2017 Annual Shareholder Meeting

 

Date

June 12, 2017

 

Location

Teaneck Marriott at Glenpointe

100 Frank W. Burr Boulevard,

Teaneck, New Jersey

 

Time

4:00 p.m.,
Local Time

Download calendar    Click for map

© 2017 Staples Inc.

2017 Annual Shareholder Meeting

 

Date

June 12, 2017

 

Time

4:00 p.m.,
Local Time

Location

Teaneck Marriott at Glenpointe
100 Frank W. Burr Boulevard, Teaneck, New Jersey

Download calendar    Click for map

EXECUTIVE COMPENSATION AND COMPENSATION DISCUSSION AND ANALYSIS

Our Compensation Discussion and Analysis (“CD&A”) describes how we design and manage our compensation program, provides an overview of our business performance and progress in 2016 with our Staples 20/20 strategy and most importantly, demonstrates the strong link between pay and performance for our Named Executive Officers (“NEOs”).

We also present a summary of shareholder feedback, the positive changes our Board has made to address this feedback, and describe how we established the compensation structure for our new CEO, appointed in September 2016.

The CD&A is structured as follows:

  • An executive summary, including our business performance and shareholder engagement in 2016 (p.27)
  • A presentation of compensation earned by our NEOs as a result of this performance (p.31)
  • A detailed discussion of our 2016 compensation program (p.34) followed by the processes we use in designing and managing compensation (p.40)
  • Additional material relating to governance of our compensation program such as policies relating to stock ownership and recoupment (p.42)

EXECUTIVE SUMMARY

Guiding Principles of Our Compensation Program

The Committee believes that executive compensation should be directly linked to performance and the creation of long-term value for our shareholders.

Based on this principle, as well as consultation with shareholders, the Committee has developed annual and longterm incentive programs that are tied to objective, quantifiable, and rigorous performance metrics. The metrics we use in our incentive programs support the long-term alignment of pay with performance.

The structure of our executive compensation program is intended to enable the company to attract, retain and motivate a talented management team to drive our business objectives of both top line and bottom line results, as well as attractive returns on capital. We believe our overall program, and in particular our focus on granting performance-based awards, is consistent with current best practices in compensation design.

Business Overview

Staples is a world-class provider of products and services that primarily serve the needs of business customers of all sizes in seven countries. The overwhelming majority of our revenue is generated in North America. We are committed to providing superior value to our customers through a broad selection of products, easy to use websites and mobile platforms, a differentiated salesforce, an integrated retail and online shopping experience and a wide range of print and marketing and technology services. With the disposition of our European business, at the end of fiscal year 2016 we operated two business segments, North American Delivery and North American Retail.

Our vision is we help businesses succeed. This reflects a multiyear effort to evolve our company to become the product and service destination for businesses in a rapidly evolving and competitive marketplace. In May 2016, we introduced our Staples 20/20 strategic plan with four key priorities to transform Staples and get our company back to sustainable sales and earnings growth. We are extremely focused on allocating more resources to the businesses where we have our strongest competitive advantages, and deemphasizing our underperforming businesses. We’re also prioritizing innovation as a key catalyst to further differentiate Staples from our competitors.

Our priorities are to:

  • Accelerate mid-market growth in North America
  • Narrow our geographic focus to North America
  • Rationalize and preserve profitability of our North American Retail stores
  • Drive profit improvement and cost reduction across the company

Our North American Delivery segment (58% of total company sales in 2016) consists of the U.S. and Canadian businesses, including Staples Advantage, Staples.com, Staples.ca, and Quill.com, that sell and deliver products and services directly to businesses and consumers. Our strategies for North American Delivery focus on driving increased customer acquisition, retention and share of wallet through our customized contract offerings, our membership programs and expanding categories beyond office supplies, with a particular focus on the midmarket customer segment. We are also focused on serving our customers by evolving our team-based contract selling model to be more unified and collaborative. We are driving growth in categories beyond core office supplies by adding specialists who have expertise in selling products like facilities and break room supplies, furniture, promotional products and technology products.

Our North American Retail segment (37% of total company sales in 2016) consists of 1,255 stores in the United States and 304 stores in Canada at year end. Our strategies for North American Retail focus on offering easy-to-shop stores with products that are readily available and easy to find, and knowledgeable sales associates to support customers while preserving profitability through increased customer conversion, cost reductions and growing our services businesses. Our goals are to continue to be a destination for core office supply categories like ink, toner and paper as well as products and services beyond office supplies, such as print and marketing services, facilities and break room supplies and technology products and services.

Staples 20/20 Strategic Priorities 2016 Staples 20/20 Accomplishments
Accelerate mid-market growth in North America
  • Realigned our operating structure to better serve our customers by aligning our delivery businesses and mid-market customers within one business unit
  • Strengthened our differentiated approach to serving mid-market customers by combining the strength of our sales force with our digital expertise
  • Began scaling our membership programs, ending the year with significantly increased numbers of mid-market contract membership customers and small business membership customers who shop on Staples.com and Quill.com
  • Achieved double digit growth in sales beyond office supplies in the mid-market contract business
Narrow geographic focus to North America
  • Entered into an agreement to sell a controlling interest in our remaining European operations to Cerberus Capital Management during the fourth quarter of 2016 and this transaction closed in early 2017
  • Sold our UK retail business and operations to Hilco
  • Acquired Capital Office Products, one of the largest independent office products dealers in the U.S.
  • Partnered with Managed by Q to provide mid-market contract customers in New York City, Chicago, San Francisco and Los Angeles with an expanded offering of office services
Rationalize and preserve profitability of our North American Retail stores
  • Continued to rationalize excess capacity in retail network through 48 store closures and reduce risk by shortening the average remaining lease life per store in North America
  • Increased customer conversion in both U.S. Stores and Canadian Stores
  • Drove growth in print and marketing services
  • Continued to simplify the operating environment for our retail associates so that they can spend more time engaging with customers
Drive profit improvement and cost reduction across the company
  • After eliminating approximately $750 million of annualized pre-tax costs from 2013 – 2015, launched a plan to eliminate an additional $300 million of annualized pre-tax costs from 2016 – 2018
  • Achieved goal of eliminating $100 million of annualized pre-tax costs in 2016
  • Developed detailed plans to further reduce product costs, evolve our product stocking and promotional strategies, drive savings in our supply chain, eliminate fixed costs in our retail stores, and generate additional efficiency savings across the company in 2017 and 2018

2016 was a transformational year at Staples:

  • Four new Directors joined our Board – three Outside Directors from a variety of different industries and our new CEO, Ms. Goodman
  • We transitioned to separate CEO and Chairman roles pursuant to our previously announced Independent Chair policy
  • Ms. Goodman simplified her management team from 15 to 10 roles that serve on Staples leadership team
  • Ms. Goodman’s target compensation as CEO is significantly at risk – 89% of Ms. Goodman’s compensation is performance-based while Mr. Sargent’s 2016 target compensation was 65% performance-based
  • Ms. Goodman’s total target compensation as CEO is at the 25th percentile of our peer group companies
  • We eliminated many legacy executive perquisites in 2016 and plan to execute additional changes in 2017

Governance Outreach Program & Response to Shareholder Feedback

Robust Twice-Yearly Shareholder Engagement Program

For several years, Staples has conducted a comprehensive shareholder outreach program. Our Board values the opportunity to engage directly with our shareholders to hear their thoughts, better understand their views and represent their interests. As a result of this program, over the past several years, the Board has made significant enhancements to our corporate governance and compensation programs including proactive adoption of key governance initiatives and restructuring compensation to increase alignment between pay and performance.

In 2016, our Say-on-Pay proposal received support from 94% of shares voted at our annual meeting of shareholders.

In 2016, we reached out to the top 200 institutional investors, representing 86% of shares outstanding. As we reached out, we provided shareholders and proxy advisory firms with an update of Staples’ governance and compensation practices. We ultimately held discussions with investors representing approximately 40% of our shares outstanding. Our Chair of our Compensation Committee and our Chair of our Nominating and Governance Committee participated in some of the discussions and played an important role in our outreach program.

Shareholder Feedback and Board Response

A summary of shareholder’s perspectives related to executive compensation and the Board’s response is provided below. Our other robust corporate governance practices that have developed in response to shareholder feedback are described elsewhere in this proxy statement.

We received overwhelmingly positive feedback from our discussions with shareholders. They were appreciative of the Committee’s recent enhancements to the executive compensation program which included the following:

  • Adopting 3-year cumulative goals for the long-term incentive program
  • Adopting a policy limiting executive severance to 2.99 times the sum of the executive’s base salary plus target annual cash incentive award, unless shareholder approval is obtained
  • Ensuring that the performance goals in our incentive plans remain appropriately rigorous and are aligned with our business objectives
  • Modifying our peer group to provide better comparisons with Staples

All enhancements to the executive compensation program were the direct result of shareholder feedback and based on the Committee’s careful deliberation with input from management and the independent compensation consultant. Shareholders also applauded the changes made to our executive compensation program for the new CEO and appreciated the continued responsiveness to shareholder feedback. CEO compensation is discussed more fully on page 33, but highlights of the program developed based on shareholder feedback are listed below.

  • Ms. Goodman’s total target compensation as CEO is at the 25th percentile of our peer group companies
  • Ms. Goodman’s target total compensation was approximately 12% less than Mr. Sargent’s target compensation
    • – to better align pay with Staples’ historical performance
      – to reflect the fact that Ms. Goodman is a first-time CEO, and does not serve as the Chair of the Board of Directors
  • 100% of the new CEO’s long-term incentive award is performance-based shares, which results in 89% of the new CEO’s total compensation package being performance-based. In 2016, Mr. Sargent’s compensation was 65% performance-based
  • No additional awards or one-time long-term incentives were offered to the new CEO
  • Ms. Goodman also declined an increase in tax services reimbursement that was traditionally reserved for the CEO. The Company will be eliminating the executive tax services reimbursement program in 2017

We did not receive any shareholder proposals for inclusion in this year’s proxy statement. Although the shareholder feedback on our executive compensation program was very positive, the Committee will continue to monitor the sentiments of our shareholders through our outreach program.

The Committee will also remain vigilant to ensure that the goals in our incentive plans remain rigorous and our peer group is composed of companies that appropriately reflect the evolving markets which our company operates in, and the changing composition of our company.

Committed to Compensation Best Practices
Things We Do Things We Don't Do
  • Strong alignment of pay and performance
  • 89% of CEO compensation is “at risk”
  • Both short- and long-term programs include performance goals
  • Rigorous, objective financial metrics on annual and performance-based long-term awards that are closely tied to business strategy
  • Cumulative three-year goals in the long-term incentive program
  • 3-year relative TSR modifier in performance-based long–term awards
  • Strong stock ownership guidelines (5x salary for CEO and up to 4x for other NEOs)
  • Double trigger change in control provisions in severance agreements
  • Policy requiring shareholder approval for executive severance in excess of certain limits
  • Clawback policy
  • Anti-hedging policy
  • No employment agreements
  • No excise tax gross-ups in executive severance agreements
  • No pension plan
  • No private plane
  • Minimal executive perquisites

Plan Design & Components of Executive Compensation

Our NEOs for fiscal year 2016 were:

NEO Title
Shira Goodman1 CEO
Christine T. Komola Executive Vice President and CFO
Mark Conte Senior Vice President and Corporate Controller
Joseph G. Doody Vice Chairman
Michael Williams2 Executive Vice President and Chief Legal Officer
   
Ronald L. Sargent3 CEO and Chairman
John Wilson4 President International Operations and Head of Global Transformation

1 Ms. Goodman served as President, North American Commercial until her appointment as interim CEO on June 14, 2016 and permanent CEO on September 25, 2016.
2 Mr. Williams’ title was Executive Vice President and General Counsel until January 2017.
3 Mr. Sargent stepped down from the CEO position on June 14, 2016 and left Staples on January 28, 2017.
4 Mr. Wilson left Staples on October 31, 2016.

Messrs. Conte and Williams qualified as NEOs for 2016 due to the review of our management structure as part of Ms. Goodman’s transition to her new role as CEO.

In 2016, our executive compensation program had three elements: (1) base pay, (2) annual performance-based cash incentive and (3) long term incentive(s); for our CEO, from 2017 the long term incentive is 100% performance-based. For the other NEOs (excluding Mr. Conte), the long term incentive is 2/3rd performance-based and 1/3 time-based (Restricted Stock Units). The first chart below illustrates how our CEO’s target compensation in structured; the second chart shows the (average) target structure of NEOs other than the CEO (excludes Mr. Conte and NEOs who left Staples during 2016):

CEO Target Opportunity Mix

NEO Average (excluding Mr. Conte & CEO)
Target Opportunity Mix

 

Component Fixed or Variable 2016 Benchmark/Metrics
Base Salary
Fixed
  • Based on median of peers
Annual Cash Award 100% Performance based
  • 50% Earnings Per Share
  • 25% Total Gross Profit Dollars
  • 25% Total Sales
Performance Share Award 100% Performance based
  • 50% Return on Net Asset (RONA) %
  • 50% Operating Income Growth %
  • +/- 25% based on 3-year Relative Total Shareholder Return (TSR)
Restricted Stock Unit Award 100% Time based
  • Vest ratably over 3 years (1/3, 1/3, 1/3)
Benefits Fixed
  • Broad-based plans and limited executive perquisites
 
2016 Compensation Results

The Committee sets rigorous financial metrics tied directly to the success of our strategy and the creation of long-term shareholder value in a highly competitive industry.

Both our annual cash award and our performance share awards for 2016 were 100% tied to objective and rigorous financial goals. We set our goals for our incentive programs within the first 90 days of the fiscal year. Target performance goals are generally based on our fiscal year operating plan and outlook for the coming year.

The following tables set out our results against our predetermined, rigorous performance goals, under our incentive award plans for which there was a payout opportunity in 2016.

Annual Cash Incentive Award
  Target
Value $
Actual
Value $
Realized Value as
% of Target
Shira Goodman $1,244,291 $584,817 47%
Christine T. Komola $621,154 $291,942 47%
Mark Conte1 $189,609 $120,378 63.5%
Joseph G. Doody $593,635 $279,008 47%
Michael Williams $271,802 $127,747 47%
       
Ronald L. Sargent $1,873,812 $880,692 47%

1 Mr. Conte is not a member of Staples leadership team and was eligible for a different bonus plan in 2016 than the other NEOs.
* Mr. Wilson was not eligible to receive a payment under the Annual Cash Incentive Award as he left Staples on October 31, 2016.

 

Performance Share Award

In March 2017, performance shares were earned and released for the 2014-2016 performance cycle.

  • The target value and target number of shares were determined at the start of the performance period
  • The realized value is a function of the number of shares earned, adjusted for relative total shareholder return and the stock price when shares are released
  • For the 3-year performance period from 2014 – 2016, cumulative total shareholder return fell in the bottom one-third of the S&P 500, resulting in a 25% reduction in shares earned
  • As a result, the realized value of performance share awards was 53.925% of target value

Performance Share Award, 2014 – 2016

Name Target
Value $
Target
Shares1
Shares
Awarded
Actual
Value $2
Realized Value as
% of Target
Shira Goodman $2,169,112 161,874 87,291 $766,415 53.925%
Christine Komola $2,169,112 161,874 87,291 $766,415 53.925%
Mark Conte3
Joseph Doody $2,169,112 161,874 87,291 $766,415 53.925%
Michael Williams4 $406,271 30,019 16,189 $142,139 53.925%
           
Ronald Sargent $8,225,000 613,806 330,996 $2,906,145 53.925%
John Wilson5 $2,169,112 161,874 82,289 $722,497 50.835%

1 Target shares calculated on share price of $13.40 on March 5, 2014 grant date and rounded up to the nearest full share.
2 Value based on closing price of $8.78 of Staples stock on date of release (March 7, 2017).
3 Mr. Conte is not eligible to receive Performance Share Awards.
4 Target shares calculated on share price of $13.40 on March 5, 2014 grant date and $14.43 on December 3, 2014 grant date, rounded up to the nearest full share.
5 Mr. Wilson’s award was pro-rated to reflect the fact that he left Staples on October 31, 2016.

Total shareholder return (TSR) Notwithstanding our progress on key Staples 20/20 objectives, we believe total shareholder return on a 1-year basis was negatively affected by the U.S. District Court for the District of Columbia ruling in May, 2016 granting the Federal Trade Commission’s request for a preliminary injunction to block Staples’ acquisition of Office Depot, as well as yearover- year declines in total company sales and non-GAAP earnings per share during fiscal years 2014 – 2016. Our stock prices on the first and last day of fiscal 2016 were $8.92 and $9.16 respectively.

Total Shareholder Return Staples S&P Retail
Index
S&P 500
1-year +8% +18% +20%
3-year -21% +67% +36%
 
New CEO Compensation

In 2016, Staples transitioned our CEO position from Mr. Sargent to Ms. Goodman, who was appointed to the role of interim CEO on June 14, 2016, and permanent CEO on September 25, 2016. The Committee engaged its independent compensation consultant, Exequity, to provide data and analysis to support the Committee’s decision-making process in agreeing an appropriate target compensation structure and value for the new CEO.

In reaching its decision, the Committee considered many factors, including peer group CEO compensation, tenure of each of the CEOs, and the revenue and market capitalization of the peer group companies. The analysis also took into account whether the role of CEO at the peer companies was a combined CEO / Chair role or whether the peer group company had separate CEO and independent Chair roles.

Ms. Goodman’s total target annual compensation as CEO is at the 25th percentile of our peer group companies

The Committee determined that the following target total compensation was appropriate:

Base Salary Annual Cash Incentive Long Term Incentive
  • Ms. Goodman’s annual base pay was increased from $700,000 to $1,100,000 with effect from her appointment as CEO
  • Ms. Goodman served as interim CEO between June 14 and September 24, 2016. During this time, Ms. Goodman received a monthly stipend allowance of $30,500 to recognize her additional responsibilities as interim CEO, in addition to her base pay of $700,000. This stipend ceased on her appointment to the CEO role on September 25, 2016
  • The base salary of $1,100,000 represents an 11.9% reduction in base salary compared to the base salary of Mr. Sargent, the previous CEO
  • Ms. Goodman’s annual cash incentive target as a percentage of base pay was increased from 85% to 150% on her appointment as interim CEO on June 14, 2016. The calculation of bonus earned took into account base pay and the monthly stipend she received to recognize her role as interim CEO
  • The 150% target is in line with Mr. Sargent’s target opportunity as CEO and is in line with target percentages of peer group companies
  • On the change of incumbent in the CEO role, the Committee determined that it would be appropriate for the CEO long term incentive to be 100% performance-based
  • The Committee also determined that the target value of the CEO long term incentive should be reduced
  • The Committee’s guiding principle in moving from a Long Term Incentive (“LTI”) practice of 2/3rds Performance Shares, 1/3rd timebased Restricted Stock Units was to reinforce our pay for performance philosophy and to more fully align our CEO’s interests with those of our shareholders
  • Consequently, Ms. Goodman’s first long term incentive grant as CEO was granted 100% in performance shares, with a target value of $7,250,000
  • This represents a reduction of $975,000 or 11.8% of the target LTI value of the previous CEO, Mr. Sargent

Taking these changes together, this represents a reduction in target annual compensation for our CEO in excess of $1.3M or 11.8%, as set out in the table below.

    Target Annual Compensation as CEO
    Mr. Sargent   Ms. Goodman Difference,
Ms. Goodman
vs. Mr. Sargent
Base Salary   $1,249,208   $1,100,000 -$149,208
Target Annual Cash Incentive 150% $1,873,812 150% $1,650,000  
Total Target Annual Cash   $3,123,020   $2,750,000 -$373,020
Long Term Incentives          
Target Value - Performance Shares   $5,483,333   $7,250,000  
Grant Date Value - Restricted Stock Units   $2,741,667   0  
Long Term Incentives - Total Target Value   $8,225,000   $7,250,000 -$975,000
Total Target Annual Compensation   $11,348,020   $10,000,000 -$1,348,020