The Corporate Library Blog

CEO Pay at BorgWarner

Auto parts manufacturer BorgWarner is putting the turbocharge into executives’ bank accounts. Most notably, CEO Timothy M. Manganello saw his non-equity incentive compensation increase from $0 in fiscal 2008 to $2,997,412 in fiscal 2009. One reason for this drastic change is that the company changed the performance measures used to determine 2009 annual incentives so that instead of using economic value (EV) it used cash flow and relative profitability targets. Furthermore, cash flow targets were so soft that a target bonus was achievable at negative $50 million and a maximum bonus achievable for any positive cash flow, even $.01. Also, long-term equity still partly consists of time-based restricted stock. We believe all equity should be performance based. Furthermore, performance shares pay out on sub-median TSR performance as compared to company peers and performance periods are only three years in length. Lastly, we note low shareholding requirements (three times base salary) for the CEO that can be achieved in less than one fiscal year and generous perks such as personal use of corporate aircraft and club memberships.

For more details, purchase BorgWarner's corporate governance profile from The Corporate Library's online store.

Damion Rallis - Ratings Analyst

Pay Czar Feinberg's Best Practice Principles

There was a report about Pay Czar Feinberg talking at the Practising Law Institute’s conference Hot Issues in Executive Compensation 2010 in Agenda this week. It reported on the upcoming survey of bankers’ bonuses but also quoted extensively from his speech. For example:

In light of his TARP experience, Feinberg stressed five basic steps boards should take to ensure fair compensation: (1) Make sure pay is competitive; (2) make sure there is no excessive risk; (3) tie compensation to performance; (4) hire independent compensation consultants; and (5) exercise sound discretion to determine pay.

There’s a lot of best practice principles out there and, in principle, it’s great when companies sign on to them. But I find that in many cases, even where companies have signed on, principle and practice are two very different things. On the other hand, I’m not even sure that I agree with all these principles.

1. Make sure pay is competitive? Isn’t that partly what got us into this mess in the first place? Everyone trying to pay their CEO as much as or a little bit more than their peers?
2. Make sure there is no excessive risk. Sure, no problem there.
3. Tie compensation to performance. Yes, but that should have been number one.
4. Hire independent compensation consultants? Well, maybe, but how about just “get independent compensation advice”? It doesn’t matter where it comes from, and sometimes the board is the best place to find it.
5. Exercise sound discretion in pay? Ah, there’s the rub. The Lehman Brothers board probably thought it was exercising sound discretion, but we know better. Sound discretion, like beauty, is in the eye of the beholder, so this last principle is fundamentally meaningless. It’s like saying make sure the pay is fair. Who defines fair? The board? The CEO? The shareholders? Mr. Feinberg himself? President Obama? Of course, The Corporate Library would do it best.

Paul Hodgson - Senior Research Associate

Delay Some Pay

An article by Robert Shiller, a Yale professor, appeared in the June 20 edition of the New York Times called “Help Prevent a Sequel. Delay Some Pay”. It describes the Squam Lake Group, a band of 15 professors of financial economics who get together and pool their resources to solve the problems of the day. The article goes on to describe a solution for the whole banking executive compensation problem.

But let’s backtrack a little. The article makes a number of claims and assertions, so let’s look at these.

Claim 1: “But it’s not the high level of executive salaries that helped cause the financial collapse.”

Well, OK, not salaries themselves, which in finance were pretty low, at least on the Street. At least they were until poorly written compensation restrictions managed to boost them out of the water. But no one’s claiming that it is salaries that caused the problem. It was pay. High pay. All of it. Bonuses, stock, stock options. Not just salaries. Why would you be tempted to cause the downfall of the financial system for $600,000 a year? No one would. But for $60 million a year, now we’re talking.

Claim 2: the 1993, Section 162(m) $1,000,000 pay cap directly contributed to the crisis because in seeking to limit compensation it encouraged it to balloon in the form of stock options.

Well, actually most of the compensation delivered to Wall Street executives came in the form of stock and cash, rather than options, but the theory is the same. And yes, it was a stupid law, and had as many unintended consequences as most government interventions in pay, but I don’t think it deserves all the blame. Didn’t the whole idea for stock options come from academia in the first place?

Solution: “the Squam Lake group recommends that companies be encouraged to withhold a good part of the compensation of their top executives for a number of years, and that it should not take the form of stock options.”

Fair enough.

But most, if not all, of the banks are already doing that.

In fact, most, if not all, of the banks were doing it all along. Just read the proxy statements. It’s all there.

All banking executives took a major hit in the collapse of stock prices. Some of them mortal blows in the case of Lehman and Bear Stearns. Literally billions of dollars of restricted stock lost.

But they didn’t care.

Why? Because they’d already made so much money out of the banks anyway that a few hundred million more didn’t make any difference. So it was the level of pay. And deferring it, unless you defer it all, isn’t going to mean squat. Particularly if you don’t tie it to future performance conditions.

Paul Hodgson - Senior Research Associate

Six directors received support from less than one-third of shareholders

This proxy season has proven to be an interesting one, as there are many more directors who are failing to receive support from a majority of shareholders. Increased scrutiny of directors combined with the elimination of broker voting in uncontested elections means that the proportion of "for" votes is likely to be smaller at most companies.  Our data team is processing the form 8-Ks, on which this information is now provided, and notifying us whenever a director has a no or withhold vote percent that is over 50%.  We have been surprised to see that more than a few directors have received support from LESS THAN ONE-THIRD of their shareholders.  So far, we have identified the following six directors who have failed to receive support from at least 70% of the company’s shareholders.  That means fewer than three in ten shareholders want that director to continue serving on the board.  And, in most cases the directors are still on the boards, despite this clear message from the very people the directors are supposed to serving.

• Edward C. Nafus, director and former CEO of CSG Systems International, Inc., is the winner – or loser in this case – with the highest percent of withhold votes spotted so far this season: 80%. Amazingly, four out of five shareholders of CSG Systems do not want Mr. Nafus representing their interests as a director of the company. But he continues to serve.
• Peter B. Davis is a member of the Audit Committee at Nabi Biopharmaceuticals. More than three-quarters (76%) of the Nabi shareholders withheld their support from Mr. Davis’s reelection to the board. The Nabi board has adopted a resignation policy for those directors who do not receive support from a majority of shareholders (i.e., Plurality and Resignation Policy) – however, despite Mr. Davis’s poor showing, the board rejected the resignation he tendered after the election and so he will continue to serve on the board.
• Two directors who were up for election at the classified board of United Online, Inc. - Kenneth L. Coleman and Robert Berglass - both received 71% votes withheld at the company’s annual meeting in May 2010. Another director, Dennis F. Holt, who was up for election last year at the company’s 2009 annual meeting saw 65% of votes withheld from his re-election. All three of these directors are members of the board’s compensation committee.
• Shareholders of Helix Energy Solutions Group, Inc. were apparently upset at the attendance record of director Bernard J. Duroc-Danner, because only 29% supported his re-election to the board after he attended only four of eleven board meetings during 2009.
• Skywest Inc. director J. Ralph Atkin, who founded the company and now chairs the board’s Audit Committee, received support from less than 25% of shareholders at this year’s election. J. Ralph Atkin’s nephew, Jerry C. Atkin, is currently the company’s Chair and CEO.

Annalisa Barrett - Senior Research Associate

How many stock options did Liberty Media give its CEO?

Ten million, eight hundred and fifty-six thousand, to be precise. 10,856,000 stock options for CEO Gregory Maffei valued at just shy of $80 million.

Unbelievable.

Our ratings team, Hoang Nguyen and Damion Rallis, brought it to my attention to see if we needed to manually adjust Liberty Media's governance risk rating.

Actually, it was almost as bad as they come, so we didn't have too much wiggle room.

Of course, my first reaction was to say yes, but wait, I thought, these were options that would cliff vest half at the end of four years and half at the end of five years. Maybe they were going to replace all his options over the next four or five years with these ones, which would be a mere two million or so a year (counting 2010-2014 and well into megagrant territory each year but, still) and maybe they premium-priced them in tranches.

Maybe this was not so bad after all.

So I asked Hoang and Damion to check on the prices.

• $10.27
• $23.28
• $47.70

My heart soared. I was going to be able to say something positive. Whoopee.

Then we looked a little closer. The options were for three different shares – LINTA, LSTZA, LCAPA – and each option was granted at market.

Even more depressing after the initial, but mistaken, elation.

He already has nearly five million outstanding options but those were all underwater, so where’s the fun in that?

Now, these weren’t low point stock prices (those happened when everyone else’s did) but then again they weren’t exactly high point prices too, so he’s made a paper profit of more than $51.5 million already less than two years into the vesting period.

And the compensation committee members?

• Donne Fisher
• Malcolm Gilchrist
• David Rapley
• Andrea Wong

Wong and Gilchrist were up for re-election this year, but, damn, we just missed the annual meeting.

And if you think this is bad, wait until you see how many other megagrants there were this year in our forthcoming report SON OF MEGAGRANT.

Paul Hodgson - Senior Research Associate

Small Print

The Award for "Best Use of Subliminal Language Relating to your Business" Goes to...

Events Team Manager Mark Magee found this gem of gobbledygook in a June 22 8-K from Spartan Motors.

Spartan Motors Announces Business Realignment: Exiting Road Rescue Ambulance Operation, Reducing Operating Costs

CHARLOTTE, Mich., June 22, 2010 – Spartan Motors, Inc. (NASDAQ: SPAR) today announced its intent to exit its Road Rescue ambulance operation as part of the Company’s continuing review of all aspects of its business. The exit will allow Spartan to focus its resources on the highest growth and profit opportunities. The exit from the underperforming Road Rescue operation is expected to be completed by the end of 2010. In addition, Spartan announced a number of actions designed to reduce expenses and better align its cost structure with current levels and mix of demand.

I tell you, if we lived in a world where people could just say what they meant, or, even better, actually knew how to say what they meant, there’d be a lot less humor in it. Now, I’m just going to exit this section of Small Print so I can better align myself with the next section.

Is that like the Twelfth of Never...?

Events Analyst Dovid Muyderman found this shade of Johnny Mathis in Enzon Pharmaceuticals, Inc. option award table in its 2010 proxy.

 

Yes, I know, I had to read it a couple of times too. So, these options are going to expire on the 38th of September 2014? Now, I like September. It’s a great month. Especially here in Maine. But even I know it doesn’t have 38 days in it. So back to Johnny Mathis:

“Until the twelfth of never and that's a long, long time.”

Oh, and just a thought. That name. Enzon. You gotta change that name.

Silver Hello from Fidelity National Information Services

I already blogged about this company at the time the time of the annual meeting where I got myself a little aerated about that fact that the company was called Fidelity and the only way they could get anyone to be faithful to it was by shoveling spadefuls of cash into a wheelbarrow for them and requiring them to turn up to work for at least a week.

But Compensation Team Leader Scott Patterson has found yet more barrowloads of cash being doled out. He came up with the moniker “Silver Hello” because they were being paid for a demotion. Nice. You see, in relation to a merger with Metavante; Mr. Kennedy was CEO and President and became Executive Vice Chairman and Mr. Scanlon was Executive Vice President and CFO and became Corporate Executive Vice President, Finance. Confusing, I know, and it does sound like a bit of a come down, but – and it is a big but – their company WAS being taken over.

The motivated and focused efforts of Messrs. Kennedy and Scanlon through and during the critical period following the merger were critical to achieving our objectives of properly integrating Metavante into our operations, driving significant synergies after the closing and having a unified post-closing management team consisting of our senior officers and Metavante’s senior officers. However, the changes to Messrs. Kennedy’s and Scanlon’s positions resulting from the Metavante merger would have constituted “good reason” under their employment agreements, which would have given them the right to terminate employment following the merger and receive severance payments under their employment agreements. Because of concerns that Messrs. Kennedy and Scanlon would exercise these rights by terminating employment, we agreed to pay Mr. Kennedy $10,468,302 and Mr. Scanlon $3,000,000 in cancellation of any rights they may have had upon termination of employment under their agreements and in consideration for their agreement to accept their new positions following the merger and to enter into new employment agreements with us.

Well, we know that it was critical, that’s for sure.

But, critically, presumably these people supported the merger in the first place. Critically realized it might lose them their jobs. Critically had all their stock options accelerated alongside a hefty merger premium no doubt. And they were really worried that they were going to turn round and claim constructive dismissal? At this critical period?

If that’s the kind of commitment to the job they were demonstrating, let them go, I say. And who writes these employment agreements, anyway? Oh, yes, that’s right, the executive’s own lawyer.

Paul Hodgson - Senior Research Associate

Incentives for Fraud

Directorship has an article about an award-winning study of the unintended consequences of incentive compensation, Winners and Losers: Rethinking Performance-Based Pay by Judi McLean Parks and James Hesford.

It is well established in the academic literature—and certainly in practice—that properly aligned performance incentives can have a positive effect on business results. What has been given little academic attention, however, is the potential cost related to the unintended negative consequences of incentive compensation. These can come both in the form of accounting fraud – overstating actual results to achieve an award (think Enron et al) – and in property theft from disgruntled employees. Warren Buffet and Alan Greenspan – among others – have warned about the potential for executives to “cook the books” to achieve performance awards.

The authors did an experiment to try to measure the incentives for fraud.  It showed that certain kinds of structures improved performance -- but some also increased the number of lies about performance and even the willingness of test subjects to steal the pen they were given to complete the experiment task. 

[B]oth incentive plans outperformed salary on an actual basis. As the underlying rationale of incentive schemes predicts, there are performance gains. Yet our second observation is cautionary: incentive plans – penalty especially so – induced fraudulent behaviors. Third, the compensation form (salary, bonus or penalty) also affected whether or not the participants stole the pens (which they were asked to return). While being primed to think about ethical concerns had no effect on cheating, it did suppress pen theft.

It is especially interesting that the structure of the incentive compensation and presentation of ethical standards affected behavior not directly tied to the task for which the incentives were being paid.

Nell Minow - Editor 

Say on Pay every two or three years?!?

Oh, how bloody childish.

For goodness’ sake. Just grow up.

We’re just managing to get rid of classified boards at many companies so shareholders get the chance to express their approval or disapproval of directors every year and now we’re going to have classified Say on Pay?

Do they have that anywhere else in the world where they have Say on Pay?

No.

Why is it America wants to be best at everything EXCEPT corporate governance?

I mean, what’s the point? Are boards hoping they can get away with stupid compensation decisions because they made them in Year 1 and shareholders will have forgotten about them in Year 3?

Great idea, Senator Mike Crapo. But I wonder whose idea it actually was. Like we don’t know.

But I guess it will be a test of sorts. Mature companies will have a vote every year. Teenagers will have it every two years. And two-year olds every three years. You should just vote against them on principle.

I just give up.

Paul Hodgson - Senior Research Associate

The Mafia Running the Police Force

I just read in Mother Jones that among the 14 securities industry insiders currently working for the Obama administration to help regulate Wall St (including the likes of Neal Wolin) is one Herbert Allison.

Herbert Allison?

Responsible for overseeing TARP?

Isn’t that like asking the Mafia to run the police force? We know there’ll be lots of arrests, but what’s going to happen back in the cells? Or to reach further back into metaphorical history, isn’t that like getting the fox to guard the chickens?

I mean, I know he ran TIAA-CREF for a little while, but before that he was CFO and COO of Merrill Lynch, and on the board there. He was there 28 years. He was a director of the NYSE when Dick Grasso was walking away with barrow loads of cash. And then he worked at Fannie Mae just overseeing its total implosion.

There wasn’t anybody else without any skeletons in the conflict of interest closet that this administration is supposed to be doing something about?

Thank you, Mother Jones. She’s it for the best investigative reporting into this crisis and its aftermath.

Paul Hodgson - Senior Research Associate

Chamber of Commerce Watch Website

Bravo to Change to Win for their new US Chamber of Commerce Watch website, a stunning expose of the reality behind the Chamber's initiatives.  The site has extensive information about where the money comes from, where the Chamber hides where the money is coming from, and the hypocrisy behind their claims (instead of job creation, the members reduce American jobs through outsourcing; instead of supporting the environment, they work to dismantle regulatory oversight).  You can also follow USChamberwatchon Twitter and YouTube. 

Nell Minow - Editor