• Accounting rule lets company reduce reported compensation
  • Hedge fund H Partners led campaign to change board last year

Tempur Sealy International Inc. used a rarely applied rule to make an $81 million stock award to five top executives without recording its value, reducing their reported compensation for last year.

The award will pay out if the mattress maker exceeds a financial target -- a feat the board calls "not probable" -- or if the executives are let go after an acquisition by a third party, according to a proxy statement filed on Monday. The board didn’t include the $81 million in the compensation table for executives, citing a rule that lets companies value equity awards based on the probability their performance criteria will be met.

Chief Executive Officer Scott Thompson, whose shares had an actual value of $44.5 million when awarded last year, took over the company in September after hedge fund H Partners Management persuaded shareholders to oppose re-election of three board members, including Mark Sarvary, who also stepped down as CEO. Thompson, the former head of Dollar Thrifty Automotive Group Inc., had helped orchestrate that company’s sale to Hertz Global Holdings Inc. in 2012.

Tempur Sealy "generates a tremendous amount of cash flow so it’s certainly a candidate to be taken private at some point,” said Brad Thomas, an analyst at KeyBanc Capital Markets Inc., which has provided investment banking to the company and rates the stock a buy. “That’s not something we expect in the near term, but it’s possible.”

Rick Maynard, a spokesman for Tempur Sealy, which sells beds in about 100 countries, declined to comment beyond the filing.

Hedge Fund Owner

H Partners owns about 11 percent of Tempur Sealy, making the hedge fund the largest shareholder. The board’s compensation committee consists of H Partners senior partner Usman Nabi, former Dollar Thrifty director Richard Neu and John Heil, the former co-chief operating officer at Spectrum Brands Holdings Inc. Outgoing directors Paul Judge and Peter Hoffman are also on the committee.

The award for Thompson and his four top lieutenants consists of 1.12 million restricted shares that will vest if the company posts $650 million in annual adjusted earnings before interest, taxes, depreciation and amortization by 2017. The target represents a 43 percent increase from the company’s 2015 Ebitda results. One-third of the shares will vest if the goal is reached by 2018.

“It’s not impossible it can be done in two years, but it’s not my expectation,” said John Baugh, a managing director at Stifel Nicolaus & Co., which expects to receive investment banking income from Tempur Sealy in the next three months.

$67.8 Million Compensation

Thompson’s shares made up the bulk of his total pay for 2015, valued at $67.8 million. That’s more than nine times the median compensation for 2014 awarded to CEOs in Tempur Sealy’s compensation peer group, according to data compiled by Bloomberg.

Thompson also received $2.4 million in salary and bonus, stock options worth $7.2 million and $13.6 million in additional restricted shares. The equity will vest over three years, some of it contingent on the company posting positive pretax profit in 2016.

Executive vice presidents Barry Hytinen, David Montgomery and Jay Spenchian received shares worth between $5.86 million and $9.16 million under the award. Chief Financial Officer Timothy Yaggi’s part of the grant will be forfeited when he steps down on March 31.

Boards don’t often apply zero compensation values for awards, which allow them to report lower pay figures and hold off expensing them until the year they are deemed likely to vest.

“If it really is not going to vest, they should not give it,” John Core, an accounting professor at MIT’s Sloan School of Management, said in an e-mail. “If they give it, they should admit there is some chance that it will vest and value it accordingly.”

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