In Slump, Firms Move Performance Goalposts
Thursday, March 19, 2009
FBR Capital Markets failed to reach its performance goals in 2008.
But the board of the Arlington investment bank awarded six-figure payouts to its executives anyway. The awards, the company said in a regulatory filing, recognize that executives "perform functions that are not directly related to the corporate performance" of the company. The bonuses, the filing said, are meant to reward individual performance.
The moves at FBR are just one example of how executives continue to receive generous payments despite meager corporate results and tanking share prices. A range of companies -- from New York Stock Exchange operator NYSE Euronext to Oregon tech firm FEI -- are handing out payments even though their executives might not have qualified for performance rewards under rules and guidelines set by the businesses themselves.
The payments come in the form of discretionary pay and retention awards as well as bonuses paid out after directors on the companies' compensation boards adjusted compensation plans or lowered performance goals.
Some of the companies say deteriorating conditions in the capital markets and the broader economy pushed performance goals out of reach, thereby rendering bonuses useless as a motivational and retentive measure.
But corporate governance experts say that executives have been benefiting from favorable capital market and economic environments for the past several years. Lowering the performance bar now -- or ignoring it altogether -- undermines the purpose of performance-based pay, they say.
"These machinations that are being used just breed cynicism and distrust to the whole system," said James Cox, a professor of law at Duke University who studies compensation matters. "It's really revolting."
In another twist that Cox and others call troubling, companies are shortening the periods during which they measure performance because they say they are unable to forecast economic conditions in the uncertain climate. As a result, they are paying out bonuses in several installments over the fiscal year.
Such actions, which critics say create an environment ripe for manipulation, come despite mounting criticism that pay structures that awarded short-term profits at the expense of long-term corporate health were to blame for the demise of prominent Wall Street firms and the economic turmoil that came with it. "If we've learned anything, it's that we should be going in the opposite direction," Cox said.
At FEI, which makes electronic microscopes, the compensation board decided to set performance goals for the first six months of this year only and make an initial bonus payment in August. Performance goals for the second half of 2009 will be set later this year.
The move, a company representative said yesterday, is aimed at avoiding situations in which the company would have bonus targets that could turn out to be much too high if economic conditions deteriorate further or payouts that would be too large if the economy recovers later this year.
"If any part of the company loses a lot of money, no one gets paid," said Fletcher Chamberlin, FEI's treasurer.
But the company did modify its own rules in awarding bonuses for 2008, getting rid of the minimum threshold of 5.8 percent for return on sales halfway through the year. The change, the company said in a July filing with the Securities and Exchange Commission, was made to "bolster employee retention" and in recognition of the fact that any payments under the original rules were "increasingly unlikely."
The company's return on sales for the year came in at 5.5 percent, said Chamberlin, who noted that restructuring charges as well as performance issues affected the outcome.
At FBR, an affiliate of Friedman, Billings, Ramsey Group that recently changed its name to Arlington Asset Investment, two executives took home handsome bonuses despite a $195 million loss last year, during which the company's stock price dropped by nearly 50 percent.
Chief Financial Officer Bradley Wright took home a $400,000 bonus, most of it in cash. General Counsel William Ginivan received $275,000. FBR also awarded 500,000 stock options to chief executive Richard Hendrix. The company declined to comment.
Some compensation consultants said these examples go against efforts other companies are making to rein in executive pay packages after decades of increases. Executives at at least 33 companies have agreed to forfeit bonuses from last year or 2009, according to Equilar, a compensation research firm. Four in 10 companies surveyed by compensation consultancy Pearl Meyers & Partners last month said they might pay out less than what the executives would have been entitled to based on corporate performance.
At NYSE Euronext, directors decided to exclude a $1.6 billion write-down in calculating the minimum performance requirement. The directors "determined that the impairment was driven primarily by adverse equity market conditions," the company said in a regulatory filing.
Chief executive Duncan Niederauer was awarded a $4 million bonus in equal parts cash and stock on top of his $1 million salary. Chief Financial Officer Michael Geltzeiler got $750,000, and General Counsel John Halvey received $1.75 million.
NYSE Euronext reported a net loss of more than $700 million for 2008, although it would have made money excluding the charge, which stems largely from its acquisition of Euronext in 2007.
Richard Adamonis, a spokesman for NYSE Euronext, said the company and its executives had met most of its goals for 2008, such as posting gains in net revenue and reducing fixed expenses.
At Mercury Computer Systems, a Massachusetts tech firm, the compensation board said it decided to lower performance targets "due to particular performance challenges in fiscal year 2008."
But it didn't make a difference. "None of the threshold performance targets were met, and therefore no payments were made," the company reported.