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If someone was paid to improve your house but instead burned it down and then demanded that you continue to pay to them, would you? That's the question Zale Corporation (NYSE:ZLC) shareholders should be asking when dealing with the "corporate arson" they are now facing. Thursday, the Wall Street Journal reported that ZLC CEO Neal Goldberg and other ZLC executives would be dismissed following poor same store sales in its key holiday period. This performance was particularly bad in light of the positive sales performance experienced by rival Signet (NYSE:SIG).

Today, ZLC has a market capitalization of just under $100MM. According to ZLC's most recent proxy, CEO Goldberg took in $3.5MM in total compensation for 2009 and $3.0MM in 2008. His compensation for 2009 is the equivalent of 3.5% of ZLC's market cap. Goldberg began his tenure at ZLC on December 20, 2007 and while he received a roughly 17% increase in pay from 2008 to 2009, ZLC shareholders got their teeth kicked in with the stock dropping from roughly $16 at the start of Goldberg's tenure to about $3 per share. Goldberg oversaw the destruction of 81% of shareholder value, or about $550MM in shareholder wealth, and received $6.5MM for a job well done.

CHART I: ZLC PERFORMANCE 12/21/2007 - 01/14/2009


Goldberg was at the helm while ZLC was going under and the Board decided to fire him after the damage had been done. However, ZLC shareholders should consider what else Goldberg is entitled to and question what the Board's compensation committee was thinking (if it was) when structuring the deal. According to ZLC's proxy (pg 30):

Mr. Goldberg has an employment agreement that provides that in the event that the Company terminates Mr. Goldberg's employment (i) in connection with the Company's election of non-renewal of the term under his employment agreement or without "cause" or Mr. Goldberg terminates his employment for a "termination reason," he will be entitled to receive (1) an amount equal to the sum of two times his annual base salary as of the date of termination plus two times the average of the annual incentive bonus amount earned by him with respect to the three fiscal year period preceding the termination, and (2) continued coverage under various Company employee benefit plans for a period of up to 2 years. In the event of a termination of employment in connection with a change in control of the Company, he will be entitled to receive (1) an amount equal to the sum of three times his annual base salary as of the date of termination plus three times the average of the annual incentive bonus amount earned by him with respect to the three fiscal year period preceding the termination, (2) continued coverage under various Company employee benefit plans for a period of up to 3 years, and (3) vesting of all outstanding equity awards held by the employee.

Based on Goldberg's 2009 salary of $1MM, ZLC shareholders will be forking over $2MM to Goldberg because his strategy to revive ZLC performance failed. In addition, while I am not certain what qualifies under the strict term of annual incentive bonus amount, Goldberg received bonuses of $578,000 in 2009 and stock awards of $1.3MM and option awards of $541,000. In the prior year, Goldberg's bonus was $1.4MM with stock awards of $829,000 and option awards of $231,000. I haven't bothered to look at the prior year proxy but it's clear that Goldberg will receive $2MM and possibly another $2-3MM excluding any benefits/health care. Even worse, ZLC shareholders are on the hook for Goldberg's potential tax liabilities:

Under Mr. Goldberg's employment agreement, if the payments he would receive upon a termination of employment would result in an excise tax (the "280G excise tax") then the Company will be required to make an additional gross-up payment to Mr. Goldberg. However, if the total payments to Mr. Goldberg would not be subject to the 280G excise tax if they were reduced by an amount that is less than 10% of portion treated as "parachute payments" under Section 280G of the Code, then the total payments to Mr. Goldberg will be reduced to the maximum amount that could be paid without giving rise to the 280G excise tax. Under the employment security agreements, if an officer would receive payments upon termination of employment that would result in a 280G excise tax, the payments to the officer upon termination of employment will be reduced to avoid the imposition of the 280G excise tax.

While ZLC shareholders and employees are faced with a company that has $450MM in net debt and highly strained to negative cash flow, the man who oversaw this received $6.5MM during that time and now will be riding off into the sunset with a package that may equal his two year compensation. At a company where cash is vital to survival given its financial structure, ZLC's Board, particularly its compensation committee consisting of James Cotter, David Szymanski, Yuval Braveman, Thomas Shull, and Charles Sonsteby should seek to recoup this package, forfeit their director fees, and/or resign.

Unfortunately, the ZLC/Goldberg episode is representative of just another day in the life of Corporate America. The shareholders, employees, and creditors lose out while the very top loot the company. Worst of all, until the SEC allows shareholders to have a real voice in designing compensation structures and electing Board members that actually represent shareholders and can think for themselves without the need for compensation consultants, management teams and Board of directors will continue to bilk the true owners of American businesses blind.

DISCLOSURE: NONE

Source: Zale Corp's Management: Paid for Failure