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No Say on CEO Pay at Jakks Pacific

According to an employment agreement disclosed in a proxy statement filed last week, Jack Friedman, CEO of the Jakks Pacific Inc. -- maker of World Wrestling Entertainment action toy figures, Pokémon and Hannah Montana products -- became eligible for an aggregate $9.75 million in a single-annuity retirement benefit (spread equally over a ten-year period) on Dec. 31, 2007.

That's just for starters. The company also boosted Friedman's total compensation by 125 percent year-on-year to almost $7.2 million in 2007. The 68-year-old executive received a salary of $1.06 million and a cash bonus and stock options worth $2.7 million and $3.4 million. Friedman, who co-founded the company in 1995, benefited from a better than expected 24.3% increase in net income to $90.0 million for 2007, driven by robust Christmas sales across product lines.

In addition to accelerated vesting of restricted stock grants, the compensation committee used its permitted discretion to award Friedman a special stock award of $500,000 (included in total), due to "strong performance occurring in the face of negative economic trends." Like most companies, the board of directors at Jakks argued that the outsized pay awarded to Friedman is necessary to retain and motivate him--ultimately providing a substantial benefit to all shareholders.

Friedman's total pay, however, remains insensitive to stock performance -- the ultimate benefit to shareholders. An analysis of historical stock performance data refutes the board's core argument. If you look at recent history, the annual return on Jakks Pacific stock for the year-ended 2005, 2006, and 2007 was (5.3) percent, 4.3 percent, and 8.1 percent; whereas, total compensation year-on-year for Friedman rose a respective 52 percent, (37) percent, and 125 percent.

I suspect Friedman will retire when his employment agreement expires on December 31, 2010. In addition to retirement benefits, look for the Board to reward him with the Chairman emeritus title, complete with a then-projected salary of $1.15 million.