DEF: Scotts Miracle-Gro Seeks Shareholder Approval for LTIP Boost

The Scotts Miracle-Gro Company will hold its 2026 Annual Meeting to elect directors, vote on executive compensation, ratify auditors, and approve an increase in shares for its Long-Term Incentive Plan.

Summary

• The 2026 Annual Meeting of Shareholders will be held virtually on Monday, January 26, 2026, at 9:00 A.M. Eastern Time.
• Shareholders will vote on the election of four Class I directors, an advisory resolution on named executive officer (NEO) compensation, the ratification of Deloitte & Touche LLP as the independent auditor for fiscal year 2026, and an amendment to the Long-Term Incentive Plan (LTIP).
• The proposed LTIP amendment seeks to increase the maximum number of common shares available for grant by 2,750,000 and eliminate the fungible share ratio, simplifying administration to a one-for-one basis for all awards.
• The company reported strong financial performance for fiscal 2025, with Non-GAAP Adjusted EBITDA of $584.3 million, a 14% increase over fiscal 2024, and a leverage ratio improvement to 4.10x from 4.86x.
• NEOs received incentive payouts at 165.8% of target for fiscal 2025 due to strong financial performance, with a portion paid in fully vested restricted stock units to maximize cash for debt reduction.
• The 2025 Say-on-Pay vote received 69.3% approval, a decline from the prior year, prompting shareholder engagement and subsequent changes to the executive compensation program.
• Key changes to executive compensation include discontinuing temporary LTI increases, no special one-time LTI awards, simplified Performance Unit design with new 3-year metrics (Cumulative POS Unit Growth %, Cumulative Non-GAAP Adjusted EBITDA, Absolute TSR), and a return to single annual equity grants in fiscal 2026.

Sentiment

Score: 7

Explanation: The company demonstrated strong financial performance in fiscal 2025, exceeding key targets for EBITDA and leverage reduction. Proactive adjustments to executive compensation based on shareholder feedback are positive. However, the significant underperformance in TSR compared to the industry index and the high CEO pay ratio temper the overall positive sentiment. The request for additional shares for the LTIP, while justified for retention and strategic transition, introduces potential dilution.

Positives

• Fiscal 2025 Non-GAAP Adjusted EBITDA increased by 14% over fiscal 2024, reaching $584.3 million, exceeding the target of $550.0 million by 6.2%.
• The company achieved $100 million in cost outs during fiscal 2025, demonstrating effective cost management.
• The leverage ratio improved significantly to 4.10x from 4.86x, surpassing the target improvement of 0.36x.
• Gross margin improved by 490 basis points, allowing for increased investment in brands and innovation.
• Overall category market share in units grew by 1%, driven by increased consumer engagement.
• Executive compensation structure for fiscal 2025 is designed to align NEO interests with shareholder value, with approximately 75% of total direct compensation being variable pay.
• The company proactively engaged with shareholders following a decline in the 2025 Say-on-Pay vote, leading to concrete changes in the executive compensation program.
• The Long-Term Incentive Plan (LTIP) amendment aims to simplify administration by removing the fungible share ratio, counting all awards on a one-for-one basis against the share reserve.

Negatives

• The 2025 advisory Say-on-Pay vote received only 69.3% approval, indicating a notable decline in shareholder support for executive compensation practices compared to the prior year.
• The company utilized a temporary measure in fiscal 2025 to pay a portion of annual cash incentives in equity, which required increased share utilization and potential dilution, although it was for debt reduction.
• The CEO pay ratio for fiscal 2025 was 184 to 1, with the CEO's total compensation at $12,299,261 compared to the median employee's $66,696.
• Company Total Shareholder Return (TSR) significantly underperformed the S&P 500 Household Products Index TSR in fiscal years 2025 (43.9% vs 117.4%), 2024 (64.1% vs 132.8%), and 2023 (36.6% vs 106.1%).
• The proposed increase of 2,750,000 common shares for the LTIP, combined with existing shares, represents a pro forma fully diluted overhang of 12.32%, raising potential dilution concerns for shareholders.

Risks

• Potential dilution of shareholder value due to the proposed increase of 2,750,000 common shares available for grant under the Long-Term Incentive Plan.
• The company operates in a heavily regulated industry, making it susceptible to actions and decisions of federal, state, local, and other governmental agencies.
• Cybersecurity risks are a concern, with the Audit Committee overseeing measures to identify, monitor, and control such exposure.
• The company faces challenges in attracting, retaining, and motivating high-caliber leadership and key talent in a competitive market, necessitating robust incentive programs.
• Reliance on discretionary adjustments in incentive payouts based on individual facts and circumstances, which could lead to differences between reported financial results and actual payouts.
• The company's run rate for equity awards has increased significantly due to temporary measures to convert cash-based incentives to equity, which may continue in the near term, impacting dilution.

Future Outlook

The company aims to transition its compensation program back to a long-term, sustainable model, with a commitment to paying annual cash incentives entirely in cash in future years. The increased share authorization for the LTIP is expected to provide a 2-3 year runway for equity awards, supporting strategic goals and retention of key next-generation leaders. The company will return to approving annual equity-based awards in January, following the first-quarter earnings release, starting in fiscal 2026.

Management Comments

• Our Compensation Committee seeks to align our NEOs interests with those of our shareholders by establishing performance goals intended to increase shareholder value and rewarding performance that meets or exceeds those performance goals.
• We believe that our competitive executive compensation structure results in fair realizable pay commensurate with the Company's financial performance and is competitive compared to a peer group established by the Compensation Committee with its independent compensation consultant and general industry survey data.
• The Company believes its director compensation structure reflects the additional responsibilities that the Company expects each non-employee director to assume, facilitates the rotation of directors among the various Board committees and ensures that the Company continues to provide a competitive level of compensation to its non-employee directors.
• The Amended Plan and the requested share increase are vital to supporting the Company's strategic goals and transitioning our compensation program back to a long-term, sustainable model.
• The Compensation Committee carefully considered the need for new shares against the potential dilutive impact on shareholders and believes this request is reasonable, necessary, and vital to driving the execution of our mid-term strategy.

Industry Context

The company operates in a heavily regulated industry, requiring constructive engagement with governments. Its focus on driving innovation in product development, design, communications, and business operations aligns with broader consumer industry trends, especially as consumers shift to new media and formats. The company's efforts to improve gross margins and expand e-commerce channels reflect competitive pressures and evolving retail landscapes. The underperformance in TSR compared to the S&P 500 Household Products Index suggests that while internal financial metrics are improving, the market's perception of the company's value creation lags behind its peers.

Comparison to Industry Standards

• The company's overall non-employee director compensation for 2025 was positioned above the 75th percentile of its Compensation Peer Group (highly regarded consumer products-oriented companies with annual revenues between $1.1 billion and $8.2 billion, median $3.7 billion), excluding the Lead Independent Director.
• The CEO pay ratio of 184 to 1 is a metric that varies widely across industries and companies, but it is a point of scrutiny for corporate governance advocates and may be higher than some industry averages, though specific comparable company ratios are not provided in the filing.
• The company's Total Shareholder Return (TSR) of 43.9% for fiscal 2025 significantly underperformed the S&P 500 Household Products Index TSR of 117.4% for the same period, indicating a substantial lag compared to broader industry benchmarks.
• The company's executive compensation practices, including performance-based pay (75% variable), no employment agreements, double-trigger change in control provisions, clawback policies, and robust stock ownership guidelines (10x base salary for CEO, 3x for other NEOs), are generally aligned with or exceed corporate governance best practices in the industry.

Management Changes

Corporate Governance

Related Party Transactions

• James Hagedorn (Chairman & CEO) purchased 188.2 flight hours on Company aircraft for personal use at a cost of $468,342 during fiscal 2025 under a time sharing agreement.
• Nathan E. Baxter (President & COO) purchased 71.8 flight hours on Company aircraft for personal use at a cost of $168,274 during fiscal 2025 under a time sharing agreement.
• Scotts LLC leased aircraft from Hagedorn Aviation, Inc. (majority owned by James Hagedorn) at a cost of $486,362 during fiscal 2025.
• Hagedorn Aviation, Inc. is obligated to reimburse Scotts LLC $571,406 for fuel used from Company accounts during fiscal 2025.
• The Farms For City Kids Foundation, Inc. (founded by James Hagedorn and his wife) received $923,044 in support from the Company during fiscal 2025.
• The Hagedorn Legacy Foundation (HLF), where James Hagedorn is a director/officer, received an aggregate of $229,982 in direct financial support from The Scotts Miracle-Gro Foundation (SMGF) and/or indirect administrative support from Scotts LLC during fiscal 2025.
• Nicholas Hagedorn (son of James Hagedorn, brother of Christopher J. Hagedorn) is Chief Genetics Officer at a subsidiary and received $219,787 in salary, bonus, and other payments during fiscal 2025.
• Jordan Littlefield (son of Katherine Hagedorn Littlefield, a director) is Director, Strategy at Scotts LLC and received $233,963 in salary, bonus, and other payments during fiscal 2025.
• Adam Hanft (non-employee director) received $250,000 from the Company for strategic consulting services provided by his firm, Hanft Ideas LLC, during fiscal 2025.

Stakeholder Impact

• Shareholders: Potential for dilution from increased share authorization for the LTIP, but also benefit from improved financial performance and management retention. The Say-on-Pay vote outcome and subsequent compensation changes reflect direct shareholder influence.
• Employees: Executive compensation changes, including the shift back to all-cash annual incentives and streamlined equity grants, impact NEOs and key management. The Discounted Stock Purchase Plan offers benefits to eligible employees.
• Customers: Improved gross margins and focus on innovation and market share growth suggest continued investment in products and consumer engagement.
• Creditors: Significant reduction in the leverage ratio (from 4.86x to 4.10x) and efforts to maximize cash flow for debt paydown positively impact creditors by reducing financial risk.
• Community/Non-profits: Continued support for The Farms For City Kids Foundation and The Hagedorn Legacy Foundation demonstrates corporate social responsibility and community engagement.

Next Steps

• Shareholders will vote on the election of four Class I directors at the 2026 Annual Meeting.
• Shareholders will conduct an advisory vote on the compensation of named executive officers.
• Shareholders will vote on the ratification of Deloitte & Touche LLP as the independent registered public accounting firm for fiscal year ending September 30, 2026.
• Shareholders will vote on the approval of an amendment and restatement of The Scotts Miracle-Gro Company Long-Term Incentive Plan.
• The company plans to return to making all equity awards at the same time, following the first-quarter earnings release, starting in fiscal 2026.
• The company is committed to returning to sustainable compensation practices, including the payment of the annual incentive entirely in cash in future years.

Key Dates

Recommendation

The company demonstrated strong operational and financial improvements in fiscal 2025, exceeding EBITDA and leverage targets, which is a positive signal. Management's responsiveness to shareholder feedback on compensation and commitment to debt reduction are commendable. However, the significant underperformance in Total Shareholder Return (TSR) compared to the S&P 500 Household Products Index over multiple years remains a concern, indicating that operational improvements have not fully translated into competitive shareholder value creation. The proposed increase in LTIP shares, while necessary for talent retention, adds to potential dilution. A 'hold' recommendation is appropriate as the company executes its strategic plan and aims to close the gap in TSR performance, requiring continued monitoring of execution and market response.

Keywords

Scotts Miracle-Gro, SMG, Proxy Statement, Annual Meeting, Executive Compensation, Long-Term Incentive Plan, LTIP, Shareholder Vote, Corporate Governance, EBITDA, Leverage Ratio, Total Shareholder Return, TSR, Dilution, Board of Directors, Risk Management, Cybersecurity, Related Party Transactions, Say-on-Pay, Performance Units, Stock Options, Restricted Stock Units