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.
Much attention is paid to employee compensation contracts for their incentive value. The structure of compensation (in the form of salary, bonus, and equity grants) is important for the attraction, retention, and motivation of executives. Less clear is the incentive value that comes from indirect compensation and other perquisites.
Take, for example, Bally Technologies, a maker of casino equipment (primarily slot machines). In August 2009, the company revised the employment contract of CEO Richard Haddrill. Among the revisions:
-“Haddrill shall be entitled to a lump sum cash payment of $2,500,000 (the ‘Strategic Initiatives Bonus’) upon the first to occur of: (i) the achievement of certain strategic initiatives established by the Board of Directors on or before December 31, 2010 […], or (ii) a Change of Control occurring on or before December 31, 2010.
-“The Company shall pay to Haddrill $998,000 and, if such Change of Control occurs on or before December 31, 2010, an additional payment equal to $1,996,000.”
What incentives are these amendments intended to provide? One obvious possibility is that the board wants to encourage the CEO to find a buyer for the company, or at least position it for a sale. A more cynical interpretation is that a potential buyer has already been identified and this is a sophisticated way of positioning the CEO to profit.