The Advisors' Blog

– Lynn Jokela

With a depressed company stock price, senior officers at AMC Entertainment Holdings recently agreed to a new compensation approach for its executives.  The approach involves a reduction in agreed-upon pay in exchange for an equivalent out-of-the-money share grant.  AMC’s stock price has been in decline for several years likely at least partially attributable to a decline in movie theater viewership.

AMC’s press release announcing the new executive comp program says cash salaries of senior officers will be reduced by 15% and their target cash bonus opportunity will also be reduced by 15%.  Here’s how the reduction will work:

This compensation decrease will be split into thirds and applied evenly as reductions across each of three categories: one-third lowering combined cash salary & cash bonus, one-third lowering at-market restricted share equivalent grant amounts that time vest and one-third lowering at-market performance share equivalent grant amounts that vest based on performance. Importantly, these sacrifices in lowered cash salary and cash bonus, as well as in lowered restricted share equivalent grant and performance share equivalent grant levels, will continue at the new lower totals in each of the coming three years.

To potentially offset the pay reduction, the officers will receive a one-time grant of AMC share equivalents that, with certain exceptions, has a 3-year time vesting provision and requires AMC’s stock price to rise materially in order for vesting to occur.  Initial vesting will not occur until AMC’s stock price rises to 102% of the grant date price and future vesting goes up from there.  Here’s how the vesting will work:

This share equivalent grant is split into six equal tranches. Initial vesting will not occur until the AMC share price recovers on a 20-day VWAP basis to $12 per share, a 102% premium to yesterday’s market close. The second tranche will vest only when the AMC share price rises to $16, a 170% premium. The third tranche vests at $20, a 237% premium. The subsequent tranches vest at $24, $28 and $32, premiums of 305%, 372%, and 440% respectively.

The press release says certain officers are excepted from the program, such as officers that are expected to retire prior to the 3-year time vesting requirement.  All other officers voluntarily signed-on to the program signaling they believe the company’s stock is undervalued.

Will be interesting to see how this plays out.  For companies with an undervalued stock price, I can see how some might find the approach enticing presuming risk mitigation is factored in so that compensation-related risks aren’t inadvertently raised.