code is not a significant concern.
Policy Regarding Recoupment of Certain Compensation
The Company has adopted a formal compensation recovery or "clawback" policy for its executive officers, including all Named Executive
Officers. Pursuant to this policy, the Board of Directors of the
38
Table of Contents
Company
may seek to recoup certain incentive compensation, including cash bonuses and equity incentive awards paid based upon the achievement of financial performance metrics, from executives in the
event that the Company is required to restate its financial statements.
Prohibition on Margin Accounts and Hedging and Similar Transactions
Our executive officers and directors, including the Named Executive Officers, are subject to an insider trading policy that, among
other things, prohibits them from holding Company securities in a margin account, and also prohibits them from engaging in put or call options, short selling or similar hedging activities involving
our stock. We prohibit these transactions because they may reduce the individual's incentive to improve our performance, focus the individual on short-term performance at the expense of long-term
objectives and misalign the individual's interests with those of our stockholders generally.
Director and Officer Stock Ownership Guidelines
In June 2014, we revised our Stock Ownership Guidelines in order to further the investment of our non-management directors, executive
officers, and Senior Vice Presidents in the success of the Company and to encourage a long-term perspective in managing the Company. The stock ownership requirements are:
|
|
|
Position
|
|
Minimum Ownership Requirements (Number of Share Equivalents)
|
Chief Executive Officer
|
|
lesser of 1,400,000 share equivalents or 5 times base salary
|
President(1)
|
|
lesser of 700,000 share equivalents or 3 times base salary
|
Senior Executive Vice Presidents
|
|
lesser of 700,000 share equivalents or 3 times base salary
|
Executive Vice Presidents
|
|
lesser of 200,000 share equivalents or 2 times base salary
|
Senior Vice Presidents
|
|
lesser of 100,000 share equivalents or 1 times base salary
|
Non-Management Directors(2)
|
|
lesser of 150,000 share equivalents or 2 times annual cash retainer
|
-
(1)
-
If
the President is also the Chief Executive Officer, the Chief Executive Officer amount shall apply.
-
(2)
-
Other
than an Executive Chairman, who shall be subject to the same requirement as the Chief Executive Officer.
Newly
appointed or promoted executives who are or become subject to our Stock Ownership Guidelines and newly elected non-management directors have five years from the time they are
appointed, promoted or elected, as the case may be, to meet the stock ownership requirements. Currently, all of those persons subject to the guidelines, including all Named Executive Officers and
senior vice presidents, have achieved the minimum holding ownership requirement or have not yet served for five years.
For
the purposes of determining stock ownership levels, the following forms of equity interests in the Company are included:
-
-
Shares owned outright by the participant or his or her immediate family members residing in the same household;
-
-
Restricted stock and restricted stock units whether or not vested; and
-
-
Shares underlying Rite Aid stock options whether or not vested.
Restricted
stock and restricted stock units, whether or not vested and shares owned count as one (1) share equivalent per share beneficially owned and stock options whether or not
vested count as one-half (.5) share equivalent per stock option.
39
Table of Contents
The
Compensation Committee is responsible for interpreting and administering the Stock Ownership Guidelines, and may, from time to time, reevaluate and revise the Stock Ownership
Guidelines, including when there are changes to the Company's capital structure or where implementation of the Stock Ownership Guidelines would cause a non-management director, executive officer or
Senior Vice President to incur a hardship due to his or her unique financial circumstances.