Access owns a controlling equity interest in Deezer S.A., which was formerly known as
Odyssey Music Group (“Odyssey”), a French company that controls and operates a music streaming service, formerly through Odyssey’s subsidiary, Blogmusik SAS, under the name Deezer (“Deezer”), and is represented on Deezer S.A.’s Board of Directors. Subsidiaries of the Company have been a party to
attractlicense arrangements with Deezer since 2008, which provide for the use of the Company’s sound recordings on Deezer’s ad-supported and
retain qualified executives and (c) tied to annual financial performance and long-term stockholder value creation.subscription streaming services worldwide (excluding Japan) in exchange for fees paid by Deezer. The Company has entered into employment agreementsalso authorized Deezer to include the Company’s sound recordings in Deezer’s streaming services where such services are offered as a bundle with each of our Named Executive Officers,third-party services or products (e.g., telco services or hardware products), for which establish each executive’s base salary and an annual target bonus. PursuantDeezer is also required to make payments to the agreements,Company. Deezer paid to the actualCompany an aggregate amount of each annual bonus is determined by the Compensation Committee in its sole discretionapproximately $42 million, $49 million and may be higher or lower than the target range or amount. In addition, as a result of the evaluation of their roles and responsibilities, each Named Executive Officer was allowed to invest in equity of the Company or was awarded equity in the form of stock options and/or restricted stock in connection with their employment. The Compensation Committee believes these arrangements are reasonable and competitive compared to other companies the Company competes with for the attraction and retention of talent.
Compensation of Our Named Executive Officers
Our Named Executive Officers (“NEOs”) for fiscal 2010 are:
Edgar Bronfman, Jr. (our CEO);
Executive Compensation Objectives and Philosophy
We design our executive compensation programs to attract talented executives to join the Company and to motivate them to position us for long-term success, achieve superior operating results and increase stockholder value. To realize these objectives, the Compensation Committee and management focus on the following key factors when considering the amount and structure of the compensation arrangements for our executives:
| • | | Alignment of executive and stockholder interests by providing incentives linked to operating performance and stock price performance. We are committed to creating stockholder value and believe that our executives and employees should be provided incentives through our compensation programs that align their interests with those of our stockholders. Accordingly, we provide our
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| executives with both short-term annual cash bonus incentives linked to our operating performance and long-term equity incentives linked to stock performance. For information on the components of our executive compensation programs and the reasons why each is used, see “Components of Executive Compensation” below.
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| • | | A clear link between an executive’s compensation and his or her individual contribution and performance. As further discussed below, the components of our executive compensation programs are designed to reward the achievement of specified key goals. These goals include, among other things, the successful implementation of strategic initiatives, realizing superior operating and financial performance, and other factors that we believe are important, such as the promotion of an ethical work environment and teamwork within the Company. We believe our compensation structure motivates our executives to achieve these goals and rewards them for their significant efforts and contributions to the Company and the results they achieve.
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| • | | The extremely competitive nature of the media and entertainment industry, and our need to attract and retain the most creative and talented industry leaders. We compete for talented executives in relatively high-priced markets, and the Committee takes this into consideration when making compensation decisions. For example, we compete for executives with other recorded music and music publishing companies, other entertainment, media and technology companies, law firms, private ventures, investment banks and many other companies that offer high levels of compensation. We believe that our senior management team is among the best in the industry and is the right team to lead us to long-term success. Our commitment to ensuring that we are led by the right executives is a high priority, and we make our compensation decisions accordingly.
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| • | | Comparability to the practices of peers in our industry and other comparable companies generally. The Compensation Committee considers information about the practices of our peer companies and other comparable public companies, as well as evolving market practices, when making its compensation decisions. Generally, the Compensation Committee looks to this type of information when evaluating employment arrangements with new employees and extensions or renewals with existing employees. From time to time, the Compensation Committee also receives independent advice on competitive practices from Hewitt and now Meridian and other independent sources of market trends, including literature and conference remarks on executive compensation matters. When using peer data to evaluate employment arrangements with new employees and extensions or renewals with existing employees, the Compensation Committee may consider ranges of compensation paid by others for a particular position, both by reference to comparative groups of companies of similar size and stature and, more particularly, a group comprised of our direct competitors, which includes other recorded music and music publishing companies, primarily Universal, Sony and EMI in recorded music (Universal Music Group, Sony Music Entertainment and EMI Music) and Universal, EMI and Sony/ATV in music publishing (Universal Music Publishing Group, EMI Music Publishing and Sony/ATV Music Publishing), as one point of reference when making compensation decisions regarding total compensation or particular elements of compensation in the agreements under consideration. The Compensation Committee does not typically use information with respect to our peer companies and other comparable public companies to establish targets for total compensation, or any element of compensation, or otherwise numerically benchmark its compensation decisions. For example, in fiscal 2008 the Compensation Committee reviewed pay data for a range of companies in connection with the review of new employment arrangements with Messrs. Bronfman, Cohen and Macri. The Compensation Committee did not, however, use third-party data in establishing fiscal 2010 compensation for the Company’s NEOs. The Compensation Committee makes decisions for a specific executive on an annual basis in its discretion, based upon the executive’s compensation as set forth in their employment agreement, the performance of the Company and taking into consideration competitive factors and the executive’s specific qualifications, such as his or her professional experience, tenure at the Company and within the industry, leadership position within the Company, and individual performance factors.
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Components of Executive Compensation
Employment Agreements
We have entered into employment agreements with all of our NEOs, the key terms of which are described below under “Summary of NEO Employment and Equity Agreements.” We believe that having employment agreements with our executives is beneficial to us because it provides retentive value, subjects the executives to key restrictive covenants, and generally gives us a competitive advantage in the recruiting process over a company that does not offer employment agreements. Our employment agreements set forth the terms and conditions of employment and establish the components of an executive’s compensation, which generally include the following:
A target annual cash bonus;
Any long-term incentives in the form of equity grants; and
Benefits, including participation in our 401(k) plan and health, life insurance and disability insurance plans.
Our NEO employment agreements also contain key provisions that apply in the event of an executive’s termination or resignation, setting forth the circumstances under which an executive may resign for “good reason” or under which we may terminate the agreement “for cause,” and formalizing restrictive covenants such as commitments not to solicit our employees and/or talent away from the Company, and to protect our confidential information, among others. The circumstances that would allow an executive to terminate his or her employment for “good reason” are negotiated$39 million in connection with the employment agreement and generally include such events as substantial changes in the executive’s duties or reporting structure, relocation requirements, reductions in compensation and specified breaches by us of the agreement.
Effective January 1, 2011, Mr. Johnson ceased serving as the CEO of Warner/Chappell Music and Cameron Strang was appointed CEO of Warner/Chappell. Mr. Johnson will continue to serve as Chairman of Warner/Chappell until June 30, 2011 (the end date of his employment agreement), at which point Mr. Johnson will be leaving the Company and Mr. Strang will assume the additional role of Chairman of Warner/Chappell. Mr. Strang’s appointment as CEO of Warner/Chappell Music entitled Mr. Johnson to terminate his employment agreement for “good reason.” Therefore, in order to secure Mr. Johnson’s services through the end date of his employment agreement, on January 1, 2011, Warner/Chappell entered into a separation agreement with Mr. Johnson. The terms of that agreement provide Mr. Johnson with severance payments and benefits generally consistent with those he would have been entitled to for a “good reason” termination under his employment agreement (although a portion of his fiscal year 2011 bonus will be subject to discretionary determination by the Company) and are described below in the section entitled “Potential Payments upon Termination or Change-In-Control—David Johnson Separation Agreement.”
Key Considerations in Determining Executive Compensation
In general, the terms of our executive employment agreements are initially negotiated by our Chairman and CEO, Executive Vice President, Human Resources, other corporate senior executives, as appropriate, and our legal department or outside legal counsel. The key terms of the agreements for our NEOs and other executives over whose compensation the Compensation Committee has authority are presented to the Compensation Committee for consideration. When appropriate, the Compensation Committee takes an active role in the negotiation process. The Compensation Committee also establishes from time to time the general compensation principles set forth in our executive employment agreements.
During the review and approval process for the employment agreements for executives under its purview, the Compensation Committee considers the appropriate amounts for each component of compensation and the compensation design appropriate for the individual executive. In its analysis, the Compensation Committee
considers the individual’s credentials, and if applicable, performance at the Company, the compensation history of the executive, input from the Compensation Committee’s independent compensation consultant on market and peer company practices, data on the compensation of other individuals in comparable positions at the Company and the total projected value of the compensation package to the executive.
The following describes the components of our NEO compensationforegoing arrangements and why each is included in our executive compensation programs.
Base Salary
The cash base salary an NEO receives is determined by the Compensation Committee after considering the individual’s compensation history, the range of salaries for similar positions, the individual’s expertise and experience, and other factors the Compensation Committee believes are important, such as whether we are trying to attract the executive from another opportunity. The Compensation Committee believes it is appropriate for executives to receive a competitive level of guaranteed compensation in the form of base salary and determines the initial base salary by taking into account recommendations from management and, if deemed necessary, the Compensation Committee’s independent compensation consultant.
In cases where an NEO’s employment agreement calls for annual base salary reviews, increases in base salary are determined by the Compensation Committee in its discretion. The individual’s performance during the course of the prior year, his or her contribution to achieving the Company’s goals and objectives and competitive data on salaries of individuals at comparable levels both within and outside of the Company may be evaluated in connection with the Compensation Committee’s annual consideration of base salary increases.
Each of our NEOs was paid base salary in accordance with the terms of their respective employment agreement in fiscal 2010. The Compensation Committee did not approve any change to base salary for any of our NEOs in fiscal 2010.
Annual Cash Bonus
Our Compensation Committee directly links the amount of the annual cash bonuses we pay to our corporate financial performance for the particular year. Each of our NEOs has a target bonus amount set forth in his employment agreement, which is stated as either a range or a set dollar amount. The actual amount of each annual bonus is determined by the Compensation Committee in its sole discretion and may be higher or lower than the target range or amount.
The Compensation Committee establishes performance goals for our corporate performance after considering our financial results from the prior year and the annual operating budget for the coming year. It uses these performance goals to establish a target for the Company-wide bonus pool. In fiscal 2010, the performance goals related to the achievement of budgeted amounts of net revenue and operating income before depreciation and amortization (or OIBDA), which equals operating income less depreciation expense and amortization expense, with achievement of net revenue weighted 25% and OIBDA weighted 75%. OIBDA is among the measures used by management to gauge operating performance and is used by investors, analysts and peer companies to value the Company and compare our performance to that of our peers. These metrics are used because we believe they encourage executives to achieve superior operating results. In its assessment of whether the performance goals are met, the Compensation Committee may consider the nature of unusual expenses or contributors to financial results, and authorize adjustments in its sole discretion.
If the performance targets set by the Compensation Committee are met, the bonus pool will be set at the target amount set in the annual operating budget, subject to the Committee’s discretion as discussed below. If our performance exceeds the budgeted levels of net revenue and OIBDA, the bonus pool amount is generally initially increased above 100% of target calculated based on the pre-established scale. If we do not meet the budgeted performance goals, the bonus pool amount is generally initially decreased from the target calculated based on the pre-established scale. The actual bonus amounts allocated to the bonus pool for the entire Company are
ultimately determined by the Compensation Committee in its discretion taking into account the achievement of the performance goals, qualitative factors and management’s recommendations. The Compensation Committee has the discretion to adjust the initial bonus pool amount determined by reference to the pre-established scale upwards or downwards, considering management’s recommendations, the achievement of the pre-established qualitative factors and other considerations the Compensation Committee deems appropriate.
Bonuses for our NEOs are then separately determined by the Compensation Committee in its sole discretion, and may be higher or lower than the target amounts set forth in the NEOs’ employment agreements. Mr. Bronfman’s contractual bonus range is from $0 to $6.0 million, with a target bonus of $3.0 million. Mr. Cohen’s contractual bonus range is from $1.5 million to $5.0 million, with a target bonus of $2.5 million. Other NEOs have target bonuses set forth in their employment agreements as described below under “Summary of NEO Employment and Equity Agreements.” The amount our NEOs and other executive officers subject to the Compensation Committee’s oversight receive from the bonus pool is determined by the Compensation Committee, and for other executives and employees, by the appropriate member of management, so long as the entire Company-wide bonus pool determined by the Compensation Committee is not exceeded. For NEOs other than the Chairman and CEO, the Compensation Committee considers the recommendation of the Chairman and CEO and the Executive Vice President, Human Resources in making its bonus determinations. The Compensation Committee evaluates the performance of the Chairman and CEO annually in connection with its bonus determination for the Chairman and CEO. Bonuses for executive officers, including our NEOs, are based on the target bonuses set forth in their employment agreements, corporate performance, including relative to the Company-wide bonus pool, and other discretionary factors, including achievement of strategic objectives, goals in compliance and ethics and teamwork within the Company. Bonuses for executives in our recorded music or music publishing businesses or other specific areas, such as international recorded music or digital, are also based in part on their particular segment’s or area’s performance. For Mr. Fleisher, a portion of his bonus is also determined based on his performance with respect to any special projects and/or transformational initiatives that have been assigned to him by the CEO. For our executive officers, including our NEOs, a variety of qualitative and quantitative factors that vary by year and are given different weights in different years depending on facts and circumstances are considered, with no single factor material to the overall bonus determination. The factors considered by the Compensation Committee in connection with fiscal 2010 bonuses are discussed in more detail below.
In fiscal 2010, after considering the factors described above and management’s recommendations, the Committee determined that the bonuses for our NEOs would be set at amounts which ranged from 75% to 140% of their respective target bonus amounts set forth in their employment agreements. This reflected the Compensation Committee’s and management’s assessment that overall corporate performance and discretionary factors justified payment of bonuses ranging from below to above target bonuses for our NEOs based on their and the Company’s performance during the fiscal year.
Specifically, with respect to Mr. Bronfman, the Compensation Committee set the amount of his bonus at approximately 133% of target having determined that in setting the Company’s strategic objectives to be carried out by the executive management team, he played a crucial role in the Company’s achievement of the financialyears ended September 30, 2020, September 30, 2019 and other results described below and in guiding and positioning the Company for future success. With respect to Mr. Cohen, the Compensation Committee set the amount of his bonus at 140% of target in recognition of his key contributions across all aspects of the business, including, without limitation, his responsibility for Latin America and the UK and leading the Company’s efforts to diversify revenues by entering into expanded-rights deals with recording artists. With respect to Mr. Fleisher, the Compensation Committee set the amount of his bonus at 100% of target having determined that he provided solid leadership in his areas of responsibility and successfully maintained cost controls.September 30, 2018, respectively. In addition, Mr. Fleisher was assigned to lead various projects involving the transformation of the Company’s business models and operational processes on a global basis in fiscal 2010. Based on the Compensation Committee’s determination that Mr. Fleisher made substantial progress on these initiatives, the Compensation Committee awarded Mr. Fleisher 100% of his annual “projects bonus” and determined not to exercise its negative discretion with respect to the portion of Mr. Fleisher’s Bonus Equity (as
defined below) that was scheduled to vest on November 14, 2010. See “Summary of NEO Employment and Equity Agreements” below for a description of Mr. Fleisher’s annual “projects bonus” and Bonus Equity. With respect to Mr. Macri, the Compensation Committee set the amount of his bonus at approximately 133% of target to reward his strong transition into the CFO role. The Compensation Committee noted that Mr. Macri led the implementation of the new SAP enterprise resource planning system and started the roll-out of the new U.S. royalty system during the year, was very involved in the Company’s cost-cutting efforts, led significant repatriation of cash back to the U.S. on a tax-free basis and took on management of the Company’s information technology department. Finally, with respect to Mr. Johnson, the Compensation Committee set the amount of his bonus at 75% of target after considering his individual performance and the performance of the music publishing business, including objective and subjective measures.
The annual bonuses in fiscal 2010 for the NEOs reflected the performance of the Company and each individual NEO during the fiscal year. The Company’s performance continued to be negatively impacted by the industry-wide difficulties in the recorded music business in fiscal 2010. During fiscal 2010, the Company effectively mitigated the impact of the ongoing transition in the recorded music business through, among other things, revenue diversification, a continued focus on the Company’s digital strategy and effective balance sheet and cost management efforts. For example, despite these adverse conditions, the Company was able to continue to advance its strategic objectives and essentially sustained margins over the fiscal year, with OIBDA margins remaining largely steady year over year at 12%, despite declining revenue and increased severance charges. We believe the performance of our recorded music business continued to be strong relative to our most direct competitors. While digital growth in the U.S. has slowed due primarily to a declining ringtone business, international digital growth remains strong. In addition, the Compensation Committee noted that the Company made meaningful progress in many areas during fiscal 2010, including:
| (1) | effectively managing its balance sheet and cash flow (ending the year with a cash balance of $439 million, up from $384 million at the end of fiscal year 2009, and net debt of $1.51 billion, as compared to $1.56 billion at the end of the prior year), |
| (2) | controlling costs, a key factor in the Company’s ability to maintain operating income despite challenging market conditions, |
| (3) | sustaining the Company’s digital leadership by continuing to focus on encouraging and sustaining viable new business models, |
| (4) | continuing the Company’s success in artist and repertoire (“A&R”) (for example, in the U.S., the Company’s September quarter 2010 track-equivalent album share reached its highest level since 2008 and its total album share reached its highest level in 14 years), |
| (5) | continuing to expand the Company’s recorded music revenue base beyond record sales through numerous expanded-rights deals with recording artists and the completion of several artist services acquisitions (with non-traditional Recorded Music revenue amounting to 10% of the Company’s recorded music revenue for the fiscal year and more than half of the Company’s global active artist roster signed to comprehensive expanded-rights deals), |
| (6) | continuing to strengthen the Company’s music publishing business through the development of its catalog and synchronization business, and |
| (7) | contributing to important industry-wide gains on the public policy front, with the introduction of the Combating Online Infringement and Counterfeits Act (COICA) and the continued implementation of “graduated response” legislation in various parts of the world, including France and the U.K. |
In making the bonus determinations for the NEOs, other qualitative factors taken into account included performance in internal and public financial reporting, budgeting and forecasting processes, compliance and infrastructure, investment and cost-savings initiatives. Non-financial factors considered also included, among other items, providing strategic leadership and direction for the Company, including corporate governance matters, managing the strategic direction of the Company, increasing operational efficiency, expanding our digital presence and communicating to investors, shareholders and other important constituencies.
Long-Term Equity Incentives
The Compensation Committee is responsible for establishing and administering the Company’s equity compensation programs and for awarding equity compensation to the executive officers. To date, the sole forms of equity compensation awarded to or purchased by officers and employees have been restricted stock and stock options. The Compensation Committee believes that restricted stock and stock options are an important part of overall compensation because they align the interests of officers and other employees with those of stockholders and create incentives to maximize long-term stockholder value.
The Compensation Committee determines the number of stock options or shares of restricted stock granted or sold to each executive officer based on the total amount of equity awards available under outstanding plans and the responsibility and overall compensation of each executive officer. In general, executive officers and other employees have received an initial grant of equity in the form of restricted stock (either purchased or awarded) or stock options, usually at the time of their initial employment (or, for those employed at such time, in connection with the acquisition of the Company from Time Warner in 2004). On occasion, the Compensation Committee may grant additional equity awards to recognize increased responsibilities or special contributions, to attract new hires to the Company, to retain executives or to recognize other special circumstances.
The Company did not make any equity grants to NEOs in fiscal 2010. In fiscal 2009, the Company awarded additional restricted stock and stock options to Mr. Fleisher. The grants to Mr. Fleisher were made in connection with entering into a new employment agreement. In determining the size of the equity award to Mr. Fleisher, the Compensation Committee considered his performance with the Company and his contribution to achieving the Company’s goals and objectives. In fiscal 2008, the Company made restricted stock and/or stock option awards to Messrs. Bronfman, Macri, Cohen and Johnson in connection with these executives entering into new employment agreements. See “Summaryarrangements, (i) the Company was issued, and currently holds, warrants to purchase shares of NEO EmploymentDeezer S.A.; and Equity Agreements” below(ii) the Company purchased a small number of shares of Deezer S.A., which collectively represent a small minority interest in Deezer S.A. The Company also has various publishing agreements with Deezer. Warner Chappell has licenses with Deezer for use of repertoire on the service in Europe, which the Company refers to as a description of these equity grants.
Tax Deductibility of Performance-Based CompensationPEDL license (referencing the Company’s Pan European Digital Licensing initiative), and Other Tax Considerations
Where appropriate,for territories in Latin America. For the PEDL and after taking into account various considerations, we structure our executive employment agreements and compensation programs to allow us to take a tax deductionLatin American licenses for the full amount of the compensation we pay to our executives. Our Amendedfiscal years ended September 30, 2020 and Restated 2005 Omnibus Award Plan (the “Plan”) is designed to be compliant with the requirements of Section 162(m) of the Internal Revenue Code (“Section 162(m)”). Section 162(m), which generally places limits on the tax deductibility of executive compensation for publicly traded companies, disallows deductions for compensation in excess of $1,000,000 per yearSeptember 30, 2019, Deezer paid to the NEOs (other than the CFO), unless such compensation is performance-based, is approved by stockholders, and meets other requirements. In order to maximize deductibility of future executive compensation under Section 162(m), our NEOs participate in the Plan.
The Company has implemented procedures intended to permit performance-based compensation to be deductible under Section 162(m). Under these procedures, at the outset of each fiscal year, the Compensation Committee establishes Section 162(m) performance targets for the components of an executive’s compensation that are performance-based. The targets will be used solely for setting a maximum amount of bonus for which our NEOs are eligible for Section 162(m) purposes at various target thresholds. For example, cash bonuses may be conditioned on the achievement of a specified amount of budgeted OIBDA and/or net revenues. In November 2010, the Compensation Committee determined that the performance targets for fiscal 2011 would relate to the achievement of specified levels of budgeted OIBDA and/or net revenues.
The Section 162(m) performance targets set by the Compensation Committee should generally allow us to take a tax deduction for the performance-based components of an executive’s compensation. If the maximum
Section 162(m) performance target is met in a given year, our NEOs are eligible to earn an annual cash bonus no greater than the maximum amount permitted under the Plan. The maximum amount permitted under the Plan based on achievement of the specified performance targets is $10 million for Messrs. Bronfman and Cohen and four times the target bonuses in effect at the beginning of the fiscal year for the other NEOs. If the maximum Section 162(m) performance target is not met, the maximum amount of bonus our NEOs are eligible to earn is decreased on a pre-established scale to reflect the maximum bonus established for the actual target level of performance achieved. In practice, however, even if our NEOs are eligible for the maximum bonus amounts described, the Compensation Committee generally exercises its negative discretion and sets the actual bonus compensation by reference to the lower target bonus amount set forth in the respective employment agreements using the discretionary factors described above.
Benefits
Our NEOs also receive health coverage, life insurance, disability benefits and other similar benefits in the same manner as our U.S. employees generally.
Deferred Compensation
We offer a tax-qualified 401(k) plan to our employees and in November 2010 we adopted a non-qualified deferred compensation plan which is available to those of our employees whose annual salary is at least $200,000. Both plans are available to the named executive officers.
In accordance with the terms of the Company’s 401(k) plan, the Company matches, in cash, 50% of amounts contributed to that plan by each plan participant, up to 6% of eligible pay, up to a maximum of $245,000 of eligible pay or $16,500 in pre-tax deferrals ($22,000 in the case of participants age 50 or greater), whichever occurs first. The matching contributions made by the Company are initially subject to vesting, based on continued employment, with 25% scheduled to vest on each of the second through fifth anniversaries of the employee’s date of hire.
The non-qualified deferred compensation plan allows an employee with an annual salary of $200,000 or more to defer receipt of a portion of his or her annual bonus until a future date or dates elected by the employee. Amounts in a participant’s account will be indexed to one or more deemed investment funds chosen by each participant from a range of such alternatives available under the plan, which investment alternatives generally include the investment funds available under our 401(k) plan. Each participant’s account will be adjusted to reflect the investment performance of the selected investment fund(s), including any appreciation or depreciation. We have established a “rabbi trust” (the assets of which will remain subject to the claims of our general creditors) for the purpose of assisting us in meeting our obligations under the deferred compensation plan. In the event of a change of control, we will cause such trust to be fully funded with amounts necessary to cover all accrued benefits under the deferred compensation plan through the date of such change of control. Prior to a change in control, the rabbi trust may or may not be funded by us. The deferred compensation plan provides an additional vehicle for employees to save for retirement on a tax-deferred basis. The deferred compensation plan does not provide preferential rates of return. Participants have onlyapproximately $2 million and $1 million, respectively. Deezer also licenses other publishing rights controlled by Warner Chappell through statutory licenses or through various collecting societies.
On October 1, 2018, WMG China LLC (“WMG China”), an
unsecured contractual commitment by us to pay amounts owed under the plan.Perquisites
We generally do not provide perquisites to our NEOs. Other than Mr. Johnson as disclosed below in the Summary Compensation Table, none of our NEOs received any perquisites in fiscal 2010.
Other Compensation Policies
Timing of Equity Grants
All of our equity grants require the approval of the Compensation Committee. We do not have a plan or practice designed to time equity grants in coordination with the release of material non-public information. Pursuant to a policy adopted by our Compensation Committee in 2006 we only make grants on one day each month, on or about the 15th of each month. Therefore, grants are generally made as of the 15th of the first month following approval of any such grants by the Compensation Committee. Grants for newly hired executives, and, grants based upon entering into new or amended employment agreements with existing executives, are generally made on the first 15th of the month following the later of approval of such grants by the Compensation Committee and the execution of the employment agreement by both parties.
Hedges and Pledges of Stock
All hedges of the Company’s common stock by executive officers or employeesaffiliate of the Company, are prohibited. In addition, pledges of our securities are prohibited unless the executive officer or employee first obtains approval in accordance with procedures set by the Compensation Committee from time to time.
Summary Compensation Table
The following table provides summary information concerning compensation paid or accrued by us to or on behalf of our Chief Executive Officer, Chief Financial Officer and each of our three other most highly compensated executive officers who served in such capacities at September 30, 2010, collectively known as our Named Executive Officers, or NEOs, for services rendered to us during the specified September 30th fiscal year.
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Name and Principal Position | | Year | | | Salary
($) | | | Bonus
($)(1) | | | Stock
Awards
($)(2) | | | Option
Awards
($)(2) | | | Non-Equity
Incentive Plan
Compensation
($) | | | Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($) | | | All Other
Compensation
($)(3) | | | Total
($) | |
Edgar Bronfman, Jr. | | | 2010 | | | $ | 1,000,000 | | | $ | 4,000,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
Chairman of the Board and CEO | | | 2009 | | | $ | 1,000,000 | | | $ | 2,100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 3,100,000 | |
| | | 2008 | | | $ | 1,000,000 | | | $ | 3,000,000 | | | $ | 5,994,881 | | | $ | 5,967,500 | | | | — | | | | — | | | $ | 1,779,486 | | | $ | 17,741,867 | |
Steven Macri(4)(5) | | | 2010 | | | $ | 600,000 | | | $ | 800,000 | | | | — | | | | — | | | | — | | | | — | | | $ | 7,350 | | | $ | 1,407,350 | |
Executive Vice President and Chief Financial Officer | | | 2009 | | | $ | 600,000 | | | $ | 480,000 | | | | — | | | | — | | | | — | | | | — | | | $ | 7,350 | | | $ | 1,087,350 | |
| | | 2008 | | | $ | 400,000 | | | $ | 325,000 | | | | — | | | $ | 611,520 | | | | — | | | | — | | | $ | 8,025 | | | $ | 1,344,545 | |
Lyor Cohen(5) | | | 2010 | | | $ | 3,000,000 | | | $ | 3,500,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 6,500,000 | |
Vice Chairman, Warner Music Group and Chairman and CEO, Recorded Music – Americas and the U.K. | |
| 2009
2008 |
| | $
$ | 3,000,0002
2,307,692 |
| | $
$ | 2,000,000
3,250,000 |
| |
$ | —
3,832,792 |
| |
$ | —
3,255,000 |
| |
| —
— |
| |
| —
— |
| | $
| —
1,295,136 |
| | $
$ | 5,000,000
13,940,620 |
|
Michael D. Fleisher(4) | | | 2010 | | | $ | 825,000 | | | $ | 1,100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 1,925,000 | |
Vice Chairman, Strategy and Operations | | | 2009 | | | $ | 825,000 | | | $ | 900,000 | | | $ | 378,296 | | | $ | 531,000 | | | | — | | | | — | | | $ | 485,632 | | | $ | 3,119,928 | |
| | | 2008 | | | $ | 800,000 | | | $ | 950,000 | | | | — | | | $ | 48,825 | | | | — | | | | — | | | $ | 456,505 | | | $ | 2,255,330 | |
David H. Johnson(6) | | | 2010 | | | $ | 700,000 | | | $ | 600,000 | | | | — | | | | — | | | | — | | | | — | | | $ | 49,350 | | | $ | 1,349,350 | |
Chairman and CEO, Warner/Chappell Music | | | 2009 | | | $ | 700,000 | | | $ | 600,000 | | | | — | | | | — | | | | — | | | | — | | | $ | 114,101 | | | $ | 1,414,101 | |
| | | 2008 | | | $ | 700,000 | | | $ | 850,000 | | | | — | | | $ | 260,225 | | | | — | | | | — | | | $ | 109,917 | | | $ | 1,920,142 | |
(1) | Represents cash bonus amounts in respect of fiscal 2010, 2009 and 2008 performance paid in December 2010, December 2009 and December 2008, respectively. Mr. Fleisher’s fiscal 2010 bonus includes a $300,000 annual “projects bonus.” |
(2) | Reflects the aggregate grant date fair value of awards made in fiscal 2009 and 2008 computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation, without taking into account estimated forfeitures. The assumptions used in calculating the grant date fair values are disclosed in Note 15,Stock-Based Compensation Plans, to our Consolidated Financial Statements found in our Annual Report on Form 10-K for the year ended September 30, 2010. Amounts reported in the “Stock Awards” column for Messrs. Bronfman, Cohen and Fleisher are based upon the probable outcome of performance conditions with respect to their respective performance-based restricted stock awards. Assuming the highest level of performance conditions is achieved, the aggregate grant date fair values of these performance-based restricted stock awards would be as follows: Mr. Bronfman $14,547,500, Mr. Cohen $9,257,500 and Mr. Fleisher $1,246,500. These amounts assume vesting of the full awards at the per share closing price on the date of the grants of $5.29, $5.29 and $2.77, respectively. |
(3) | For Messrs. Macri and Johnson, all other compensation in fiscal 2010 also includes $7,350 of 401(k) matching contributions. For Mr. Johnson, all other compensation in fiscal 2010 also includes a car allowance of $24,000 and a financial advisory allowance of $18,000. |
(4) | On September 16, 2008, Mr. Macri was named the Company’s CFO. Mr. Fleisher, who had served as the Company’s CFO from January 2005 to September 16, 2008, was named Vice Chairman, Strategy and Operations of the Company. |
(5) | Effective September 16, 2008, Mr. Macri’s salary increased from $400,000 to $600,000 annually. Effective March 15, 2008, Mr. Cohen’s salary increased from $1.5 million to $3.0 million annually. |
(6) | Effective January 1, 2011, Mr. Johnson ceased serving as the CEO of Warner/Chappell Music and Cameron Strang was appointed CEO of Warner/Chappell. Mr. Johnson will continue to serve as Chairman of Warner/Chappell until June 30, 2011, at which point Mr. Strang will assume the additional role of Chairman of Warner/Chappell. |
Grant of Plan-Based Awards in Fiscal 2010
We did not make any grants of plan-based awards to NEOs during fiscal 2010.
Summary of NEO Employment and Equity Agreements
This section describes employment arrangements in effect for our NEOs during fiscal 2010. In addition, the terms with respect to grants of restricted common stock and stock options are described below for each of our NEOs. Potential payments under the severance agreements and arrangements described below are provided in the section entitled “Potential Payments upon Termination or Change-In-Control.” In addition, for a summary of the meanings of “cause” and “good reason” as discussed below, see “Termination for “Cause”” and “Resignation for “Good Reason” or without “Good Reason”” below.
Employment Agreement with Edgar Bronfman, Jr.
On March 14, 2008, the employment agreement with Edgar Bronfman, Jr., the Chairman of the Board and CEO of the Company, was amended and restated effective March 15, 2008. The amended and restated employment agreement, among other things, includes the following:
| (1) | the term of Mr. Bronfman’s employment agreement was extended until March 15, 2013 and will be automatically extended for successive one-year terms unless either party gives written notice of non-renewal no less than 90 days prior to the annual March 15 expiration date (commencing with March 15, 2013), in which case the agreement will end on the March 15 immediately following the receipt of the notice, |
| (2) | an annual base salary of at least $1,000,000, subject to discretionary increases from time to time by the Board of Directors or Compensation Committee, which is unchanged from his prior agreement, |
| (3) | a target bonus of 300% of base salary, with a minimum of 0% and a maximum of 600% of base salary, which is also unchanged from his prior agreement and |
| (4) | revisions intended to comply with the requirements of Section 409A of the Internal Revenue Code. |
The employment agreement also provided for the grants of equity described below under “Fiscal 2008 Equity Grants.”
Consistent with Mr. Bronfman’s prior agreement, in the event we terminate Mr. Bronfman’s employment for any reason other than for “cause” or if Mr. Bronfman terminates his employment for “good reason,” each as defined in the agreement, Mr. Bronfman will be entitled to severance benefits equal to one year of his then-current base salary and target bonus plus a pro-rated annual bonus and continued participation in the Company’s group health and life insurance plans for up to one year after termination. Mr. Bronfman may terminate his employment with or without good reason, also consistent with his prior agreement.
The employment agreement, as amended and restated, also contains standard covenants relating to confidentiality and assignment of intellectual property rights and one year post-employment non-solicitation and non-competition covenants consistent with the prior agreement.
2004 Equity
Mr. Bronfman purchased 3,283,944 shares of the Company’s common stock through a restricted stock agreement dated March 1, 2004 for an aggregate purchase price of $2,883,913.60. Upon any termination of Mr. Bronfman’s employment, the restricted stock may be purchased by the Company (or our subsidiary). Such stock is also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.” All of the shares of restricted stock were vested as of September 30, 2009.
Fiscal 2008 Equity Grants
Mr. Bronfman’s amended and restated employment agreement provided for the grant to Mr. Bronfman of 2,750,000 stock options and 2,750,000 performance-based restricted shares of the Company’s common stock pursuant to a separate stock option agreement and a separate restricted stock award agreement. The equity grants were made under the Plan. Pursuant to the Company’s policy, the options and the restricted shares were granted on March 15, 2008, the first 15th of the month following approval of the grant by the Compensation Committee and execution of the amended and restated employment agreement, and the exercise price of the options is $5.29 per share, which was the closing price on March 14, 2008, the last trading date prior to the grant date. The options generally vest 20% a year over five years (subject to continued employment) and have a term of 10 years. The shares of restricted stock generally vest based on a double trigger that includes achievement of both service and performance criteria (each, subject to continued employment through the applicable vesting dates). The time vesting criteria for the restricted shares are the same as for the stock options—20% a year over five years. The performance vesting criteria for the restricted shares are as follows:
650,000 shares, upon the Company achieving an average closing stock price of at least $10.00 per share over 60 consecutive trading days;
650,000 shares, upon the Company achieving an average closing stock price of at least $13.00 per share over 60 consecutive trading days;
650,000 shares, upon the Company achieving an average closing stock price of at least $17.00 per share over 60 consecutive trading days; and
800,000 shares, upon the Company achieving an average closing stock price of at least $20.00 per share over 60 consecutive trading days.
The stock option agreement and restricted stock award agreement each provide for up to 12 months’ additional vesting in the case of a termination of employment due to “disability,” as defined in the agreements, or death. Additionally, in the event of an involuntary termination of employment without “cause” or a voluntary termination for “good reason,” each as defined in the agreements (or, under certain limited circumstances as further described in the stock option agreement and restricted stock award agreement, any termination of employment other than for “cause”), that occurs on or after, or in anticipation of, a “change in control” of the Company as defined in the Plan, the stock option agreement provides for the options to become fully vested and exercisable and the restricted stock award agreement provides for the time vesting condition attributable to the restricted shares to be deemed fully satisfied. Additionally, if the “fair market value” of the Company’s common stock as defined in the Plan as of the date of any “change in control” (or, if greater, the per share consideration paid in connection with such “change in control”) exceeds the per share dollar threshold amount of any of the performance conditions described above for the restricted shares (without regard to the number of consecutive trading days for which the average closing price was achieved), then such performance condition shall be deemed to have been achieved as of the date of such “change in control,” to the extent not previously achieved. While the time vesting criteria for 20% of the restricted shares was achieved in fiscal 2010, none of the performance vesting criteria for the restricted shares had been achieved and, therefore, none of the restricted shares vested in fiscal 2010.
The equity grants are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.”
French Legal Proceedings
APPAC, a minority shareholder group of Vivendi Universal, initiated an inquiry in the Paris Court of Appeal into various issues relating to Vivendi, including Vivendi’s financial disclosures, the appropriateness of executive compensation, and trading in Vivendi stock by certain individuals previously associated with Vivendi. The inquiry has encompassed certain trading by Mr. Bronfman in Vivendi stock. Several individuals, including
Mr. Bronfman (the former Vice Chairman of Vivendi) and the former CEO, CFO and COO of Vivendi, had been given the status of “mis en examen” in connection with the inquiry. Although there is no equivalent to “mis en examen” in the U.S. system of jurisprudence, it is a preliminary stage of proceedings that does not entail any filing of charges.
In January 2009, the Paris public prosecutor formally recommended that no charges be filed and that Mr. Bronfman not be referred for trial. On October 22, 2009, the investigating magistrate rejected the prosecutor’s recommendation and released an order referring for trial Mr. Bronfman and six other individuals, including the former CEO, CFO and COO of Vivendi. While the inquiry encompassed various issues, Mr. Bronfman was referred for trial solely with respect to certain trading in Vivendi stock. The trial concluded on June 25, 2010. At the trial, the public prosecutor argued that Mr. Bronfman and all of the other defendants in the trial should be acquitted. In addition, the lead civil claimant in the case, APPAC, stated that it believed Mr. Bronfman should be acquitted. The outcome of the trial and any subsequent proceedings with respect to Mr. Bronfman is uncertain at this time. Mr. Bronfman believes that his trading in Vivendi stock was at all times proper.
The court originally announced that it would deliver its verdict on November 19, 2010, but later advised that the verdict date was being postponed. On November 19, 2010, the court announced that it now intends to deliver its verdict on January 21, 2011.
Employment Agreement with Steven Macri
Mr. Macri has entered into an employment agreement dated as of July 21, 2008. The employment agreement, among other things, includes the following:
| (1) | the term of Mr. Macri’s employment agreement ends on December 31, 2012 and |
| (2) | upon elevation to the position of Chief Financial Officer, Mr. Macri’s base salary is now $600,000 and his target bonus is now $600,000. |
The employment agreement also provided for the grant of 175,000 options to Mr. Macri as described below under “Fiscal 2008 Equity Grants.” Mr. Macri was named the Company’s CFO on September 16, 2008.
In the event we terminate his employment for any reason other than for “cause” or if Mr. Macri terminates his employment for “good reason,” each as defined in the agreement, Mr. Macri will be entitled to severance benefits equal to $1,200,000 plus a pro-rated target bonus and continued participation in the Company’s group health and life insurance plans for up to one year after termination.
The employment agreement also contains standard covenants relating to confidentiality and a one-year post-employment non-solicitation covenant.
2005 Equity Grant
Mr. Macri received a grant of 22,774 stock options on February 22, 2005. The exercise price of the options is $9.14 per share, which was the fair market value on the grant date. The options generally vest 25% a year over four years (subject to continued employment) and have a term of 10 years. Such options are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.” All of these options were vested as of February 21, 2009.
Fiscal 2008 Equity Grants
Pursuant to the terms of Mr. Macri’s employment agreement, he received an award of 175,000 stock options of the Company. The option grant was made under the Plan. Pursuant to the Company’s policy, the options were granted on August 15, 2008, the first 15th of the month following approval of the grant by the Compensation
Committee and execution of the employment agreement, and the exercise price of the options is $7.56 per share, which was the closing price on August 15, 2008. The options generally vest 25% a year over four years (subject to continued employment) and have a term of 10 years.
In addition, Mr. Macri received a grant of 22,000 stock options on December 15, 2007. The option grant was made in recognition of his fiscal 2007 performance and was made under the Plan. The exercise price of the options is $6.34 per share, which was the closing price on the grant date. The options generally vest 25% a year over four years (subject to continued employment) and have a term of 10 years.
The equity grants are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.”
Employment Agreement with Lyor Cohen
On March 14, 2008, the employment agreement with Lyor Cohen was amended and restated effective March 15, 2008. The amended and restated employment agreement, among other things, includes the following:
| (1) | the term of Mr. Cohen’s employment agreement was extended until March 15, 2013 and will be automatically extended for successive one-year terms unless either party gives written notice of non-renewal no less than 90 days prior to the annual March 15 expiration date (commencing with March 15, 2013), in which case the agreement shall end on the March 15 immediately following the receipt of such notice, |
| (2) | an annual base salary of $3.0 million, subject to discretionary increases from time to time by the Board of Directors or Compensation Committee, |
| (3) | a target bonus of $2.5 million, with a minimum of $1.5 million and a maximum of $5.0 million and |
| (4) | revisions intended to comply with the requirements of Section 409A of the Internal Revenue Code. |
The employment agreement also provided for the grants of equity described below under “Fiscal 2008 Equity Grants.” On September 16, 2008, Mr. Cohen was named Vice Chairman, Warner Music Group and Chairman and CEO, Recorded Music—Americas and the U.K.
In the event we terminate Mr. Cohen’s employment for any reason other than for “cause” or if Mr. Cohen terminates his employment for “good reason,” each as defined in the agreement, Mr. Cohen will be entitled to severance benefits equal to: (1) two years of his then-current base salary and one year of his target bonus, (2) a pro-rated annual bonus and (3) continued participation in the Company’s group health and life insurance plans for up to one year after termination; provided, however, that if the termination event giving rise to payment of the severance benefits is a termination by Mr. Cohen for “good reason” solely due to an adverse change to the executive’s reporting lines such that the executive no longer reports to the Company’s CEO, then the payments set forth in (1) above will be limited to $4.0 million. Mr. Cohen may terminate his employment with or without “good reason,” consistent with his prior agreement.
The employment agreement, as amended and restated, also contains standard covenants relating to confidentiality and assignment of intellectual property rights and six-month post-employment non-solicitation covenants consistent with the prior agreement.
2004 Equity Grant
The Company granted to Mr. Cohen 2,390,102 shares of its common stock pursuant to a restricted stock agreement dated March 1, 2004. The restricted stock may also be purchased by the Company (or our subsidiary) upon any termination of employment. Such stock is also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.” All of the shares of restricted stock were vested as of September 30, 2009.
Fiscal 2008 Equity Grants
Mr. Cohen’s amended and restated employment agreement provided for the grant to Mr. Cohen of 1,500,000 stock options and 1,750,000 performance-based restricted shares of the Company’s common stock pursuant to a separate stock option agreement and restricted stock award agreement. The equity grants were made under the Plan. Pursuant to the Company’s policy, the options and the restricted shares were granted on March 15, 2008, the first 15th of the month following approval of the grant by the Compensation Committee and execution of the amended and restated employment agreement, and the exercise price of the options is $5.29 per share, which was the closing price on March 14, 2008, the last trading date prior to the grant date. The options generally vest 20% a year over five years (subject to continued employment) and have a term of 10 years. The shares of restricted stock generally vest based on a double trigger that includes achievement of both service and performance criteria (each, subject to continued employment through the applicable vesting dates). The time vesting criteria for the restricted shares are the same as for the stock options—20% a year over five years. The performance vesting criteria for the restricted shares are as follows:
413,666 shares, upon the Company achieving an average closing stock price of at least $10.00 per share over 60 consecutive trading days;
413,667 shares, upon the Company achieving an average closing stock price of at least $13.00 per share over 60 consecutive trading days;
413,667 shares, upon the Company achieving an average closing stock price of at least $17.00 per share over 60 consecutive trading days; and
509,000 shares, upon the Company achieving an average closing stock price of at least $20.00 per share over 60 consecutive trading days.
The stock option agreement and restricted stock award agreement each provide for up to 12 months’ additional vesting in the case of a termination of employment due to “disability,” as defined in the agreements, or death. Additionally, in the event of an involuntary termination of employment without “cause” or a voluntary termination for “good reason,” each as defined in the agreements, that occurs on or after, or in anticipation of, a “change in control” of the Company as defined in the Plan, the stock option agreement provides for the options to become fully vested and exercisable and the restricted stock award agreement provides for the time vesting condition attributable to the restricted shares to be deemed fully satisfied. Additionally, if the “fair market value” of the common stock as defined in the Plan as of the date of any “change in control” (or, if greater, the per share consideration paid in connection with such “change in control”) exceeds the per share dollar threshold amount of any of the performance conditions described above for the restricted shares (without regard to the number of consecutive trading days for which the average closing price was achieved), then such performance condition shall be deemed to have been achieved as of the date of such “change in control,” to the extent not previously achieved. While the time vesting criteria for 20% of the restricted shares was achieved in fiscal 2010, none of the performance vesting criteria for the restricted shares had been achieved and, therefore, none of the restricted shares vested in fiscal 2010.
The equity grants are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.”
Employment Agreement with Michael D. Fleisher
On September 16, 2008, Mr. Macri was named the Company’s CFO. Mr. Fleisher, who had served as the Company’s CFO from January 2005, was named Vice Chairman, Strategy and Operations of the Company.
On November 14, 2008, Mr. Fleisher entered into a new employment agreement effective September 16, 2008. The employment agreement, among other things, includes the following:
| (1) | a term of employment through December 31, 2013, |
| (2) | an annual base salary of $825,000 and |
| (3) | commencing in the Company’s 2009 fiscal year, a target bonus of $1,100,000 consisting of (a) an annual “corporate bonus” to be determined in the discretion of the Company, with a target of $800,000 (which will be determined based on the performance of the Company and Mr. Fleisher) and (b) an annual “projects bonus” to be determined in the discretion of the Company, with a target of $300,000 (which will be determined based on Mr. Fleisher’s performance with respect to any special projects and/or transformational initiatives that have been assigned to him by the CEO). |
The employment agreement also provided for the grants of equity described below under “Fiscal 2009 Equity Grants.”
Under his new employment agreement, in the event we terminate Mr. Fleisher’s employment for any reason other than for “cause” or if Mr. Fleisher terminates his employment for “good reason,” each as defined in the agreement, Mr. Fleisher will be entitled to severance benefits equal to $1,925,000 plus a pro rata portion of Mr. Fleisher’s target bonus of $1,100,000 with respect to the year of termination and continued participation in the Company’s group health and life insurance plans for up to one year after termination. Mr. Fleisher may terminate his new employmentshare subscription agreement with or without “good reason,” consistent with his prior agreement. In the case of termination due to death or “disability,” as defined in the agreement, Mr. Fleisher will be entitled to severance benefits equal to his annual base salary of $825,000 for an additional twelve month period, a pro rata portion of his target bonus of $1,100,000 with respect to the year of termination and those death or disability benefits to which Mr. Fleisher would be entitled to under any benefit plans, policies or arrangements of the Company.
The new employment agreement also contains standard covenants relating to confidentiality, assignment of intellectual property rights and six-month post-employment non-solicitation covenants consistent with his prior agreement.
2004 Equity
Mr. Fleisher purchased 896,208 shares of the Company’s common stock through a restricted stock agreement dated December 21, 2004 for an aggregate purchase price of $927,916.67. The restricted stock may be purchased by the Company (or our subsidiary) upon any termination of employment. Such stock is also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.” All of the shares of restricted stock were vested as of September 30, 2009.
Fiscal 2008 Equity Grant
Mr. Fleisher received a grant of 22,500 options on March 15, 2008. The exercise price of the options is $5.29 per share, which was the closing price on the grant date. The option grant was made in recognition of his fiscal 2007 performance and was made under the Plan. The options will generally vest 25% a year over four years (subject to continued employment) and have a term of 10 years. Such options are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.”
Fiscal 2009 Equity Grants
Mr. Fleisher’s employment agreement provided for the grant to Mr. Fleisher of 450,000 stock options and 450,000 performance-based restricted shares of the Company’s common stock pursuant to separate stock option and restricted stock award agreements. The equity grants were made under the Plan. Pursuant to the Company’s policy, the options and the restricted shares were granted on November 15, 2008, the first 15th of the month following approval of the grants by the Compensation Committee and execution of the employment agreement, and the exercise price of the options is $2.77 per share, which was the closing price on November 14, 2008, the last trading date prior to the grant date. The options generally vest 20% a year over five years (subject to
continued employment) and have a term of 10 years (subject to special additional vesting terms for the “Bonus Equity” options as described below). The shares of restricted stock generally vest based on a double trigger that includes achievement of both service and performance criteria (each, subject to continued employment through the applicable vesting dates). The time vesting criteria for the restricted shares are the same as for the stock options—20% a year over five years. The performance vesting criteria for the restricted shares (subject to special additional vesting terms for the “Bonus Equity” restricted shares as described below) are as follows:
106,500 shares (of which 35,500 constitute Bonus Equity), upon the Company achieving an average closing stock price of at least $10.00 per share over 60 consecutive trading days;
106,500 shares (of which 35,500 constitute Bonus Equity), upon the Company achieving an average closing stock price of at least $13.00 per share over 60 consecutive trading days;
106,500 shares (of which 35,500 constitute Bonus Equity), upon the Company achieving an average closing stock price of at least $17.00 per share over 60 consecutive trading days; and
130,500 shares (of which 43,500 constitute Bonus Equity), upon the Company achieving an average closing stock price of at least $20.00 per share over 60 consecutive trading days.
For 150,000 of the stock options and 150,000 of the performance-based restricted shares described above (the “Bonus Equity”), there is an additional performance vesting criteria. Notwithstanding whether all of the time and/or performance conditions described above have been met, the Bonus Equity will not vest if the Compensation Committee of the Company determines, in its sole discretion, within 45 days following the date on which it would otherwise vest, that such Bonus Equity will not be permitted to vest on such scheduled vesting date, thereby exercising its “negative discretion” right. In making such determination, the Compensation Committee may take into consideration such factors as it deems appropriate, including, without limitation, whether any additional performance goals established by the Compensation Committee from time to time with respect to the vesting of such Bonus Equity have been met. Such performance goals may include goals based on Mr. Fleisher’s performance with respect to any special projects and/or transformational initiatives that have been assigned to him by the CEO. The Compensation Committee determined that additional performance goals established by the Compensation Committee from time to time with respect to the vesting of Mr. Fleisher’s Bonus Equity had been met for fiscal 2009 for the Bonus Equity that was scheduled to vest on November 14, 2009 and for fiscal 2010 for the Bonus Equity that was scheduled to vest on November 14, 2010. Therefore, 20% of the options vested as of November 14, 2009 and an additional 20% of the options vested on November 14, 2010. However, while the time vesting criteria and additional performance vesting criteria for the Bonus Equity, were achieved for the restricted shares scheduled to vest on November 14, 2009 and November 14, 2010, none of the stock price hurdles set forth above for the restricted shares have been achieved as of January 6, 2011 and, therefore, none of the restricted shares have vested as of such date.
The stock option agreement and restricted stock award agreement each provide for up to 12 months’ additional vesting in the case of a termination of employment due to “disability,” as defined in the agreements, or death. Additionally, subject to the description below with respect to the treatment of the Bonus Equity following a “change in control,” in the event of an involuntary termination of employment without “cause” or a voluntary termination for “good reason,” each as defined in the agreements, that occurs on or after, or in anticipation of, a “change in control” of the Company as defined in the Plan, the stock option agreement provides for the options to become fully vested and exercisable and the restricted stock award agreement provides for the time vesting condition attributable to the restricted shares to be deemed fully satisfied. Additionally, if the “fair market value” of the common stock as defined in the Plan as of the date of any “change in control” following which the Company’s common stock ceases to be traded on a public exchange (or, if greater, the per share consideration paid in connection with such “change in control”) exceeds the per share dollar threshold amount of any of the performance conditions described above for the restricted shares (without regard to the number of consecutive trading days for which the average closing price was achieved), then such performance condition will be deemed to have been achieved as of the date of such “change in control,” to the extent not previously achieved.
With respect to the Bonus Equity, prior to the occurrence of any “change in control” occurring on or prior to November 15, 2010, the Compensation Committee (as comprised immediately prior to such “change in control”) will affirmatively determine whether the Compensation Committee’s negative discretion as described above will continue to apply to any then outstanding Bonus Equity on and following the change in control. In the event that the Compensation Committee (as comprised immediately prior to such “change in control”) fails to take any affirmative action with respect to the then-outstanding Bonus Equity prior to the occurrence of such “change in control,” then the negative discretion will automatically cease to apply to such Bonus Equity. The negative discretion will automatically cease to apply to the Bonus Equity outstanding upon the occurrence of any “change in control” occurring after November 15, 2010 (other than with respect to any tranches of Bonus Equity which the Compensation Committee affirmatively determined not to vest pursuant to its negative discretion authority prior to the occurrence of such “change in control”).
The equity grants are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.”
Employment Agreement with David H. Johnson
On May 14, 2008, David H. Johnson, the Chairman and CEO of Warner/ChappellTencent Music entered into a new employment agreement. The new employment agreement, among other things, includes the following:
| (1) | a term of employment from July 1, 2008 until June 30, 2011, |
| (2) | an annual base salary of $700,000, which is unchanged from his prior agreement, |
| (3) | a target bonus of $800,000, which is also unchanged from his prior agreement, and |
| (4) | in addition to his entitlement to paid vacation time and continued eligibility to participate in or receive benefits under any employee benefit plan, program or arrangement currently available to other executives of Warner/Chappell, Mr. Johnson will be entitled to continue to receive automobile and financial advisory services allowances consistent with his prior agreement. |
The employment agreement also provided for the grant of 100,000 options to Mr. Johnson as described below under “Fiscal 2008 Equity Grants.”
Consistent with Mr. Johnson’s prior agreement, in the event we terminate his employment agreement for any reason other than for “cause” or if Mr. Johnson terminates his employment for “good reason,” each as defined in the agreement, Mr. Johnson will be entitled to severance benefits equal to one year of his base salary and target bonus and a pro-rated portion of the target annual bonus for the year of termination. In the event of non-renewal of his agreement, Mr. Johnson would receive a payment equal to one year of his base salary.
The employment agreement also contains standard covenants relating to confidentiality and one-year post-employment non-solicitation covenants.
2005 Equity
Mr. Johnson purchased 119,494 shares of the Company’s common stock through a restricted stock agreement dated January 28, 2005 for an aggregate purchase price of $123,722.22. The restricted stock may be purchased by the Company (or our subsidiary) upon any termination of employment. Such stock is also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.” All of the shares of restricted stock were vested as of September 30, 2009.
Fiscal 2008 Equity Grants
Pursuant to the terms of his employment agreement Mr. Johnson received a grant of 100,000 stock options on May 15, 2008. The equity grant was made under the Plan. Pursuant to the Company’s policy, the options were granted on May 15, 2008, the 15th of the first month following approval of the grant by the Compensation
Committee and execution of the amended employment agreement, and the exercise price of the options is $8.03 per share, which was the closing price on the NYSE on the grant date. The options generally vest 25% per year over four years (subject to continued employment) and have a term of 10 years. In the event of an involuntary termination of employment without cause or a voluntary termination for good reason that occurs on or after, or in anticipation of, a change in control of the Company, the stock option agreement provides for the options to become fully vested and exercisable.
In addition, Mr. Johnson received a grant of 16,250 options on March 15, 2008. The option grant was made in recognition of his fiscal 2007 performance and was made under the Plan. The exercise price of the options is $5.29 per share, which was the closing price on the grant date. The options generally vest 25% a year over four years (subject to continued employment) and have a term of 10 years. At the time of the grant, Mr. Johnson was also provided the opportunity to receive an additional award of 3,750 options but, upon his recommendation, these awards were instead granted to other employees he supervised.
The equity grants are also subject to the stockholders agreement described under “Certain Relationships and Related Party Transactions.”
Outstanding Equity Awards at 2010 Fiscal Year-End
The following table provides information regarding outstanding awards made to our Named Executive Officers as of our most recent fiscal year-end, September 30, 2010.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards | |
Name | | Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable | | | Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable | | | Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) | | | Option
Exercise
Price
($) | | | Option
Expiration
Date | | | Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#) | | | Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($) | | | Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#) | | | Equity
Incentive
Plan
Awards:
Market
or Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)(1) | |
Edgar Bronfman, Jr. | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,750,000 | (2) | | $ | 12,375,000 | |
| | | 1,100,000 | | | | 1,650,000 | (2) | | | — | | | $ | 5.29 | | | | 3/14/2018 | | | | — | | | | — | | | | — | | | | — | |
Steven Macri | | | 22,774 | (3) | | | — | | | | — | | | $ | 9.14 | | | | 2/21/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 101 | (3) | | | 11,000 | (3) | | | — | | | $ | 6.34 | | | | 12/14/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 87,500 | (3) | | | 87,500 | (3) | | | — | | | $ | 7.56 | | | | 8/14/2018 | | | | — | | | | — | | | | — | | | | — | |
Lyor Cohen | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,750,000 | (4) | | $ | 7,875,000 | |
| | | 600,000 | | | | 900,000 | (4) | | | — | | | $ | 5.29 | | | | 3/14/2018 | | | | — | | | | — | | | | — | | | | — | |
Michael D. Fleisher | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | �� | | | — | | | | 450,000 | (5) | | $ | 2,025,000 | |
| | | 90,000 | | | | 240,000 | (5) | | | 120,000 | (5) | | $ | 2.77 | | | | 11/14/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 11,250 | | | | 11,250 | (5) | | | — | | | $ | 5.29 | | | | 3/14/2018 | | | | — | | | | — | | | | — | | | | — | |
David H. Johnson | | | 8,125 | | | | 8,125 | (6) | | | — | | | $ | 5.29 | | | | 3/14/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | 50,000 | (6) | | | — | | | $ | 8.03 | | | | 5/14/2018 | | | | — | | | | — | | | | — | | | | — | |
(1) | Calculations of market value of shares of restricted stock that have not vested as of September 30, 2010 reflect the closing price of our common stock on September 30, 2010 on the NYSE ($4.50). The closing price of our common stock on January 4, 2011 was $5.55 per share. The reported value for Mr. Bronfman’s, Mr. Cohen’s and Mr. Fleisher’s performance-based restricted stock is based on the closing stock price on September 30, 2010 assuming achievement of the maximum levels of performance. The shares will vest as described below, subject to the additional performance criteria described above under “Summary of NEO Employment and Equity Agreements.” The time-vesting portion of the performance-based restricted stock awards will vest sooner in the event of a “change in control” of the Company as described further under “Potential Payments upon Termination or Change in Control” below. |
(2) | Mr. Bronfman’s unvested restricted stock vests 20% a year over five years from the grant date of March 15, 2008, subject to the additional performance criteria described above under “Summary of NEO Employment and Equity Agreements.” His restricted stock is scheduled to vest, subject to the additional performance criteria, as follows: (a) 550,000 shares on March 14, 2009, (b) 550,000 shares on March 14, 2010, (c) 550,000 shares on March 14, 2011, (d) 550,000 shares on March 14, 2012 and (e) 550,000 shares on March 14, 2013. While the time vesting criteria for 20% of the restricted shares was achieved in fiscal 2009 on March 14, 2009 and for an additional 20% of the restricted shares in fiscal 2010 on March 14, 2010, none of the performance vesting criteria for the restricted shares had been achieved and, therefore, none of the restricted shares vested in fiscal 2009 or fiscal 2010. Mr. Bronfman’s unexercisable options vest 20% a year over five years from the grant date of March 15, 2008. His 1,100,000 exercisable options vested: (i) 550,000 on March 14, 2009 and (ii) 550,000 on March 14, 2010. His unexercisable options vest as follows: (A) 550,000 on March 14, 2011, (B) 550,000 on March 14, 2012 and (C) 550,000 on March 14, 2013. |
(3) | Mr. Macri’s options vest 25% a year over four years from the respective grant dates. Mr. Macri’s unexercisable options vest as follows: (a) 5,500 on December 14, 2010, (b) 5,500 on December 14, 2011, (c) 43,750 on August 14, 2011 and (d) 43,750 on August 14, 2012. His exercisable options vested as follows: (i) 5,693 on February 21, 2006, (ii) 5,694 on February 21, 2007, (iii) 5,693 on February 21, 2008, (iv) 5,500 on December 14, 2008, (v) 5,694 on February 21, 2009, (vi) 43,750 on August 14, 2009, (vii) 5,500 on December 14, 2009 and (viii) 43,750 on August 14, 2010. |
(4) | Mr. Cohen’s unvested restricted stock vests 20% a year over five years from the grant date of March 15, 2008, subject to the additional performance criteria described above under “Summary of NEO Employment and Equity Agreements.” His restricted stock is scheduled to vest, subject to the additional performance criteria, as follows: (a) 350,000 shares on March 14, 2009, (b) 350,000 shares on March 14, 2010, (c) 350,000 shares on March 14, 2011, (d) 350,000 shares on March 14, 2012 and (e) 350,000 shares on March 14, 2013. While the time vesting criteria for 20% of the restricted shares was achieved in fiscal 2009 on March 14, 2009 and for an additional 20% of his restricted shares in fiscal 2010 on March 14, 2010, none of the performance vesting criteria for the restricted shares had been achieved and, therefore, none of the restricted shares vested in fiscal 2009 or fiscal 2010. Mr. Cohen’s unexercisable options vest 20% a year over five years from the grant date of March 15, 2008. His 600,000 exercisable options vested: (i) 300,000 on March 14, 2009 and (ii) 300,000 on March 14, 2010. His unexercisable options vest as follows: (A) 300,000 on March 14, 2011, (B) 300,000 on March 14, 2012 and (C) 300,000 on March 14, 2013. |
(5) | Mr. Fleisher’s unvested restricted stock vests 20% a year over five years from the grant date of November 15, 2008, subject to the additional performance criteria described above under “Summary of NEO Employment and Equity Agreements,” including the additional performance vesting criteria applicable to the 150,000 shares representing Bonus Equity. His restricted stock is scheduled to vest, subject to the additional performance criteria, as follows: (a) 90,000 shares (30,000 representing Bonus Equity) on November 14, 2009, (b) 90,000 shares (30,000 representing Bonus Equity) on November 14, 2010, (c) 90,000 shares (30,000 representing Bonus Equity) on November 14, 2011, (d) 90,000 shares (30,000 representing Bonus Equity) on November 14, 2012 and (e) 90,000 shares (30,000 representing Bonus Equity) on November 14, 2013. The Compensation Committee determined that additional performance goals established by the Compensation Committee from time to time with respect to the vesting of Mr. Fleisher’s Bonus Equity had been met for fiscal 2009 for the Bonus Equity that was scheduled to vest on November 14, 2009 and for fiscal 2010 for the Bonus Equity that was scheduled to vest on November 14, 2010. However, while the time vesting criteria, and additional performance vesting criteria for the Bonus Equity, were achieved for the restricted shares scheduled to vest on November 14, 2009 and November 14, 2010, none of the stock price hurdles set forth above for the restricted shares have been achieved as of January 6, 2011 and, therefore, none of the restricted shares have vested as of such date. Mr. Fleisher’s options with an expiration date of March 14, 2018 vest 20% a year over four years from the grant date of March 15, 2008. Mr. Fleisher’s unexercisable options with an expiration date of November 14, 2018 vest 20% a year over five years from the grant date of November 15, 2008, subject to the additional performance criteria described above under “Summary of NEO Employment and Equity Agreements” with respect to 150,000 options representing Bonus Equity. His exercisable options vested: (i) 5,625 on March 14, 2009, (ii) 90,000 (30,000 representing Bonus Equity) on November 14, 2009 and (iii) 5,625 on March 14, 2010. Mr. Fleisher’s unexercisable options vest, subject to the additional performance criteria for the 150,000 options representing Bonus Equity, as follows: (A) 90,000 (30,000 representing Bonus Equity) on November 14, 2010, (B) 5,625 on March 14, 2011, (C) 90,000 (30,000 representing Bonus Equity) on November 14, 2011, (D) 5,625 on March 14, 2012, (E) 90,000 (30,000 representing Bonus Equity) on November 14, 2012 and (F) 90,000 (30,000 representing Bonus Equity) on November 14, 2013. The Compensation Committee did not exercise its negative discretion with respect the first or second 20% of the options representing Bonus Equity and, therefore, the options were permitted to vest on the scheduled vesting dates of November 14, 2009 and November 14, 2010, respectively. |
(6) | Mr. Johnson’s options vest 25% a year over four years from the respective grant dates. Mr. Johnson’s unexercisable options vest as follows: (a) 4,062 on March 14, 2011, (b) 4,063 on March 14, 2012, (c) 25,000 on May 14, 2011 and (d) 25,000 on May 14, 2012. His exercisable options vested as follows: (i) 4,062 on March 14, 2009, (ii) 25,000 on May 14, 2009, (iii) 4,063 on March 14, 2010 and (iv) 25,000 on May 14, 2010. |
Option Exercises and Stock Vested in Fiscal 2010
The following table provides information regarding the amounts received by our Named Executive Officers upon exercise of options or similar instruments or the vesting of stock or similar instruments during our most recent fiscal year ended September 30, 2010.
| | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards | |
Name | | Number of Shares
Acquired on Exercise
(#) | | | Value Realized
on Exercise
($) | | | Number of Shares
Acquired on Vesting
(#) | | | Value Realized
on Vesting
($) | |
Edgar Bronfman, Jr. | | | — | | | | — | | | | — | | | | — | |
Steven Macri | | | 10,899 | | | $ | 18,102 | | | | — | | | | — | |
Lyor Cohen | | | — | | | | — | | | | — | | | | — | |
Michael D. Fleisher | | | — | | | | — | | | | — | | | | — | |
David H. Johnson | | | — | | | | — | | | | — | | | | — | |
(1) | Exercised 6,922 options on April 14, 2010 with an exercise price of $6.34 per share and sold the underlying shares at a weighted average sale price of $8 per share and exercised 3,977 options on April 15, 2010 with an exercise price of $6.34 per share and sold the underlying shares at a weighted average sale price of $8.0025 per share pursuant to a Rule 10b5-1 trading plan established by Mr. Macri in connection with his individual long-term strategy for estate planning. |
Potential Payments upon Termination or Change-In-Control
We have entered into employment and equity agreements and maintain compensation plans that, by their terms, will require us to provide compensation and other benefits to our NEOs if their employment terminates or they resign under specified circumstances or upon a change in control.
The following discussion summarizes the potential payments upon a termination of employment in various circumstances. The amounts discussed apply the assumptions that employment terminated on September 30, 2010, and calculations of equity awards reflect the closing price of our common stock on September 30, 2010 on the NYSE ($4.50) and the NEO does not become employed by a new employer or return to work for the Company.
See “Summary of NEO Employment and Equity Agreements” above for a description of their respective agreements.
Estimated Benefits upon Termination for “Cause” or Resignation Without “Good Reason”
In the event an NEO is terminated for “cause,” or resigns without “good reason” as such terms are defined below, the NEO is only eligible to receive compensation and benefits accrued through the date of termination. Therefore, no amounts other than accrued amounts would be payable to Messrs. Bronfman, Macri, Cohen, Fleisher and Johnson in this instance pursuant to their employment agreements.
In the event of such a termination or resignation, our NEOs would be eligible for specified payments under their equity agreements. For restricted stock sold to our NEOs in 2004, vested restricted shares are subject to a call option at the fair market value of the shares on the date of termination. The call option in each case is at the Company’s option. In determining that our NEOs would not receive any payment upon termination for “cause” or resignation without “good reason” we have assumed that the Company would not exercise any call right with respect to vested shares with respect to the 2004 grants since the fair market value of the shares on September 30, 2010 was in excess of the initial price paid for the shares. For grants of restricted stock to our NEOs other than those sold to our NEOs in 2004, unvested shares of restricted stock generally are cancelled effective upon the termination date. Vested and unvested options generally are cancelled effective upon the date of termination. In specified circumstances, Messrs. Bronfman, Cohen and Fleisher would have 30 days following termination to exercise some of their vested options with respect to a resignation without “good reason.”
See “Estimated Benefits upon a Change in Control” below for a discussion of the potential vesting of restricted stock and options for Mr. Bronfman in connection with certain changes in control involving EMIEntertainment Group Limited or its affiliates.
Estimated Benefits upon Termination without “Cause” or Resignation for “Good Reason”
Upon termination without “cause” or resignation for “good reason,” each of our NEOs, with the exception of Mr. Cohen, is entitled to severance benefits equal to one year of his then-current base salary and target bonus plus a pro-rated annual bonus and continued participation in the group health and life insurance plans of the Company in which he currently participates for up to one year after termination. Mr. Cohen would be entitled to the above benefits with the exception that he would be entitled to severance benefits equal to two years of his then-current base salary except if he terminates for “good reason” due to a change in reporting lines as described further following the table below. None of the NEOs have restricted stock or options that would vest upon a termination without “cause” or resignation for “good reason” with the exception of terminations in connection with specified change in control transactions. See “Estimated Benefits upon a Change in Control” below for a discussion of the potential vesting of restricted stock and options for Mr. Bronfman in connection with certain changes in control involving EMI Group Limited or its affiliates.
| | | | | | | | | | | | | | | | | | | | |
| | | Salary (other
than accrued
amounts) | | | Target Bonus | | | Equity Awards | | | Benefits(4) | | | Total | |
Edgar Bronfman, Jr. | | $ | 1,000,000 | | | $ | 6,000,000 | (1) | | | — | | | $ | 50,000 | | | $ | 7,050,000 | |
Steven Macri | | $ | 1,200,000 | (2) | | $ | 600,000 | (2) | | | — | | | $ | 50,000 | | | $ | 1,850,000 | |
Lyor Cohen | | $ | 6,000,000 | | | $ | 5,000,000 | (3) | | | — | | | $ | 50,000 | | | $ | 11,050,000 | |
Michael D. Fleisher | | $ | 1,925,000 | (2) | | $ | 1,100,000 | (2) | | | — | | | $ | 50,000 | | | $ | 3,075,000 | |
David H. Johnson | | $ | 700,000 | | | $ | 1,600,000 | (3) | | | — | | | $ | 50,000 | | | $ | 2,350,000 | |
(1) | Represents Mr. Bronfman’s target bonus of $3.0 million plus one year of pro-rated target bonus for the year of termination (assuming a full year of employment in the year of termination). |
(2) | Amount under salary (other than accrued amounts) represents the lump sum severance payable on termination. Amount under target bonus represents a full year of pro-rated target bonus for the year of termination (assuming a full year of employment in the year of termination). |
(3) | Represents two times the NEO’s target bonus, representing the target bonus and a full year of pro-rated target bonus for the year of termination (assuming a full year of employment in the year of termination). |
(4) | Health and welfare benefits and life insurance premiums will be continued at current rates. Amount to continue such benefits as part of our ongoing benefit plans are estimated to be approximately $50,000 for each NEO for the twelve-month period they are eligible to continue to receive coverage. |
If Mr. Cohen resigns for “good reason” solely due to an adverse change to his reporting lines such that he no longer reports to the CEO, then his severance amount would be limited to $4.0 million plus a pro-rated target bonus for the year of termination and the amount in the Benefits column (a total of $6,550,000, assuming a full year of employment in the year of termination) rather than the amount shown in the table.
Estimated Benefits upon Termination in connection with a Change in Control
Upon termination upon a “change in control,” each of our NEOs, with the exception of Mr. Cohen, is entitled to severance benefits equal to one year of his then-current base salary and target bonus plus a pro-rated annual bonus and continued participation in the group health and life insurance plans of the Company in which he currently participates for up to one year after termination. Mr. Cohen would be entitled to the above benefits with the exception that he would be entitled to severance benefits equal to two years of his then-current base salary. Other than with respect to the fiscal 2008 equity awards granted to Messrs. Bronfman and Cohen and the fiscal 2009 equity awards granted to Mr. Fleisher, if an NEO is terminated due to his death or by the Company due to his disability in each case on or after a “change in control”, all shares of unvested restricted stock (other than performance-based restricted stock awards) will vest and all options will vest and become exercisable. In addition, the NEOs would generally be entitled to vesting of their unvested restricted stock and options upon a termination without “cause” or resignation for “good reason” in connection with a “change in control,” other than with respect to performance-based restricted stock awards. The NEOs would, therefore, additionally recognize the market value of their shares that are not yet vested as set forth above under “Outstanding Equity Awards at 2010 Fiscal-Year End.” For the 2008 equity grants for Messrs. Bronfman and Cohen and Mr. Fleisher’s fiscal 2009 equity grant, the summary below assumes that Messrs. Bronfman, Cohen and Fleisher receive no benefits related to their restricted stock grants as the related performance vesting stock price hurdles have not been met (and it is assumed that the per share consideration paid in connection with the change in control would not exceed such performance criteria thresholds) but the summary below assumes all criteria with respect to their option grants would be met and they would fully vest upon a “change in control” termination.
| | | | | | | | | | | | | | | | | | | | |
| | | Salary (other
than accrued
amounts) | | | Target Bonus | | | Equity Awards(4) | | | Benefits(5) | | | Total | |
Edgar Bronfman, Jr. | | $ | 1,000,000 | | | $ | 6,000,000 | (1) | | | — | | | $ | 50,000 | | | $ | 7,050,000 | |
Steven Macri | | $ | 1,200,000 | (2) | | $ | 600,000 | (2) | | | — | | | $ | 50,000 | | | $ | 1,850,000 | |
Lyor Cohen | | $ | 6,000,000 | | | $ | 5,000,000 | (3) | | | — | | | $ | 50,000 | | | $ | 11,050,000 | |
Michael D. Fleisher | | $ | 1,925,000 | (2) | | $ | 1,100,000 | (2) | | $ | 622,800 | | | $ | 50,000 | | | $ | 3,697,800 | |
David H. Johnson | | $ | 700,000 | | | $ | 1,600,000 | (3) | | | — | | | $ | 50,000 | | | $ | 2,350,000 | |
(1) | Represents Mr. Bronfman’s target bonus of $3.0 million plus one year of pro-rated target bonus for the year of termination (assuming a full year of employment in the year of termination). |
(2) | Amount under salary (other than accrued amounts) represents the lump sum severance payable on termination. Amount under target bonus represents a full year of pro-rated target bonus for the year of termination (assuming a full year of employment in the year of termination). |
(3) | Represents two times the NEO’s target bonus, representing the target bonus and a full year of pro-rated target bonus for the year of termination (assuming a full year of employment in the year of termination). |
(4) | Calculations of market value of equity awards reflect the closing price of our common stock on September 30, 2010 on the NYSE ($4.50). The closing price of our common stock on January 4, 2011 was $5.55 per share. Value reflects the vesting of stock options that would vest upon a termination in connection with a “change in control,” with the value of the options based on the spread between the relevant exercise price and the closing market price of $4.50 on September 30, 2010. Based on the $4.50 closing market price on September 30, 2010, Mr. Fleisher is the only NEO with unvested options that have an exercise price that would have resulted in a “spread” value upon accelerated vesting in connection with a “change in control” termination. The calculation also assumes that the Compensation Committee does not exercise its negative discretion with respect the options representing Mr. Fleisher’s Bonus Equity and, therefore, the options are permitted to vest upon termination in connection with a “change in control”. |
(5) | Health and welfare benefits and life insurance premiums will be continued at current rates. Amount to continue such benefits as part of our ongoing benefit plans are estimated to be approximately $50,000 for each NEO for the twelve-month period they are eligible to continue to receive coverage. |
Upon the termination of Mr. Bronfman’s employment for any reason other than for “cause” on or following an “EMI change in control,” the service condition with respect to Mr. Bronfman’s 2008 equity grants will be deemed satisfied. Therefore, his options will become fully vested and exercisable and his restricted stock will vest subject to obtainment of the related performance conditions. An “EMI change in control” is any transaction that constitutes a “change in control” pursuant to which EMIWMG China agreed to purchase 37,162,288 ordinary shares of Tencent Music Entertainment Group Limited or its affiliates directly or indirectly acquires a controlling interest infor $100 million. WMG China is 80% owned by AI New Holdings 5 LLC, an affiliate of Access, and 20% owned by the Company. As a result, following an “EMI change in control,” Mr. Bronfman could also realizeOn October 3, 2018, WMG China acquired the amounts set forth above under Equity Awards following a resignation without “good reason.”
Estimated Benefits upon Death or Disability
Death. In the employment agreements for Messrs. Bronfman, Cohen and Fleisher, we provide that we will also pay to the executive’s estate an amount equal to one year of the executive’s then-current base salary and a pro-rated annual bonus within 10 days of any termination as a result of death. For the other NEOs, other than accrued benefits, no other benefits are provided in connection with an NEO’s death. Other than with respect to Messrs. Bronfman’s and Cohen’s fiscal 2008 equity grants and Mr. Fleisher’s fiscal 2009 equity grant described under “Summary of NEO Employment and Equity Agreements,” none of our NEOs have any equity awards that would be accelerated upon such executive’s death. All of our NEOs would also receive insurance payouts equal to 1.5x their base salary up to a benefit maximum of $1.5 million.
Disability. In the employment agreements for Messrs. Bronfman, Cohen and Fleisher, we provide that we will also pay to the executive an amount equal to one year of his then-current base salary and a pro-rated annual bonus within 10 days of any termination as the result of disability. For the other NEOs, other than accrued benefits and short-term disability amounts, no benefits are provided in connection with an NEO’s disability. Other than with respect to Messrs. Bronfman’s and Cohen’s fiscal 2008 equity grants and Mr. Fleisher’s fiscal 2009 equity grant described under “Summary of NEO Employment and Equity Agreements,” none of our NEOs have any equity awards that would be accelerated upon such executive’s disability. In the event an NEO becomes disabled during the term of employment, the NEO may participate in our health plans until age 65.
Stock Awards. The stock option and restricted stock agreements entered into in fiscal 2008 with Messrs. Bronfman and Cohen and in fiscal 2009 with Mr. Fleisher each provide for up to 12 months’ additional vesting in the case of a termination of employment due to disability or death. For the 2008 equity grants for Messrs. Bronfman and Cohen and Mr. Fleisher’s fiscal 2009 equity grant, the below summary assumes that the NEOs receive no benefits related to their restricted stock grants as the related performance vesting stock price hurdles have not been met but assumes one additional year of the service condition with respect to their option grants would be met and would vest upon death or disability and that the Compensation Committee does not exercise its negative discretion with respect the options representing Mr. Fleisher’s Bonus Equity and, therefore, the options are permitted to vest.
| | | | | | | | | | | | | | | | |
| | | Salary (other
than accrued
amounts) | | | Bonus | | | Equity Awards(2) | | | Total | |
Edgar Bronfman, Jr. | | $ | 1,000,000 | | | $ | 3,000,000 | (1) | | | — | | | $ | 4,132,000 | |
Steven Macri | | | — | | | | — | | | | — | | | | — | |
Lyor Cohen | | $ | 3,000,000 | | | $ | 2,500,000 | (1) | | | — | | | $ | 5,072,000 | |
Michael D. Fleisher | | $ | 825,000 | | | $ | 1,100,000 | (1) | | $ | 155,700 | | | $ | 2,080,700 | |
David H. Johnson | | | — | | | | — | | | | — | | | | — | |
(1) | Represents a full year of the NEO’s pro-rated target bonus for the year of termination. |
(2) | Calculations of market value of equity awards reflect the closing price of our common stock on September 30, 2010 on the NYSE ($4.50). The closing price of our common stock on January 4, 2011 was $5.55 per share. Value reflects one additional year of the
|
| service condition with respect to their option grants that would be met and resulting vesting upon death or disability, with the value of the options based on the spread between the relevant exercise price and closing market price of $4.50 on September 30, 2010. Based on the $4.50 closing market price on September 30, 2010, Mr. Fleisher is the only NEO with unvested options that have an exercise price that would have resulted in a “spread” value upon accelerated vesting due to death or disability. The calculation also assumes that the Compensation Committee does not exercise its negative discretion with respect the options representing Mr. Fleisher’s Bonus Equity and, therefore, the options are permitted to vest upon death or disability.
|
Relevant Provisions of Employment Agreements
Upon termination of employment for any reason, all NEOs are entitled to unpaid salary and vacation time accrued through the termination date.
Treatment of Equity Awards
Outstanding equity awards held by our NEOs as of September 30, 2010 are described above under the heading “Outstanding Equity Awards at Fiscal Year-End” and under “Summary of NEO Employment and Equity Agreements” above. The following describes the treatment of these outstanding equity awards in the event employment terminates:
If an NEO is terminated for “cause,” vested restricted shares purchased by our NEOs in 2004 are subject to a call option by us at the fair market value of the shares on the date of termination. Shares of unvested restricted stock granted to our NEOs will terminate effective upon the date of termination. Vested and unvested options will generally terminate effective upon the date of termination.
If Messrs. Bronfman, Cohen or Fleisher resign other than for “good reason,” outstanding vested stock options remain exercisable for 30 days (or if earlier, their expiration date). Unvested stock options are forfeited. Upon the termination of Mr. Bronfman’s employment for any reason other than for “cause” on or following an “EMI change in control,” the service condition with respect to Mr. Bronfman’s 2008 equity grants will be deemed satisfied. Therefore, his options will become fully vested and exercisable and his restricted stock will vest subject to obtainment of the related performance conditions. Other terms of equity awards are the same as those described above regarding a termination for “cause.”
If an NEO’s employment is terminated without “cause,” or an NEO resigns for “good reason,” or an NEO’s employment is terminated due to death or incapacity any outstanding unvested stock options will terminate upon the date of termination and all vested stock options will remain exercisable for 120 days (or if earlier, their expiration date). Upon the termination of Mr. Bronfman’s employment for any reason other than for “cause” on or following an “EMI change in control,” the service condition with respect to Mr. Bronfman’s 2008 equity grants will be deemed satisfied. Therefore, his options will become fully vested and exercisable and his restricted stock will vest subject to obtainment of the related performance conditions. Other terms of equity awards are the same as those described above regarding a termination for “cause.”
If an NEO retires, outstanding stock options that were vested and exercisable on the retirement date will remain exercisable until their expiration date. Other terms of equity awards are the same as those described above regarding a termination for “cause.”
Other than with respect to the fiscal 2008 equity awards granted to Messrs. Bronfman and Cohen and the fiscal 2009 equity awards granted to Mr. Fleisher, if an NEO is terminated due to his death or by the Company due to his disability in each case on or after a “change in control” (as defined in his respective equity agreement), all shares of unvested restricted stock (other than performance-based restricted stock awards) will vest and all options will vest and become exercisable. In addition, in the case of a termination by the Company without “cause” or a resignation by an NEO for “good reason” in connection with a “change in control,” all shares of unvested restricted stock (other than performance-based restricted stock awards) will vest and all options shall become vested and exercisable. In any of these circumstances, the Compensation Committee may exercise its negative discretion with respect the restricted stock and options representing Mr. Fleisher’s Bonus Equity and, therefore, determine that such restricted stock and options would not be permitted to vest.
Termination for “Cause”
Under the terms of their employment agreements, we generally would have “cause” to terminate the employment of each of our NEOs in any of the following circumstances: (1) substantial and continual refusal to perform his duties with the Company, (2) engaging in willful malfeasance that has a material adverse effect on the Company, (3) conviction of a felony or entered a plea of nolo contendere to a felony charge and (4) with respect to Messrs. Bronfman, Cohen and Fleisher, a determination by the Board that the executive’s representations that there were no contracts prohibiting the executive from entering into his employment agreement with the Company were untrue when made.
We are required to notify our NEOs after any event that constitutes “cause” before terminating their employment, and in general they have no less than 20 days after receiving notice to cure the event.
Resignation for “Good Reason” or without “Good Reason”
Our employment agreements for our NEOs provide that the executive generally would have “good reason” to terminate employment in any of the following circumstances: (1) if we assign duties inconsistent with the executive’s current positions, duties or responsibilities or if we change the parties to whom the executive reports, (2) if we remove the executive from, or fail to re-elect the executive to, the executive’s position, (3) if, in the case of Mr. Bronfman, he is not re-elected to the Board of Directors, (4) if we reduce the executive’s salary, target bonus or other compensation levels, (5) if we require the executive to be based anywhere other than the New York metropolitan area, (6) if we breach certain of our obligations under the employment agreement, (7) if the Company fails to cause any successor to expressly assume the executive’s employment agreements, (8) for Messrs. Cohen, Fleisher and Macri, any change in reporting line such that they no longer report to the CEO or the senior-most executive of the Company, (9) with respect to Mr. Cohen, if any recorded music operations in the Americas or the U.K. of the Company or any of our respective directly or indirectly owned subsidiaries shall not be included within the Company’s recorded music operations for which he is responsible or if there is any appointment of any Co-Chief Executive Officer of recorded music operations for which he is responsible (but the appointment of a President or Chief Operating Officer of the Company shall not constitute “good reason” so long as Mr. Cohen continues to report to the CEO) or (10) with respect to Mr. Fleisher, the appointment of any person other than Mr. Cohen or Mr. Fleisher as the Company’s President, Chief Operating Officer or the equivalent.
Our NEOs generally are required to notify us within 60 days after becoming aware of the occurrence of any event that constitutes “good reason,” and in general we have 30 days to cure the event.
Each of Messrs. Bronfman, Cohen and Fleisher may terminate their employment with or without “good reason,” subject to the applicable post-employment covenants described below.
Restrictive Covenants
Our executive employment agreements contain several important restrictive covenants with which an executive must comply following termination of employment. For example, the entitlement of Messrs. Bronfman, Cohen, Fleisher and Macri to payment of any unpaid portion of the severance amount indicated in the table as owing following a termination without “cause” or resignation for “good reason” is conditioned on the executive’s compliance with covenants not to solicit certain of our employees. This non-solicitation covenant continues in effect during a period that will end six months or one year following the executive’s termination of employment, depending on the level of the employee.
The employment agreements of our NEOs also contain covenants regarding non-disclosure of confidential information and, for Messrs. Bronfman, Cohen and Fleisher, recognition of the Company’s ownership of works of authorship resulting from their services (both of unlimited duration) and, with respect to Mr. Bronfman, a one year post-employment non-competition covenant.
Compliance with Section 409A
Our NEOs are generally expected to be “specified employees” for purposes of Section 409A of the Code. As a result, without triggering adverse consequences, we are prohibited from making any payment of “deferred compensation” within the meaning of Section 409A to them within six months of termination of employment for any reason other than death, to the extent such payments are triggered based on the employee’s separation from service. We have reviewed each of our employment agreements with our NEOs and made such changes as are necessary to delay the payment of any amounts subject to the six-month mandatory delay until we are permitted to make payment under Section 409A and any other changes appropriate to comply with Section 409A.
David Johnson Separation Agreement
Effective January 1, 2011, Mr. Johnson ceased serving as the CEO of Warner/Chappell Music and Cameron Strang was appointed CEO of Warner/Chappell. Mr. Johnson will continue to serve as Chairman of Warner/Chappell until June 30, 2011 (the end date of his employment agreement), at which point Mr. Johnson will be leaving the Company and Mr. Strang will assume the additional role of Chairman of Warner/Chappell. Mr. Strang’s appointment as CEO of Warner/Chappell Music entitled Mr. Johnson to terminate his employment agreement for “good reason.” Therefore, in order to secure Mr. Johnson’s services through the end date of his employment agreement, on January 1, 2011, Warner/Chappell entered into a separation agreement with Mr. Johnson. Set forth below is a summary of the material terms of that agreement.
The separation agreement provides Mr. Johnson with severance payments and benefits that are generally consistent with those he would have been entitled to for a “good reason” termination under his employment agreement due to his change in position (although a portion of his fiscal year 2011 bonus will be subject to discretionary determination by the Company). Subject to a release of claims against Warner/Chappell and its affiliates and his adherence to certain confidentiality and non-solicitation covenants, Mr. Johnson will be entitled to a cash payment in the form of salary continuation at the rate of $700,000 per year (less required withholdings) from July 1, 2011 to January 14, 2014, reflecting a total gross payment of $1,800,000 (which includes a bonus with respect to the period from October 1, 2010 to February 15, 2011 of the 2011 fiscal year in the amount of $300,000, representing a time-prorated portion of Mr. Johnson’s annual target bonus of $800,000). Consistent with Mr. Johnson’s entitlements under his employment agreement in the event of a termination for “good reason,” Mr. Johnson will also be eligible to receive a severance component attributable to his bonus for the period from February 16, 2011 to June 30, 2011, although this pro rata bonus will be determined in the Company’s sole good faith discretion at the time when fiscal year 2011 bonuses are determined for other senior executives. Any such discretionary bonus with respect to the period from February 16, 2011 to June 30, 2011 will be paid in the form of additional salary continuation severance payments commencing on January 15, 2014 at the rate of $700,000 per year (less required withholdings) until the discretionary bonus has been paid in full. Additionally, under the terms of Mr. Johnson’s separation agreement, he will be eligible to receive (1) continued participation in the Company’s group health plans until the earlier of the last day he is entitled to receive salary continuation severance payments as described above or the date he becomes eligible for another medical insurance plan, (2) continued participation in the Company’s basic life insurance plan through the last day he is entitled to receive salary continuation payments as described above as if he were a full-time employee of the Company (the value of continued participation in the Company’s health plans and basic life insurance plan is estimated to be approximately $50,000 a year) and (3) payment for any accrued and unused vacation time through June 30, 2011.
Mr. Johnson will continue to be paid at his current salary through June 30, 2011.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
The Investor Group, through its beneficial ownership of our common stock, has voting control of the Company. Certain members of our Board of Directors are appointed by the Investor Group as described further under “Stockholders Agreement” below. We consider the Investor Group, in addition to our directors and executive officers and certain of their family members, to be “related persons.”
Oversight of Related Person Transactions
Policies and Procedures Dealing with the Review, Approval and Ratification of Related Person Transactions. The Company maintains written procedures for the review, approval and ratification of transactions with related persons. The procedures cover related party transactions between the Company and any of our executive officers and directors. More specifically, the procedures cover: (1) any transaction or arrangement in which the Company is a party and in which a related party has a direct or indirect personal or financial interest and (2) any transaction or arrangement using the services of a related party to provide legal, accounting, financial, consulting or other similar services to the Company.
The Company’s policy generally groups transactions with related persons into two categories: (1) transactions requiring the approval of the Audit Committee and (2) certain ordinary course transactions below established financial thresholds that are deemed pre-approved by the Audit Committee. The Audit Committee is deemed to have pre-approved any transaction or series of related transactions between us and an entity for which a related person is an executive or employee that is entered into in the ordinary course of business and where the aggregate amount of all such transactions on an annual basis is less than 2% of the annual consolidated gross revenues of the other entity. Regardless of whether a transaction is deemed pre-approved, all transactions in any amount are required to be reported to the Audit Committee.
Subsequent to the adoption of the written procedures above, the Company has followed these procedures regarding all reportable related person transactions. Following is a discussion of related person transactions.
Stockholders Agreement
The Company has entered into a stockholders agreement with WMG Acquisition Corp., WMG Holdings Corp., the Investor Group and certain of our executive officers and directors. The agreement, as amended, provides that the Company’s Board of Directors consist of up to 14 members, with up to five directors appointed by THL, up to three directors appointed by Bain Capital, up to one director appointed by Providence Equity, one director who will at all times be the Chief Executive Officer, currently Edgar Bronfman, Jr., and the other directors to be chosen unanimously by the vote of the Company’s Board of Directors. The agreement regarding the appointment of directors will remain until the earlier of a “change in control” or the last date permitted by applicable law, including any NYSE requirements. In addition, within a year of the Company ceasing to be a “controlled company” under the NYSE rules, the size and composition of the Company’s Board of Directors will be adjusted to comply with the NYSE requirements. Each Investor Group director designee(s) may only be removed by the Investor Group that appointed such designee(s). The stockholders agreement contemplates that the Board of Directors of the Company will have an executive committee, an audit committee and a compensation committee and, at its discretion, a governance committee.
The stockholders agreement prohibits the parties from transferring stock to any of our competitors without the approval of our entire Board of Directors and the approval of the largest member of the Investor Group (determined by each member of the Investor Group’s relative investments in us) and one other member of the Investor Group (the “Requisite Stockholder Majority”). The agreement also provides that each party to the stockholders agreement whose sale of shares pursuant to Rule 144 under the Securities Act of 1933, as amended, would be subject to aggregationshare subscription agreement.
