Chief executive officers of publicly held jewelry companies appear to be fairly compensated, based on a comparison of executive pay in other retail categories. Jewelry executives’ salaries are moderate, and there is ample upside compensation potential via incentive programs. In addition, severance packages for jewelry industry executives appear to be reasonable, without being excessive. These are the major conclusions reached in an exclusive Executive Salary Study conducted by IDEX Online Research.

 

With executive pay packages squarely in the gun sights of regulators and social activists, IDEX Online Research examined the pay packages of the top five highest-paid officers of each major publicly held jewelry company – retailers, suppliers, and online merchants. While watchdog organizations claim that corporate executive pay is far too lavish, IDEX Online Research does not believe this to be true in the jewelry industry.

 

IDEX Online Research compared compensation of jewelry executives to several financial benchmarks – sales and profitability levels; growth of sales, profits, and the value of the company’s shares; and other benchmarks. In addition, executive compensation of jewelry executives was compared to executives in other retail categories. The highlights of the study are summarized below.

 

Executive Compensation: Jewelry Industry Executives

Compensation levels for jewelry industry executives vary widely. Further, compensation varies significantly from year-to-year, based primarily on incentive compensation.

 

Because executive compensation is an art, it is difficult to use one or even several benchmarks to measure and compare how companies’ top officers are compensated. Further, not all executive compensation is reported – and it is certainly not reported on a basis that allows easy comparisons. That should change, however, based on new Securities and Exchange Commission rules that were implemented in mid-2006.

 

Executive Compensation: Jewelry CEOs

Call them what you want – chairman, chief executive officer (CEO), president, big kahoona – they are the top executive in an organization. As former U.S. president Harry Truman said, “The buck stops here.”

 

Executive compensation plans for CEOs are particularly complex, with many moving parts. Most SEC documents filed by public companies outline executive pay programs, but few give any details about how executive performance is actually measured. Thus, our analysis is purely quantitative, based on financial benchmarks that we used during our Wall Street career. We readily acknowledge that there are qualitative issues involved with executive performance measures, but those are beyond the scope of this analysis.

 

The following table summarizes compensation levels in 2005 for jewelry industry executives, along with financial benchmarks for the time period that aligns with their compensation period. For example, Signet Group’s fiscal year runs from February to January; sales were summarized for the same period, as was a comparison of the price of the company’s shares.

 

In theory, the financial benchmarks shown on the table below should represent some of the key components that the Board of Directors’ Compensation Committee would normally examine. For example, the Compensation Committee should look at the overall growth rate of the company: did sales and profits rise? The Compensation Committee – which is typically made up of outside directors – must place emphasis on the welfare of the shareholders by asking how much the stock price rose during the year, despite the fact that a CEO has only minimal control over the price of his company’s shares. Corporate directors cannot ignore investors without the possibility of triggering a revolt, especially by large institutional shareholders.

 

It is easy to argue that these financial benchmarks are too rigid. However, in lieu of other benchmarks which are not disclosed to public shareholders (though this will change in 2007), these high level financial measures shown on our table provide a reasonable method of evaluating an executive’s performance.

 

Here is an explanation of the columns on the table:

 

• Annual compensation – Salary, bonus, and other annual compensation, excluding long term incentives such as stock options and benefits.

• Other Compensation – This includes stock options and other long term benefits. Some companies put a value on these; others do not. Under new SEC rules, companies will be required to spell out all compensation, including the value of club memberships, corporate airplane usage, and other “stealth” executive perks.

• Year-to-Year % Change – Each financial benchmark – compensation, sales, pretax profits, and stock price – was compared year-over-year, with the result being “percent change year-to-year.” All comparisons represent fiscal periods, not calendar periods. For example, we compared the average price of Signet Group shares (SIG-NYSE) during January 2006 versus January 2005. Executive compensation committees may use different time periods and different measures, but the concept we used for analysis is sound and reasonable.

 

An examination of the table above could produce erroneous conclusions without some explanatory notes:

 

• Tiffany – Total annual compensation for Tiffany’s CEO rose by 186% in 2005 due to a bonus of nearly $1.8 million versus no bonus in 2004.
• Birks & Mayor – The CEO of Birks & Mayor took a bonus of $1.1 million in 2005 versus a $367,000 bonus in the prior year.
• Signet Group – The CEO of Signet did not get a bonus in 2005. In the prior year, he received a bonus of just over $900,000.
• Whitehall – Whitehall was trying to fashion a pay package which would entice someone to lead this wounded company back to prosperity. As a result, executive compensation levels varied widely in the study period.
• Zale – A large bonus in 2004 versus a small bonus in 2005 made a significant difference in the CEO’s annual compensation.
• Charles & Colvard – A large bonus made a substantial difference in the compensation package for Charles & Colvard’s CEO.
• Lazare Kaplan & Abazias – Neither company granted “other compensation” – options – to its top officers in 2005. Options have been granted in prior years.

Under then-current SEC rules in 2005, companies were not required to put a value on long term compensation. Thus, IDEX Online Research was unable to include the value of these benefits in examining the total pay package of each jewelry executive. However, when companies disclosed the value of these long term compensation packages, they ranged from a mere pittance to 100% (or more) of total annual compensation. For example, in 2004, the CEO of Aber Diamond received a salary and bonus of $1.6 million; he also received an option package valued at $1.6 million. However, in 2005, he received no options, but did receive “other compensation” of $50,986.

 

The full analysis of the Executive Compensation study contains the following major headings:

 

Executive Compensation: Salary vs. Bonus Mix

Executive Compensation: Tied to Profits?

Executive Compensation: Jewelry Executives’ Pay Is Reasonable versus Other Retail Categories

Executive Compensation: Severance Payments

Executive Compensation: Zale Corporation

Executive Compensation: Test for Social Correctness

Executive Compensation: Other Top Officers

Executive Compensation: Motivating the Top Brass

Executive Compensation: Increased Disclosure

 

The full research report and analysis can be found here: www.idexonline.com/Research/JewelryExe