FRED Freds Inc

ITEM 11: Executive Compensation

Commencing in 2018, we qualify as a “smaller reporting company” as defined in Item 10 of Regulation S-K promulgated under the Exchange Act, and have elected to provide scaled executive compensation disclosures permitted under the Exchange Act for smaller reporting companies. As a result of being a smaller reporting company, we do not provide pay for performance, compensation and risk and compensation ratio disclosures, compensation committee interlocks disclosures, a compensation discussion and analysis or a compensation committee report, among other disclosures. We will remain a “smaller reporting company” until such time as our public float as of the last business day of our most recently completed second fiscal quarter is at least $250 million.

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Named Executive Officers

Our named executive officers for fiscal year 2018, which, because we qualify as a “smaller reporting company,” consist only of (i) our current Chief Executive Officer and our former Chief Executive Officer, who served in such capacity for a portion of fiscal year 2018, (ii) our two most highly compensated executive officers other than our Chief Executive Officer who were serving as executive officers at the end of fiscal year 2018, and (ii) two additional former executive officers for whom disclosure would have been required by clause (ii) above but for the fact that these individuals were not serving as executive officers at the end of fiscal year 2018 (collectively, our “NEOs”), are:

Changes to executive compensation as well as general guidelines for other employees are considered and recommended to the full Board by the Compensation Committee.

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Our compensation program is designed to motivate and reward outstanding performance and to drive long-term value creation.  The Compensation Committee has set the Company’s compensation philosophy of linking executive compensation to corporate performance and increases in shareholder value.  The Compensation Committee determines the executive compensation opportunity for our executives to balance between short- and long-term compensation.  

The Compensation Committee consults with our Chief Executive Officer regarding management's perspective on business objectives, the effect of business results on compensation recommendations, executive compensation data, the performance of our other NEOs and other officers and his recommendations as to the compensation of our NEOs and other officers. Our Chief Executive Officer attends Compensation Committee meetings from time to time, but he does not attend those portions of Board and Compensation Committee meetings intended to be held without members of management present, including those relating to the Chief Executive Officer’s compensation.

The Compensation Committee makes use of analyses provided, at its request, by external consultants in determining executive compensation. For fiscal year 2018, the Compensation Committee retained Lyons, Benenson & Company Inc. in connection with the Company’s discretionary incentive bonus pool for fiscal year 2018 (described below under the heading “–Fiscal Year 2018 Bonus Pool”) and with the design and components of the Company’s annual Management Incentive Plan for executive officers and directors for fiscal year 2019 and beyond, although the Compensation Committee has not formally approved a 2019 plan at this time.  For fiscal year 2017, the Compensation Committee retained Pay Governance LLC in connection with the review of the Company’s 2017 executive compensation. The Compensation Committee reviewed the independence of each of Lyons, Benenson & Company Inc. and Pay Governance LLC relative to the six consultant independence factors adopted by the SEC to guide listed companies in determining the independence of their compensation consultants and other advisors. Following its review, the Compensation Committee concluded that each of Lyons, Benenson & Company Inc. and Pay Governance LLC is independent and has no conflicts of interest.

Management Incentive Program Compensation

Through our annual management incentive program (“MIP”), we may pay annual cash and stock incentive compensation to senior executives to reward executive performance for the year upon achievement of pre-determined Company performance goals. The participants only earn payment under the MIP if these specific pre-established goals are achieved. The MIP is typically paid in part stock and part cash compensation, with the mix of cash and stock based on level in the organization.  Stock awards are granted under the 2017 LTIP.  

The Compensation Committee, with the assistance of Lyons, Benenson & Company Inc., is currently evaluating the design and components of the Company’s annual MIP and director compensation for fiscal year 2019 and beyond, although the Compensation Committee has not formally approved a 2019 plan at this time.  

While the Compensation Committee believes that best practice is to employ an objective, performance-based annual MIP, fiscal year 2018 was a year of transition in which, due to significant executive team turnover and substantial shifts in our strategic and operating plans, it was not possible to approve a reliable plan against which incentives could be generated. The Compensation Committee believed, however, that the accomplishments of the leadership team, which was put in place during fiscal year 2018, warranted the payment of bonuses, with the objectives of retaining and further motivating the new management team.  These bonuses are described below.

Fiscal Year 2018 Bonus Pool

In March 2019, the Board approved a discretionary incentive bonus pool of approximately $2 million, split evenly between cash and equity, with respect to the execution of certain key strategic initiatives in 2018 and for retention and motivation purposes, under which Messrs. Anto, Ladd and Klein, along with certain other senior executives and employees, were awarded cash and restricted stock awards under the Company’s 2017 Long-Term Incentive Plan (the “2017 LTIP”).   Of the Company’s NEOs included in the bonus pool, Mr. Anto was awarded a cash incentive payment equal to $190,000 and 124,579 shares of restricted stock, Mr. Ladd was awarded a cash incentive payment equal to $145,000 and 58,923 shares of restricted stock, and Mr. Klein was awarded a cash incentive payment equal to $120,000 and 52,189 shares of restricted stock. The cash awards were fully vested upon payment and the restricted stock awards will vest in four equal installments on each of the first four anniversaries of the date of grant.  These cash and stock bonuses, which were granted after the end of the 2018 fiscal year, are not reflected in the Summary Compensation Table or other tables in this Amendment.

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All Other Compensation

The amounts in the “All Other Compensation” column of the Summary Compensation Table above have historically included, among other things, matching contributions on the Fred’s, Inc. 401(k) plan, dividends on restricted stock awards that have not yet vested, severance payments, perquisites (including personal use of company cars), reimbursement of moving/relocation expenses and reimbursement for healthcare costs for certain NEOs.  For Mr. Bloom for 2018, such amount included cash severance payments of $535,096.  For Mr. Liebmann for 2018, such amount included cash severance payments of $276,923.  For Mr. James for 2018, such amount included cash severance payments of $31,875.  

Executive Employment Agreement

Management Compensation Agreement with Michael K. Bloom

The Company and Michael K. Bloom were parties to a management compensation agreement, dated as of January 12, 2015, as amended on August 30, 2016 and April 10, 2017 (as amended, the “Management Compensation Agreement”).  Effective on April 24, 2018, the Management Compensation Agreement was terminated, except for certain surviving provisions relating to confidentiality, non-competition, non-solicitation and non-disparagement.  

Termination .  The Management Compensation Agreement permitted Mr. Bloom to terminate the agreement for good reason or disability with at least 30 days prior notice, and it permitted the Company to terminate the agreement without cause upon at least 30 days prior notice or at any time with cause.  The Management Compensation Agreement would also terminate upon Mr. Bloom’s death.

In the event Mr. Bloom was terminated without cause or Mr. Bloom terminated for good reason, Mr. Bloom would receive his base pay as of the date of termination for a period of 36 months as well as 36 months of benefits coverage and car allowance, and Mr. Bloom’s unvested shares of restricted stock and options would vest immediately. In addition, if Company’s current healthcare provider will not permit Mr. Bloom to continue coverage under the Company’s healthcare plan, the Company would purchase equivalent coverage from another provider.

In the event Mr. Bloom was terminated without cause within 18 months after a “change in control,” as such term was defined in the Management Compensation Agreement, Mr. Bloom would have been entitled to receive the same severance and benefits as if Mr. Bloom had been terminated without cause or if Mr. Bloom had terminated for good reason.  

Restrictive Covenants .  Mr. Bloom was subject to non-competition and non-solicitation provisions for one year after termination, and remains subject to a perpetual covenant not to use or disclose confidential information or make disparaging statements about the Company.

Employment Agreement with Timothy A. Liebmann

On April 10, 2017, the Company entered into an employment agreement (the “Liebmann Employment Agreement”) with Timothy A. Liebmann.  Effective on April 27, 2018, the Liebmann Employment Agreement was terminated, except for certain surviving provisions relating to confidentiality, non-competition, non-solicitation and non-disparagement.  

Termination .  The Liebmann Employment Agreement permitted Mr. Liebmann to terminate the Liebmann Employment Agreement for any reason or no reason upon at least 180 days prior notice, and permitted the Company to terminate the Employment Agreement without cause upon at least 30 days prior notice or at any time with cause.  The Liebmann Employment Agreement would also terminate upon the executive’s death or disability.

Under the Liebmann Employment Agreement, in the event of termination without cause within 180 days after a “change in control,” as such term was defined in the Liebmann Employment Agreement, Mr. Liebmann would have been entitled to receive a severance payment equal to his base pay for 24 months, medical and dental insurance coverage for 24 months, and his unvested shares of restricted stock and options would vest immediately. In the event of termination within 180 days after a change in control and during the 24 month period following such termination Mr. Liebmann became employed by another employer, the Company would only be obligated to pay Mr. Liebmann the difference between the amount provided by the Liebmann Employment Agreement and any lesser amount received by Mr. Liebmann from his new employer.  If Mr. Liebmann had received a greater salary than the payment provided by the Liebmann Employment Agreement, the Company would no longer be required to make such payments.

In the event of a termination of Mr. Liebmann by the Company without cause, Mr. Liebmann would have been entitled to receive a severance payment equal to his or her base pay for 24 months, 24 months of COBRA coverage, and vesting of such executive’s unvested stock and options.

In the event of a termination of Mr. Liebmann due to his death or disability, Mr. Liebmann (or his estate) would have been entitled to receive an amount equal to 24 months of his base pay.

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In the event of a termination of Mr. Liebmann by the Company for cause, or a termination by Mr. Liebmann of the Liebmann Employment A greement for any reason, Mr. Liebmann would have been entitled to receive his base pay for the period ending on the effective date of termination, any unreimbursed expenses and payment of any employee benefit due but unpaid as of the date of termination, i ncluding all unused paid-time off.

Restrictive Covenants .  Mr. Liebmann was subject to certain non-competition and non-solicitation provisions for one year after termination, and remains subject to a perpetual covenant not to use or disclose confidential information or make disparaging statements about the Company.  The Liebmann Employment Agreement also included a customary acknowledgement that any intellectual property developed by the executive in connection with his employment is the property of the Company.  

Clawback Policy

The Board has adopted a clawback policy for any incentive compensation under the MIP.  It provides that i n the event of an accounting restatement due to material noncompliance of the Company with financial reporting requirements under the U.S. federal securities laws as a result of intentional misconduct, the Board has the right to recover, from any of its current or former NEOs who received a cash bonus during the twelve-month period preceding the date on which the Company is required to prepare an accounting restatement, the difference between the amount of any cash bonus paid to the executive officer with respect to the period(s) that such restatement was required, and the amount of the bonus such executive officer would have received had the amount of the bonus been calculated based on the restated financial statements.  

Insider Trading Policy

All executive officers and directors are subject to Fred’s insider trading policy, which prohibits the use or sharing of confidential information for trading in the stock of the Company.  In addition, all persons subject to Section 16(a) of the Exchange Act, which includes all Named Executive Officers and directors, may not engage in any transaction involving Fred’s stock (including a purchase or sale, gift, contribution to a trust, stock option grant or exercise, restricted stock grant, stock grant under a deferred compensation plan, intra-plan transfer involving a Fred’s stock fund, Rule 10(b)5-1 plan transaction, pledge or hedge, or any other transfer) without first obtaining pre-clearance of the transaction from the Company’s in-house counsel.

Share Ownership Guidelines

The Board encourages Board members and senior executives to have ownership in the Company.  Stock ownership aligns the interests of senior executives with the interests of shareholders and promotes a long-term focus toward management of the Company.  The Board has adopted the following share ownership guidelines to encourage ownership.  For purposes of these guidelines, shares of unrestricted stock, restricted stock and vested incentive or non-qualified stock options with a fair market value above the grant exercise price shall qualify as common stock.  

Chief Executive Officer and Chief Financial Officer

The Chief Executive Officer is expected to acquire and hold during his or her tenure shares of the Company’s common stock equal in value to at least three times his or her base salary, and the Chief Financial Officer is expected to acquire and hold during his or her tenure shares of the Company’s common stock equal to at least two times his or her base salary. The Chief Executive Officer and Chief Financial Officer shall have five years from their initial appointment to the position to meet the target stock ownership guideline, and they are expected to continuously own (i.e., retain) sufficient shares to meet the guideline once attained. 

Non-Employee Directors

Non-employee director s are expected to acquire and hold during their tenure as a Board member of the Company shares of the Company’s common stock equal in value to at least four times the annual retainer for Non-employee director s. Non-employee director s shall have five years from the date of their initial election to the Board to meet the target stock ownership guideline, and they are expected to continuously own (i.e., retain) sufficient shares to meet the guideline once attained.

Grants of Incentive Awards

The following is a description of the stock and option awards to our NEOs during fiscal years 2018 and 2017 included in the Summary Compensation Table above.  

Joseph Anto .  In fiscal 2017, Mr. Anto received a stock award of 100,000 shares of restricted stock on February 2, 2018, which shares vest 50% on the second anniversary of the grant date and 25% on the third and fourth anniversary of the grant date.  

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Michael K. Bloom .  In fiscal 2018, Mr. Bloom received, pursuant to the Management Compensation Agree ment described above, a stock award of 218,182 shares of restricted stock on March 23, 2018.  These shares, which originally had a four-year vesting period, became fully-vested on April 24, 2018 pursuant to Mr. Bloom’s separation agreement, which is descri bed in more detail in the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2018 .  In fiscal 2017, Mr. Bloom received a stock award of 11,155 shares of restricted stock and a stock option award for 38,781 shares of common stock .  Each of these grants was made on April 5, 2017 and had a four-year vesting period ; provided that each such grant became fully-vested on April 24, 2018 pursuant to Mr. Bloom’s separation agreement.  Mr. Bloom’s 2017 stock option award has an exercise price of $12. 55 and expires on April 5, 2024.

Timothy A. Liebmann .  In fiscal 2017, Mr. Liebmann received a stock award of 3,187 shares of restricted stock and a stock option award for 11,080 shares of common stock.  Each of these grants was made on April 5, 2017 and had a four-year vesting period; provided that each such grant became fully-vested on April 27, 2018 pursuant to Mr. Liebmann’s separation agreement, which is described in more detail in the Company’s Current Report on Form 8-K filed with the SEC on May 4, 2018.  Mr. Liebmann’s 2017 stock option award has an exercise price of $12.55 and expires on April 5, 2024.

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Director Compensation

There are four primary components of compensation to our Non-employee directors: a cash retainer, committee chair fee, committee member fee and restricted stock.  Members of Company management who also serve as members of the Board are not eligible for compensation for their services in their capacity as a director.  All Non-employee Directors except for the Chairman will receive an annual cash retainer of $75,000 per year and $125,000 of restricted share-based awards, and the Chairman will receive $340,000 of restricted share-based awards or phantom equity with terms equivalent to such restricted share-based awards.  Additionally, the Chairman of the Audit Committee will receive $25,000, the Chairman of the Compensation Committee will receive $20,000, the Chairman of the Nominating and Governance Committee will receive $15,000 and, to the extent a lead director is named, such individual would receive an additional $25,000 retainer.  In addition, Non-employee Directors will be provided a $10,000 retainer for each committee on which such Non-employee Director serves and a $2,000 per day fee for attending special trips/meetings at the request of management. The following table sets forth the types and amounts of compensation paid to those directors who served on the Board during any portion of fiscal 2018.

Potential Payments Upon Termination or Change in Control

Each of Mr. Bloom and Mr. Liebmann had written employment agreements with the Company during part of fiscal 2018.  No other NEO had an employment agreement with the Company during fiscal year 2018.  The employment agreement of each of Messrs. Bloom and Liebmann was terminated pursuant to the separation agreement entered into with such NEO, except for certain surviving provisions relating to confidentiality, non-competition, non-solicitation and non-disparagement.  These employment agreements, including the specific circumstances that would have triggered termination or change in control-related payments, are described above under the heading “–Executive Employment Agreements.”

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