No Bonus at Gap? No Problem

Gap's (NYSE: GPS  ) recent struggles have been renowned, and it seems pretty obvious that many Gap shareholders might be eager to see how the company compensated its head honcho this past year. According to the retailer's proxy statement, hot off the presses over at SEC.gov, CEO Paul Pressler didn't get his customary bonus because of the company's poor performance. (Note: nor did several other members of Gap's management team.) I doubt shareholders are shedding any tears, especially considering there's a bit more to the story. And even if you're not a shareholder, you're probably thinking -- well, welcome to how the rest of us live! Bonuses should be tied to merit: Profitable businesses aren't going to consider everybody entitled to one just for showing up.

For fiscal 2005, Pressler received his base salary of $1.5 million, with $233,500 in additional compensation. With a bonus now tied to performance metrics, there's a big, fat zero on the bonus line, which for many shareholders might feel a bit comforting. However, one might want to take a look at the "all other compensation" line in the proxy. There, you find a $2.6 million cash payment to Pressler last year related to a tender offer. Meanwhile, Pressler was awarded stock options worth $15.2 million (they don't begin vesting until 2010).

If you were around for last quarter's results, you know that Gap's troubles continue. Pressler, a former Disney (NYSE: DIS  ) executive, was brought on board in 2002 to execute the retailer's turnaround. Although there were bright spots early in his tenure, the last year or two have been tough going.

Pressler's pay package has been a bone of contention. For example, a shareholder resolution in Gap's 2004 proxy statement (for fiscal 2003) called for caps on executive compensation. (Indeed, some shareholder groups are agitating for change in many industries, figuring that most CEOs just plain make too much money.) At any rate, bonuses for Gap executives are now tied to targets, and given the rather sluggish results in fiscal 2005, it certainly explains why management bonuses were no-shows this year.

Tying executive bonuses to a company's performance is, of course, exactly what most of us shareholders would expect -- Fool contributor Tim Beyers actually discussed this very issue yesterday, regarding another teen retailer, American Eagle Outfitters (Nasdaq: AEOS  ) .

As for Pressler, there have been rumblings that maybe he should step aside and let somebody else take the reins at Gap. And if you take a look at the history of his compensation as well as the rich stock options package this year (and I haven't even mentioned the controversial elements of rich stock options packages), I can imagine most shareholders would consider this year's "no bonus" routine a mere slap on the wrist, although the idea that bonuses should be based on merit and performance is a worthy one. Given the past year, though, I'd wager that many shareholders don't believe a mere slap on the wrist is nearly enough.

For more on Gap, see the following Foolish articles:

Gap has been recommended by bothMotley Fool Inside Value andMotley Fool Stock Advisor.

Alyce Lomax does not own shares of any of the companies mentioned.


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