The Corporate Library Blog

Compensation Concerns at Avon Products

There is increased concern related to executive compensation at Avon Products. CEO Andrea Jung’s change in pension value was nearly $2.4 million in 2009 (it was more than $2 million in 2008) and is eight times more than the aggregate 2009 pension values ($281,119) for other named executive officers. This is a considerable compensation element considering Ms. Jung’s salary is already well over the IRC tax deductibility limit. Ms. Jung’s pension benefits are primarily pursuant to her Supplemental Executive Retirement Plan (SERP) that is available to her alone. Also, the Compensation Committee decided to add more discretion (30% based on individual performance) in the determination of 2009 annual incentive awards. We also note that the company maintains a Cash Performance Plan that is based on only three-year performance periods and pays out entirely in cash—a feature that does nothing to tie executive performance with long-term shareholder equity value. The company’s long-term incentive plan also makes equity grants of stock options—760,369 for the CEO in 2009 at an exercise price of only $15.50. On top of that, special grants of restricted stock are given from time to time outside the plan’s typical purview. Lastly, we note that all members of the Compensation Committee received at least 25% director withhold votes at the company’s 2009 annual meeting. Will shareholder discontentment continue? We will find out at Avon’s annual meeting on May 6, 2010.

More details are available in Avon Products' governance profile, available from The Corporate Library's online store.

Damion Rallis - Ratings Analyst

Governance Concerns at Discovery Communications

Although Discovery Communications eliminated CEO David M. Zaslav’s guaranteed bonus for 2009 (a slight governance improvement), significant concerns remain. The dual class structure, classified board, and poison pill combine with charter and bylaw provisions that make it difficult or impossible for shareholders to achieve control. Additionally, media mogul John C. Malone, beneficial owner of more than 23%, is a director and sits on the Executive Committee with Mr. Zaslay, Executive Chairman John S. Hendricks, and former senior executive Robert R. Bennett. Mr. Malone is also a director on 10 other boards, including four where he serves with Paul A. Gould, three with Mr. Bennett and three with LaVoy M. Robison. These four are directors of Liberty Interactive Group and Liberty Entertainment Group, all part of Mr. Malone’s Liberty Media holding company.

In terms of executive compensation, Mr. Zaslav’s base salary is among the top 10 highest for CEOs of S&P 500 companies that The Corporate Library has seen so far this proxy season. In September 2009, the Compensation Committee extended Mr. Zaslav’s employment term to 2014, increased his base salary from $2 million to $3 million in 2011 and increased the target bonus from $3.5 million to $4 million in 2009. This makes up for the loss of the minimum bonus mentioned above.

For more details, purchase Discovery Communications' governance profile, available in The Corporate Library's online store.

Hoang Nguyen - Ratings Manager

Recruiting the Top Talent

Recruiting top talent often comes at a price, and for publicly traded companies that price is often spelled out in the language of an employment agreement. The latest research from The Corporate Library shows that many of the largest severance payouts of the last couple years were issued during the financial crisis, as CEOs were able to part with sizeable checks from terms agreed to years earlier. In some cases however, the term “years” can be used very loosely. Many of these contracts contain tax gross-ups or other special perks, guaranteed equity grants, and other provisions which clearly benefit the CEO, but are lacking in terms of providing shareholders with any additional value. Though current severance packages do not often produce the eye popping dollar figures of just a few years ago, there is still significance in what these payments represent and interesting details behind the final payouts. For instance, the highest severance package of 2009 for companies covered by The Corporate Library went to a CEO who did not even resign from the company!

Purchase the full report for $15 from The Corporate Library's online store.

Greg Ruel - Research Associate

Inflated CEO pay at Goodyear Tire

Shareholder’s patience must be wearing as thin as the tread on an old tire over CEO compensation at The Goodyear Tire and Rubber Company. As our ratings analyst Hoang Nguyen quips in his ratings commentary, “it was a ’good year’ for CEO Robert J. Keegan” whose non-equity incentive plan compensation almost doubled (in a year when they went from net income to a net loss) to over $9.5 million.

I gotta say that one of the prime reasons why Goodyear would never appear in our Pay for Success report is that one of the hallmarks of a Pay for Success company is simplicity in pay practices, and, boy, compensation at Goodyear is anything but simple. So-called long-term incentives that actually measure performance over successive one-year performance periods, awarding some now, some later, some in cash, some in stock, it’s just preposterously complicated.

In addition to an overgenerous base salary, there are overgenerous perquisites such as club memberships, personal use of corporate aircraft, and security services, with a special gold-plated hub cap of additional years of credited services under the supplementary pension plan.

It might be worth mentioning that the 2009 net income target for Mr. Keegan’s performance shares – which were earned at maximum – was negative. Now, in my book, negative net income is better known as a net loss. Now I could be described as being semantically pedantic, but I’m not sure that shareholders would be much amused by a maximum payout for a net loss. In fact they could be getting a bit worn down about it. I don’t care if management did manage to lose NOT AS MUCH MONEY as it might have done, it still lost money.

Not only that, but Mr. Keegan received four separate stock option grants. The largest of the four market-priced grants, almost 500,000 of them, was at $4.81. Less than six months later he’d made $6.23 million worth of notional profit on that. This is just irresponsible, and it’s taking advantage of a super-low stock price to grant any stock options at all in such circumstances. It’s virtually impossible NOT to make money in such a situation.

Someone needs to puncture this policy and bring it more into alignment with shareholder interests. Come on shareholders, surely you must feel pumped up about this one. Annual meeting’s tomorrow. April 13th. More details in our governance risk profile of the company.

Is it time to put some pressure on those compensation committee members? It might even be time to vote against Denise Morrison, Rodney O’Neal, Craig Sullivan and Thomas Weidemeyer.

Paul Hodgson - Senior Research Associate

Lies, Damned Lies, and Statistics...and CEO Pay

The Wall Street Journal’s CEO pay survey includes a piece by Scott Thurm called Getting Bang for the Buck which looks at whether the best paid CEOs have delivered the best performance. The WSJ has produced a scatterplot that tries to map pay and performance, looking at three-year realized pay and three year total shareholder return (TSR). It looks like a target from a shooting gallery where someone used a shotgun at fifty paces. The stuff is all over the place. I happen to know that the r-squared is less than 0.1 (1 is a perfect fit, 0.1 is a long way from that). Yet we still see Steve Kaplan from Chicago University claiming that there is a strong correlation because for every 1 percent increase in TSR over the last three years we see $1 million extra in the CEO’s pocket. Thus the title of this blog.

Good grief, this is why I hate statistics. Give me a handful of companies to look at and I’ll tell you in every instance whether the CEO’s pay plans are performance-related or not. But you can prove just about anything you like as long as you keep trying tests until one comes back that gives you the answer you want.

What was my comment about the figures? More than half the CEOs delivered worse returns than a Treasury bond so they should really be just getting base salary and not be among the highest paid in the survey.

Look for The Corporate Library’s own preliminary CEO pay survey next week.

Paul Hodgson - Senior Research Associate

CEOs' Personal Use of Corporate Jets Still Flying High

Despite the recession, we are seeing corporate jet expenses increase and incidence levels hold steady (when comparing the most recently-available year’s data to data from the 12-months prior). Here are a few of several key takeaways from my study of Russell 3000 companies:

• Fifteen percent of Russell 3000 and 40 percent of S&P 500 report aircraft expense for CEOs’ personal use
• Aircraft expense is up an average of over 70 percent (median 9 percent) for Russell 3000 companies with expenses in both years
• Tax gross-ups and family use are still prevalent

Most troubling is the continued evidence of unreimbursed family and personal use, payment of related tax gross-ups, and related party transactions (such as at Williams-Sonoma) where the plane being leased for the CEO’s use is already owned by the CEO’s other company.  It is these practices that we believe call into question the culture in the boardroom.

For more details, including the top five expenses in the 2008/9 period analyzed, download a free copy of “CEOs' Personal Use of Corporate Jets Still Flying High” from The Corporate Library's online store.

Michelle Lamb - Research Associate

Win Churchill on Compensation

Jim Kristie's Boards at their Best blog has a tribute to Win Churchill, who Kristie thinks made the single best statement ever about executive compensation.  Churchill is a founder and managing general partner of SCP Partnersand a highly respected corporate director.  From 1989 to 1993, he served as Chairman of the Finance Committee of the Pennsylvania Public School Employees' Retirement System.  And here is what he said about compensation:

"Successful management should end up wealthy; unsuccessful management should not end up wealthy."

Nell Minow - Editor

Consider the Source -- "Independent" Judges of Pay and Ethics

Slate's Will Evans warns that the "World's Most Ethical Companies" list issued by Ethisphere may have some validity and credibility issues. 

The Ethisphere Insitute, which describes itself as"a leading international think-tank dedicated to the creation, advancement and sharing of best practices in business ethics, corporate social responsibility, anti-corruption and sustainability," is actually a for-profit company. The institute also lends itself credibility with an "advisory panel" of ethicists, yet several former members say they've had little if anything to do with it. Finally, the institute and an affiliated company sell services to and collect fees from some of the same companies Ethisphere extols.

Ethisphere is run by Alex Brigham, who also runs Corpedia, which helps corporations develop and review their ethics programs.  The two organizations share office space and staff.  Bingham is open with Evans about the potential conflicts of interest but insists that the two organizations are separate and that Corpedia has in fact lost business from companies that are angry at being left off the list or do so well they think they do not need any help. 

The conflicts are one problem but the bigger problem is the challenge inherent in evaluating a company's ethics, especially based on self-reporting.  Enron had an excellent code of ethics and its CEO made a superb speech about the importance of ethics -- just before the company's financial reports were revealed to be fabricated. 

Similarly, in the Wall Street Journal Joann Lublin reports that companies concerned about the credibility of their compensation plans are getting certification from specialized consultants. 

DuPont Co. has discovered a new formula for fending off shareholders who want a voice in how the chemical giant compensates its top bosses: Get an outside second opinion.

DuPont retained consultancy Soundboard Review Services LLC for a "fairness" judgment on how its directors set executive pay, according to a proxy statement filed by the company Friday. The advisory firm concluded those practices and processes are "sound," the proxy said. About a dozen other companies have recently hired the New York start-up to conduct similar reviews.

The DuPont review didn't cover the amount or type of pay afforded executives, however. And critics are concerned the DuPont board is just buying good marks. Still, it is part of a wider effort by directors and management to find fresh ways of offering shareholders more information to deflect rising public anger over sizable executive rewards.

Lublin did not find much enthusiasm from shareholders. 

While investors hunger for a fuller picture of executive pay, an outside review "bought for a stamp of approval" becomes worthless, says Ann Yerger, executive director of the Council of Institutional Investors.

Nell Minow - Editor

Daddy Starbuck$

Starbucks Corporation, like Whole Foods, is widely held and widely discussed in the responsible investing community.  The company is admired for employee policies and supply chain initiatives that are superior to those of many large companies, but some argue it is not doing as much in these areas as it should---or as its image would lead one to believe it does.  (John Harrington’s recycling proposal on this year’s ballot is one example of the shareholder engagement that results.)   Purchase The Corporate Library's governance profile for Starbucks (SBUX) here.

From a governance perspective, we think the  company’s CEO compensation policies pose investment risk. Previously, we have questioned the compensation committee’s decision to grant large amounts of stock-option grants to founder, chairman and CEO Howard Shultz, who already owns 4.2% of the company’s shares. The effect of those past decisions was on dramatic display in 2009, when Schultz realized over $26 million in value from the exercise of options. Another continuing issue is the company’s unusually high expenditures on the CEO’s personal security—more than a half a million dollars annually in 2008 and 2009. Even more worrisome, however, is the evidence of short-term thinking in the compensation changes made in 2009. Shultz voluntarily reduced his base salary to $6900 effective March 30, 2009, but the compensation committee raised it to $1.3 million as of December 1st. Shultz also received a discretionary bonus of $1 million. It’s true that the company, and its stock price, did well last year in a challenging economic environment.  But measured over the last three and five years, Starbucks’ stock is significantly underperforming its restaurant peers and the S&P 500 index.  In fact, over both time frames, Starbucks’ shareholders are still losing money.  An eight-month salary cut hardly seems an appropriate response. 

If you are interested in learning more about how The Corporate Library can help you with your responsible investment initiatives, please visit this link.

Kimberly Gladman - Director of Research and Risk Analytics

Toll Brothers CEO Compensation Still Through the Roof

Since our last reporton McMansion homebuilders Toll Brothers, CEO Robert Toll continues to amass impressive piles of cash, enough to fill one of his very own “empty nesters.” According to our analyst alert, Shock! Horror! Toll Brothers CEO receives no bonus for 2007, Mr. Toll earned $194,545,293 in aggregate total compensation between the fiscal years of 1993 to 2007. In 2005, the company delivered a record 8,769 homes and in 2006 the company delivered 8,601 homes at an average delivery price of $698,000 for a total value of approximately $5,943,291,000. Last year, fiscal 2009, Toll Brothers delivered only 2,965 at an average price of $592,000. Finally, the company’s fiscal 2010 first quarter financial statement predicts, at best, that the company will deliver 2,750 homes at an average price of $560,000 for a total value of $1,540,000,000. (At worst, the company predicts total value of $1,134,000,000 from 2,100 homes delivered.) The numbers speak for themselves.

At the company’s peak (fiscal 2006), Mr. Toll’s total compensation was approximately $29.4 million. Despite drastic reductions in delivery, Mr. Toll’s total fiscal 2009 compensation was $55.8 million. In 2008, he earned $48.2 million. That means in the last two years, Mr. Toll has earned more than half the amount he earned in all the years between 1993 and 2007. This high level of compensation is primarily due to nearly $100 million in value realized on the exercise of 5.6 million stock options. Mr. Toll seemed very eager to get rid of his fiscal 2009 stock options—in six separate transactions between September 8-18, 2009 (mere months before the options’ expiration date) he acquired a total of three million shares on the exercise of options at the exercise price of $4.375 and immediately sold them at approximately $22 per share. A very good month to be a Toll brother. In all, between August 2008 and September 2009, Mr. Toll acquired $215,607,478 in cash on the sale of company shares: a fortuitous windfall to mark the opening months of the U.S. recession.

No matter the company’s performance, no matter the company’s changes in compensation policy, no matter country-wide and industry-wide recession, Mr. Toll has managed to profit greatly. To put it into perspective, Mr. Toll’s fiscal 2009 earnings afforded him the ability to buy 97 Toll Brothers homes worth $571,000 each. And what has the company learned from all of this excessive compensation? Not a whole lot apparently. Despite its belief that “Mr. Toll had performed exceedingly well during fiscal 2009,” the Executive Compensation Committee rightly decided not to award annual incentive compensation to the well-heeled executive. However, the Committee must have felt guilty because in its next breath it decided to award even more equity to Mr. Toll— he already owns more than 11% of the company’s outstanding stock —200,000 restricted stock units with a grant date value of $3.6 million. They just couldn’t resist, could they? If you are interested in purchasing the Toll Brothers governance profile, please visit our online store.

Damion Rallis - Ratings Analyst