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September 2, 2010 |
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| June 26, 2009 |
By: Mike Seemuth |
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fter emerging as a dominant form of executive pay, stock-based compensation triggered by high share prices may become less fashionable.
The recession, of course, has held many stocks down, discouraging executives from cashing in stock options and grants. Not every company is happy with the results of stock-based compensation these days, either. After all, if the idea of stock-based pay is to elevate stock prices, why are so many stuck at bargain-basement levels?
Stock-based compensation is supposed to align the interests of a company’s officers with those of its shareholders, just in case salaries, bonuses, benefits and perks aren’t enough to do the trick. In the months and years ahead, however, companies may link stock-based compensation more closely to financial statement improvements than Wall Street’s daily appraisals.
Publicly held companies probably will become “more mindful of crafting compensation packages that are tied into the longer term, true profitability of the company,” said John Mestepey, managing director at the Miami office of Diversified Search Odgers Berndston. “When a company is just focused on share price, that’s not good. ... Compensation based on stock performance isn’t really indicative of the true performance of the company.”
Consider the roller coaster experience of Miami-based Ryder System and its chairman and chief executive officer, Gregory Swienton, who has seen the value of his stock-based compensation rocket and recede along with the company’s share price.
After selling $10 million of Ryder shares for an average price of $65.93 each last year, Swienton has sold about $525,000 worth for an average of $30.43 each so far this year, according to data compiled by online database Yahoo! Finance. Ryder reported lower first-quarter earnings, compared to the same period last year, though not as low as Wall Street expected. But the company’s share price has remained stuck inside the $20 to $30 range, well off the high of $75.09 within the last year.
Is Swienton’s leadership worth millions of dollars less this year than last year? Is Ryder better off in a long-term sense because its stock price topped $75 within the last 12 months?
While they use different names and numbers, directors serving on compensation committees of many other public companies are asking those same types of questions.
“We see companies out there that financially are not performing very well, but for some reason they are the darling of Wall Street, and their stock is going through the roof,” Mestepey said. On the other hand, “you may be running a very good ship and doing very well, but the company happens to be in a sector that is not in favor with the analysts, and therefore your stock price is not moving, and there’s nothing you can do to get it to move, despite great performance.”
Sticky $1 Million Mark
While some leading corporate executives toil for decades to reach the $1 million mark in annual salary, getting a substantially bigger paycheck can be even harder.
The biggest annual salary at 10 public companies in South Florida is $1 million or more. But payouts far above that level are rare.
Salary represents a smaller share of the typical chief executive officer’s total compensation package as other types of pay have loomed larger, and one major reason is federal tax policy.
For years, the Internal Revenue Service has barred public companies from deducting annual salary amounts above $1 million from their taxable income. But instead of limiting executives’ total compensation, the IRS mainly has limited salary.
The tax penalty has discouraged companies from increasing seven-figure salaries much, if at all. Consider, for example, that Office Depot CEO Steve Odland’s salary has been stuck at $1 million in each of the last three years. Lennar president and CEO Stuart A. Miller’s salary has held at that level for each of the last five years.
Notable exceptions are multimillion-dollar annual salaries of the two highest paid executives of Vector Group, a Miami-based cigarette manufacturer. The company last year paid salaries of $3.95 million to the chairman of its board of directors, Bennett LeBow, and $2.76 million to president and chief executive officer Howard Lorber.
In the proxy statement for Vector’s annual meeting of shareholders on June 2, the company acknowledged that Section 162(m) of the Internal Revenue Code generally prohibits a publicly held company from deducting salary amounts above $1 million. But the proxy also said that “in certain situations,” the company “will not meet these deductibility requirements in order to ensure appropriate and competitive levels of total compensation for the company’s executive officers.”
Health Care great for Frost
One of the area’s most successful stock pickers, South Florida billionaire Phillip Frost has held a fistful of winning investments so far this year, mostly in the health care field.
Frost is a major shareholder of three locally based health care stocks that appreciated from Dec. 31 through Wednesday, June 24, by more than 10 percent.
Shares of Israel-based Prolor Biotech, for example, have appreciated about 23 percent this year. The company specializes in developing longer-lasting versions therapeutic proteins.
Frost also is a major shareholder of Continucare, a provider of primary physician services on an outpatient basis, and Non-Invasive Monitoring Systems, a producer of therapeutic devices designed to improve circulation and reduce pain.
The stocks of both Miami-based companies have risen between 13 percent and 14 percent so far this year.
Frost has had mixed results this year with some of his investments outside in industries beyond health care.
Stock prices declined for both New York-based liquor manufacturer and distributor Castle Brands and Miami-based investment banking and asset management firm Ladenburg Thalmann Financial Services.
But Frost also owns stock in defense contractor Northrop Grumman, which is essentially unchanged this year, and cigarette manufacturer Vector Group, which has appreciated about 3 percent so far this year.
Preview
CONSUMER CONFIDENCE: Are consumers feeling better? The Conference Board will report its monthly index of consumer confidence for June on Tuesday. The widely followed barometer of consumer confidence rose sequentially in March, April and May, recovering from a sharp decline that began last September. The index rose to 54.9 in May from 40.8 in June. The index was set equal to 100 in 1985.
PRIVATE SECTOR JOBS: Are payrolls in the private sector increasing in response to publicly funded economic stimulus yet? Payroll processor ADP will release its June estimate of U.S. private-sector employment on Wednesday. ADP estimated that nonfarm private employment fell by 532,000 jobs in May from the April level.
PENDING HOME SALES: Have higher mortgage interest rates hurt momentum behind pending home sales? The National Association of Realtors will report its June index of pending home sales on Wednesday. The index rose to 90.3 in May from 84.6 in April, the third consecutive sequential increase.
UNEMPLOYMENT: Will this month’s national unemployment rate approach or exceed 10 percent? The federal Bureau of Labor Statistics on Thursday will report total nonfarm payroll employment and the unemployment rate for June. Nonfarm payroll employment in the private and public sectors fell by 354,000 during in May, compared to May 2008, about half of the comparable number of job losses in each of the prior six months. The unemployment rate rose, however, from 8.9 percent in April to 9.4 percent in May.
MARKETS CLOSED: U.S. securities markets will be closed next Friday in observance of Independence Day on July 4.
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