Despite a 51% decline in stock price from fiscal year end 2007 to fiscal year end 2008, Superior Energy Services’ Chief Executive Officer Terence E. Hall received more than $15.2 million in total realized compensation, a 14% increase from 2007. While 2007’s total realized compensation resulted mostly from a $9.2 million of value realized on exercised stock options, CEO Hall’s total realized compensation for 2008 is comprised mostly of $10 million of change in pension value. The Compensation Committee has the sole discretion to make discretionary contributions to a participant’s retirement account. After so many years of service, the Committee felt that Mr. Hall needed an additional retirement benefit (although the CEO owns approximately 1.3% of the company’s total outstanding common shares). The board “determined that although the company has prospered under Mr. Hall’s leadership, Mr. Hall has been under-compensated” and “in an effort to address the inadequate retirement benefits available to Mr. Hall,” the Committee credited his retirement account in the amount of $10 million. We are not persuaded that Mr. Hall is undercompensated, considering the high levels of pay he has received in several recent years. For example, the amount of his total realized compensation for 2007 was $13.3 million; in 2005 it was $14 million (including $13 million of value realized on exercised stock options) and the value of his unexercised in-the-money exercisable options at fiscal year-end 2005 was more than $10.6 million. Moreover, Mr. Hall has an aggregate balance at fiscal year-end of more than $3.4 million under his nonqualified deferred compensation plans. This may not be in the best interests of shareholders and an amount this large, which would seem an unnecessarily large use of resources, should be voted upon by public shareholders.
Moreover, in regards to the company’s annual incentive bonus, the Compensation Committee has the discretion to make additional discretionary cash awards to executives outside of the annual incentive program. This discretion has been used for the last three fiscal years for all named executive officers, including $1,225,219 in discretionary cash awards to Mr. Hall. The discretionary nature of these payments diminishes the credibility of the annual bonus plan, does little to align the interests of management with shareholders, and would seem to undermine the claim that Mr. Hall has been under-compensated, especially during a year when the company’s stock price lost more than half of its value. In regard to long-term incentive compensation, the company awards stock options, restricted stock, and performance share units (PSUs). The disadvantage of market-priced stock option awards is that in a bull market, options provide high rewards that may be unrelated to management actions and in a bear market, options can lose value through no fault of management. In addition, stock options can encourage management to manipulate results to achieve short-term stock price. The disadvantage of restricted stock is that it provides rewards whether the stock price is rising or falling, unless there are performances goals attached. In addition, the vesting period for these awards is only three years, too short of a time to be considered as being effective for retention purposes or to measure long-term performance. Finally, the 2008 payout of 2006 PSUs was in the form of cash ($1,241,467) and in stock ($246,908). Long-term performance compensation paid in cash does little to align the interests and risks of management with that of shareholders.
Hoang Nguyen — Ratings Manager
