Newspaper article The Christian Science Monitor

Despite Losses, A Big Bonus for Top Brass FRUIT OF THE LOOM

Newspaper article The Christian Science Monitor

Despite Losses, A Big Bonus for Top Brass FRUIT OF THE LOOM

Article excerpt

Soaring executive pay at American corporations is defended as an incentive to jazz up company performance.

But what happens when the company falls flat? At Fruit of the Loom Inc., the board simply whittled down the yardstick for management performance - by a lot.

The Chicago-based apparelmaker repriced stock options for scores of top managers last November in what has so far become, on paper, a $25 million boon for the executives. The company disclosed the move in a proxy statement released before a May 14 shareholders meeting.

Fruit of the Loom's compensation committee made the award even though executives had overexpanded production capacity, not anticipating a severe downturn in retailing. The company lost $232.5 million last year. Moreover, Fruit of the Loom provided the largess even as it was shutting down 13 plants and laying off 6,000 workers.

The practice of repricing options has been widely criticized by investors.

"If Fruit of the Loom has any institutional shareholders who are aware of the repricing, I am sure they are going to bring the roof down," says John Nash, president of the National Association of Corporate Directors (NACD) in Washington.

The move has indeed vexed major shareholders. Some of the company's biggest institutional investors said on condition of anonymity that they condemned the repricing in meetings with company management.

"We view it {the repricing} as a negative," says Greg Jackson, portfolio manager at Yacktman Asset Management Company in Chicago. "Basically, it is a way to benefit management at shareholders' expense." Since the company last fall told Yacktman it was considering a repricing, Yacktman has more than halved its holdings to 2.1 percent of Fruit of the Loom's stock, Mr. Jackson says.

Fruit of the Loom says the criticism has been isolated. "Very few shareholders voiced any major concerns with the repricing - I would say the vast majority of them understood it," says Mark Steinkrauss, the vice president for corporate relations.

The flap underscores that among shareholders at least, the way a company offers executives compensation can be as prickly an issue as the amount it pays.

Moreover, it comes as most companies refrain from the controversial practice of options repricing. United States companies in the past four years have generally offered other kinds of incentives because of greater shareholder vigilance and tighter federal regulations. Also, rocketing US stock exchanges have made repricing of options unnecessary, financial experts say.

"Options repricing is a no-no. It's unfair to shareholders," says Mr. Nash at the NACD. "Management should share the same risk as all shareholders and shouldn't be rewarded for mistakes." The NACD represents more than 1,500 members of corporate boards of directors.

Stock-option plans typically give executives rights to buy a given number of the company's shares at a fixed price (often the market price when the option is offered) during a period starting at future date. This allows them to profit from a share-price rise.

When a company reprices options, it calls in outstanding stock options and reissues a comparable or lesser number of options at the prevailing market price. …

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