Staples Inc. has struggled as the Internet and other retail forces reshape the office supply business it dominated for decades. Sales have fallen and profits have slumped. The company is closing stores, and employees are feeling the squeeze.
One person who has prospered through the rocky reshaping of the business is chief executive Ronald Sargent. His annual total compensation has nearly doubled to $12.4 million over the past three years.
Sargent is leading a "reinvention" plan that aims to shrink Staples' physical retail presence and boost online sales. Last year, Staples said that it planned to close 225 stores by the end of 2015.
The company does not disclose how many employees have been affected by store closings, but Staples recorded $45.3 million of "employee related" restructuring costs in 2014, and it forecasts as much as $28 million more this year.
Sargent will speak Monday to stockholders attending the Staples annual meeting, a crowd that will be keenly interested in progress on another element of the company's strategy: a pending $6.3 billion merger with Office Depot Inc. The deal was struck mainly to reduce competition and cut costs.
Starboard Value LP, a hedge fund firm that at one time owned 5.1 percent of Staples, leaned hard on managers to make a deal with Office Depot. Staples shares have moved higher since Starboard became a big investor, but the business continues to struggle. Sales were down 7 percent in the company's most recent quarter.
Some compensation experts question why pay for Staples executives has risen so much, despite the company's performance in recent years.
"When you step back and ignore the noise from the stock market, you say this company is not doing terrifically well," said Sean J. Egan, managing director of Egan-Jones Rating Co. "If the company is not doing well, why is there a near doubling of the CEO's compensation?"
Egan-Jones, which provides advisory services for investors, said in a recent report that it has "some concerns" with Staples' new compensation package. The report categorized Staples as "a weak performer."
Institutional Shareholder Services, the leading investor advisory firm, went a step further and recommended stockholders reject Staples' executive pay package. Shareholders will participate in a nonbinding vote on pay at the annual meeting.
Another advisory firm, Glass, Lewis & Co., supported Staples' executive pay package but cited concerns about some details of the company's compensation plans.
In an e-mail statement, Staples said executives are managing the company to generate long-term growth. It said compensation for top executives is based on "rigorous" tests "tied directly to the success of our strategy and the creation of long-term shareholder value."
Sargent, 59, has served as chief executive of Staples for 13 years. He joined the company in 1989 and has held a number of roles over the years, including president, chief operating officer, president of North American operations, and president of Staples' contract and commercial business.
Staples sales fell nearly 3 percent in its fiscal year ended Jan. 31. Despite a third straight annual sales decline, Staples directors awarded Sargent a 15 percent pay raise, amounting to $1.6 million.
Executive pay packages can vary greatly from one company to another. But compensation specialists point to a number of unusual or shifting business performance goals used by Staples over the years. They also cite a lack of clear disclosure to stockholders about the company's pay standards.
"This raises a lot of questions," said Fred Whittlesey, a consultant at Compensation Venture Group in Seattle. "There's a history here of making changes and putting a special one-year plan in place because their strategy changed. It always seems to change in a way that helps them dodge the latest bullet."
One of the more easily achieved Staples business targets is a goal established for the company's cash incentive plan that rewards executives even when sales decline, said David L. Yermack, a professor of finance at New York University with a focus on executive compensation.
"I can't remember seeing many cases when the goal was not to shrink too much," Yermack said.
The Staples target for 2014 was set at 2.29 percent growth, but executives still got partial credit as long as sales did not fall sharply. Despite the company's actual 3 percent sales decline, the executives still achieved 71 percent of their target last year.
Yermack and others said another cause for concern about compensation plans at Staples is the board's practice of annually adjusting goals for its three-year, long-term incentive plan. Experts said the design defeats the purpose of a long-term goal, which is to increase performance over time, and allows the board to make the plan more achievable every year.
"One way to get paid is to get performance higher and the other is to get the benchmark lower," said Kevin Murphy, a finance and business economics professor at the University of Southern California. "If you set all the targets in advance, the only way to get a bigger bonus is to get performance up."
Staples said the needs of its customers are changing rapidly and it is difficult to predict the short-term effect on business.
The company said it adjusts long-term goals each year because of the potential impact of business conditions. Goals set years earlier could become unrealistically high and the company would lose attractive incentives to retain executives, Staples said.
But given the performance of Staples, analysts question whether the board should be worried about retention.
"I don't know why you would be concerned about retaining managers that have run down the stock price," Yermack said. "I can't imagine they would get a lot of offers to do the same."
Last year, Staples shareholders signaled their own disapproval with the way top executives were compensated.
Staples performed so poorly in 2013 that none of the company's top executives qualified for cash bonuses. The board created a special one-time cash payout anyway, describing it as an award to retain executives who had not received bonuses in two years.
In a rare move, 54 percent of shareholders voted against a nonbinding "say on pay" question seeking approval for the company's executive compensation at last year's annual meeting.
Staples said it refrained from offering another one-time cash payout and has "no plans to do so in the future." Staples executives failed to qualify for traditional bonuses again in 2014.
But ISS, the firm recommending that Staples shareholders vote against this year's say-on-pay question, still found the company's compensation structure "overly short-term focused." It said that focus "has contributed to continued misalignment between pay and performance."
ISS also noted concerns about lowered performance goals in incentive programs without a clear explanation.
Whittlesey had similar concerns about transparency. He said Staples may have valid reasons for changes it has frequently made to the company's compensation plan over time. But he said it looked suspicious when Staples did not disclose reasons or clearly defined the goals it set.
"For a company that has lost on a 'say on pay' vote and at a time when transparency is being questioned, they didn't use this as an opportunity to explain any of these changes," he said.
"The criticism of these numbers is that they are a black box that have not demonstrated they are related to share price," Whittlesey said. "We don't know exactly why they paid out, but they paid out."
Taryn Luna can be reached at email@example.com. Follow her on Twitter @TarynLuna.