Archive for September, 2009

Commentary by David F.  Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

The economic stimulus bill passed by Congress in 2009 included a last-minute provision that restricts the compensation paid to executives at companies that have received federal funding. Executive bonuses were limited to no more than one-third of total compensation. Further, bonuses could only be paid in restricted stock, not stock options. The restrictions were intended to alter the composition of pay packages that were deemed to encourage excessive risk taking.

Two companies that fall under these restrictions handled the restrictions differently.
Wintrust Financial, based in Illinois, increased cash salaries for executive officers. For example, the base salary of President and CEO Edward J. Wehmer increased from $800,000 to $1,100,000, with $100,000 of the increase paid in company stock. Wintrust explained, “The salary adjustments are not intended to increase total annual compensation for the executive officers, but instead only to adjust the mix between fixed and variable compensation paid to them.” Wintrust Financial, Form 8-K, Filed August 20, 2009

Wells Fargo increased base salaries for executive officers, with much of the increase paid in company stock. Long-term stock incentives were commensurately decreased. The base salary of President and CEO John Stumpf increased from $900,000 to $5,600,000 with the increase paid in the form of stock granted under the company’s long-term incentive program. Wells Fargo, Form 8-K, Filed August 6, 2009

Investors will have to decide whether either of these changes have a substantive impact on executive incentives or, by extension, corporate risk management.

Commentary by David F.  Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

Source: The Coca-Cola Company, Form DEF 14A, Filed March 5, 2009

Confidentiality, at what price?  In May 2008, the Coca-Cola Company received a comment letter from the SEC requesting that the company improve disclosure on the performance targets used in the company’s bonus plan.  Rather than comply with this request, the company decided not to award performance-based bonuses but instead to award discretionary bonuses.  The difference matters, because the discretionary bonuses awarded were not tax deductible.  The company explained the rationale behind its decision:

“The Company believed that disclosing the ranges would allow a competitor to recreate the matrix of business performance targets and use this information to determine our business strategy. […]The Compensation Committee weighed the additional tax cost versus the competitive harm in disclosing the plan targets and determined that the potential competitive harm significantly outweighed the additional tax cost, which was not material.”

Commentary by David F.  Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.

Source: Point Blank Solutions, Form 10-K, Filed October 1, 2007

In fiscal 2006, David H. Brooks, chairman and CEO of Point Blank Solutions, received $468,750 in total compensation.  According to the company’s proxy, Brooks’ pay consisted entirely of salary, with $0 listed for bonus, options, and all other compensation.  These amounts, however, came with a caveat that was explained in a footnote disclosure:

“We made numerous payments that appear to be personal expenses, or for which we cannot verify a business purpose. These payments include:

a. Approximately $200,000 for the purchase of a Bentley Flying Spur in 2006, which was included on our fixed asset register and operated by Mr. Brooks. […]
b. Approximately $299,000 for payments […] related to private jet travel by Mr. Brooks in 2006.
c. Approximately $175,000 for payments made to an affiliated company of Mr. Brooks, which owns a residence in south Florida in 2006.
d. The value, for which we have not been able to quantify the cost, of Mr. Brooks’ personal use […] of a Madison Square Garden skybox in our name that was controlled by Mr. Brooks.
e. Payments totaling approximately $62,000 made in 2006 to […] numerous payees which appear to be personal in nature.”

Following an investigation by the SEC and U.S. Attorney’s Office, Brooks and several other senior officers were terminated.