Reynolds Offers "Game Changer" Incentive

Reynolds American Inc. is offering management - minus top executive Susan Cameron - and employees a "game changer" incentive toward ensuring a smooth integration of the Newport brand.

The non-company members of Reynolds' board of directors have approved a one-time, performance-based cash award to all employees of Reynolds and its subsidiaries. Reynolds disclosed the program in a regulatory filing Wednesday.

The incentive is "designed to maintain focus on the successful integration of the recently completed acquisition of Lorillard Inc." Spokesman David Howard said the company isn't disclosing how much it could spend on incentives in part because they are performance-based.

The board set an 18-month incentive period that began July 1 and goes through Dec. 31, 2016. That period covers the time needed to transfer Newport production to Reynolds' 2-million-square-foot manufacturing plant in Tobaccoville. Full-time employees hired during the 18-month period would get a prorated amount.

The award payout, if achieved, would be made by March 15, 2017.

Reynolds spent $29.25 billion to buy Lorillard in a megadeal that closed June 12. Reynolds gained Newport, the No. 2 U.S. traditional cigarette brand, and some smaller Lorillard brands in the deal.

Acquiring Newport has bolstered Reynolds' U.S. market share to 31.8 percent, with the potential to rise another 2-3 percentage points as the company plans to spend more marketing dollars on Newport than Lorillard, expand Newport's national reach and develop new product styles.

The board did not disclose the incentive range for employees. Howard said it is based on the same formula used for employees' annual bonus.

"This is specific to integration goals set by the board, scored on what we achieve," Howard said.

"This could be in line with essentially getting a second bonus, but it is important to note that it is performance based specific to what each department is involved in up to the big-picture goal.

"It is part of our vision to be an employer of choice, and that employees have a role in shaping our success and can share in that success," Howard said.

The company said Cameron is not participating by mutual decision with the board.

Cameron ended a 39-month retirement to return as Reynolds' chief executive May 1, 2014, on a two-year contract. Her return was the key element in Lorillard's board of directors and management gaining confidence in the megadeal.

Cameron told the Journal on June 12 that, "I will absolutely ensure that the integration is completed and we get the strategic value of Newport. I have promised the company and the board that I will not leave until we are all very satisfied and absolutely have the right succession in place."

Reynolds provided details about incentive pay for four executives: Thomas Adams, retired chief financial officer; Andrew Gilchrist, who became chief financial officer March 1; Debra Crew, president of R.J. Reynolds Tobacco Co., and chief commercial officer; and Martin Holton III, general counsel. Adams is serving as an executive vice president to assist with the Newport integration.

The award pool for the executives would be one-tenth of 1 percent of Reynolds' cash net income for the 18-month period. The company defined cash net income as "as net income from continuing operations in the consolidated statement of income adjusted for the impact of non-cash items, such as depreciation, amortization, unrealized gains and losses, intangible asset impairments and other non-cash gains/losses included in net income."

Reynolds' overall and cash net income is likely to rise with additional Newport revenue during the time period, as well as with projected revenue growth in other traditional cigarette and smokeless brands.

The incentive target award values are a percentage of each executive's base salary as of April 1, 2016. The percentage would be 65 percent for each executive.

The base salary for the executives for fiscal 2014 was $730,600 for Adams, $637,600 for Gilchrist, $620,000 for Crew and $572,400 for Holton. Gilchrist's fiscal 2015 salary likely was increased closer to what Adams was paid.

The board could adjust the incentive payout downward depending on performance.

Tony Plath, a finance professor at UNC Charlotte, said the incentive plan is unusual in that it provides awards "to the rank-and-file managers who are actually responsible for merger integration work."

"Is it a good idea?" Plath asked.

"Apparently so in Reynolds' case, since a smooth corporate integration of Lorillard is essential to the future of the new Reynolds, and the board feels the issue is so important to the shareholders that they're willing to offer extra cash to all of their employees for getting the job done right." Enditem

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