DEFA14A: Levi Strauss & Co. Defends Executive Pay Practices Ahead of Shareholder Vote

Levi Strauss & Co. is supplementing its proxy statement to provide additional information regarding its executive compensation program and to reiterate its recommendation for shareholders to vote FOR the advisory vote on executive compensation.

Summary

• Levi Strauss & Co. (LS&Co.) has released a supplement to its proxy statement addressing concerns raised by Institutional Shareholder Services (ISS) regarding executive compensation.
• The company emphasizes that over 85% of the CEO's compensation is performance-based, and the 2023 results, which were below expectations, led to a lower AIP payout for Mr. Bergh.
• LS&Co. defends its temporary shift in AIP approach during the COVID-19 pandemic, which involved weighting financial and individual performance equally and measuring performance over two 6-month periods.
• The company highlights that it is returning to its pre-pandemic AIP structure in fiscal year 2024, weighting financial performance at 75% and individual performance at 25%, using 12-month performance periods.
• LS&Co. justifies the make-whole awards granted to Ms. Gass to compensate for forfeited compensation from her previous employer, Kohl's, noting that the awards were calibrated to actual forfeited compensation.
• The company points out that it has received strong shareholder support for its executive compensation program in the past, with an average of 99.75% of votes cast in favor of the say-on-pay vote since its IPO in 2019.
• LS&Co. also notes that proxy advisory firm Glass Lewis has recommended that shareholders vote FOR the Say on Pay Proposal.
• The company reiterates its commitment to attracting, motivating, and retaining high-performing talent, delivering competitive compensation for results, and aligning executive interests with those of shareholders.

Sentiment

Score: 7

Explanation: The document presents a balanced view, acknowledging challenges while emphasizing positive aspects of the compensation program and its alignment with shareholder interests. The company is proactively addressing concerns raised by proxy advisory firms.

Positives

• A significant portion of executive compensation is performance-based, aligning interests with shareholders.
• The company is returning to its pre-pandemic AIP structure, emphasizing financial performance.
• LS&Co. has a history of strong shareholder support for its executive compensation program.
• The make-whole awards for Ms. Gass were carefully designed to offset forfeited compensation.
• The company is transparent about its compensation practices and addresses concerns raised by proxy advisory firms.

Negatives

• Fiscal year 2023 results were below LS&Co.'s expectations, leading to a lower AIP payout for the CEO.
• PRSUs granted in fiscal year 2021 and vesting in fiscal year 2023 had a 76% payout, which was below target primarily based on relative TSR.
• The temporary shift in AIP approach during the pandemic may have raised concerns about the emphasis on individual performance over financial results.

Risks

• Continued volatility in the economic and geopolitical climate could impact the company's ability to achieve financial goals.
• Failure to attract, motivate, and retain high-performing talent could negatively impact the company's performance.
• Changes in shareholder sentiment or proxy advisory firm recommendations could impact future say-on-pay votes.
• The company's ability to successfully execute its strategic priorities, such as its Brand Led, DTC First, and diversification strategies, could impact executive compensation payouts.

Future Outlook

LS&Co. will return to weighting the executive leadership team's AIP bonus payments based 75% on the financial performance of LS&Co. and 25% on individual performance in fiscal year 2024, significantly decreasing the portion of annual incentives based on individual performance. LS&Co. will also return to utilizing 12-month performance periods in fiscal year 2024.

Management Comments

• The Compensation and Human Capital Committee believes that LS&Co.'s performance-based pay philosophy delivered fully appropriate levels of realized compensation for Mr. Bergh.
• The Committee has and continues to consistently apply this philosophy in our executive pay decisions, with guidance from independent outside advisors.
• We believe these changes were critical in affording us the flexibility to adjust for extreme changes to the economic and geopolitical climate when implementing our AIP during fiscal years 2021 through 2023.
• Fiscal year 2023 AIP payouts reflect the accomplishments of our named executive officers in advancing these strategic priorities.
• The Compensation and Human Capital Committee believed these make-whole awards were necessary to attract an executive of Ms. Gass' talent and abilities and were carefully designed to offset forfeited compensation, in addition to ensuring appropriate retention and performance.

Industry Context

The document highlights the challenges faced by companies in the sector during the COVID-19 pandemic and geopolitical events, leading to adjustments in compensation programs. It also mentions that LS&Co. is aligning its compensation practices with industry standards and best practices.

Comparison to Industry Standards

• The document mentions that many companies within the sector re-assessed their approach to their annual incentive bonus program during the COVID-19 pandemic.
• The document references Kohl's compensation practices in relation to Ms. Gass' forfeited compensation.
• The document notes that LS&Co. benchmarks its executive compensation against market competitiveness.

Stakeholder Impact

• Shareholders are being asked to vote on the advisory vote on executive compensation.
• The executive compensation program is designed to attract, motivate, and retain high-performing talent, which benefits the company and its stakeholders.
• The company's performance impacts executive compensation payouts, aligning executive interests with those of shareholders.

Next Steps

• Shareholders will vote on the advisory vote on executive compensation at the 2024 Annual Meeting.
• The Compensation and Human Capital Committee will continue to monitor and adjust the executive compensation program to align with company performance and shareholder interests.

Key Dates

Keywords

executive compensation, proxy statement, say on pay, performance-based compensation, AIP, make-whole awards, shareholder value, CEO transition, Levi Strauss & Co., LS&Co.