This crap drives us crazy, too

Posted by Marc Hodak on March 7, 2008 under Executive compensation | 5 Comments to Read

Toll Brothers has somehow flushed a perfectly good bonus plan down the toilet.

Their old bonus plan gave the CEO a fixed 2.9 share of his company’s profit gains. There was no cap on the bonus, which presumably meant no cap on their performance. And their performance was good. In the good years, their CEO made big bucks. So did the shareholders, including the largest shareholder, the CEO.

The new bonus plan is based on undisclosed “varied” criteria. In my experience, this is pretty close to saying “discretionary.” Mr. Toll also continues to get 2 percent of the profit, so there is now marginally less emphasis on profitability, and more on other “varied” stuff. And his new plan is capped at $25 million. Two things puzzle me about this cap: it’s arbitrarily high, so it won’t likely be a practical limit, and it still manages to convey that we will cap performance when the wind is really to our back. This is almost the perfect way to convey the message that we will provide a token sop to our investors that doesn’t really help them.

What I don’t get is why Mr. Toll would go to the trouble of undermining a perfectly good bonus system for a few million more dollars. The man owns 29 million shares. It’s not like this extra $6 million he would have earned under the new plan would make up for the nearly $300 million he lost as a shareholder from the decline in his stock price. He can make this bonus amount with a one percent increase in his stock price.

Then, KB Homes, with the same, nearly flawless bonus plan, objective and profit-based, decides to override the market’s short-term verdict with a “discretionary” bonus of $6 million (coincidence?). Their explanation?

Otherwise he wouldn’t have received KB’s standard “annual incentive” for the top job, which is tied to profits under the builder’s current plan.

“Standard annual incentive?” What the hell is that? The bonus amount you get paid for not earning your bonus?

“This is the kind of stuff that makes us crazy,” says Richard Metcalf, director of public affairs at the Laborers International Union of North America, whose pension funds own stakes in both Toll and KB. “What kind of board of directors gives a $6 million bonus when the company’s stock falls 60%?”

It drives me crazy too. And it’s the kind of thing that invites Henry Waxman to pull CEOs into his Star Chamber, and the IRS to do stuff like this.