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New York Times, March 11, 2007 column


The New York Times

March 11, 2007

Gretchen Morgenson

Weird and Weirder Numbers on Pay Reports

PORING over executive pay filings — packed as they are with all the new details that the Securities and Exchange Commission requires — is turning out to be, no surprise, an exercise in exhaustion. Asking for additional data in the filings, the regulators said, would make them more illuminating.

Is that the result? Your humble research assistant is here with a report.

Of course every company will be different. But in the case of Brookfield Homes, a home builder operating in California and Washington, D.C., more is definitely less. How much less? The summary compensation table in the company’s proxy reported that Ian G. Cockwell, Brookfield’s chief executive, made a negative $2.3 million last year.

Before you send any charity checks to help bail out Mr. Cockwell, though, you should know that he received $620,000 in cash and bonus in 2006, $170,000 in other compensation (mostly dividends on his stockholdings), $4.2 million in option gains and $2.9 million in realized deferred stock gains. In other words, Mr. Cockwell’s total takeaway last year was almost $8 million.

Welcome to the new world of executive pay disclosure. Shareholders who thought that a quick glance at the summary compensation table would tell them all they needed to know have another think coming.

“This is a rather extreme example of where you get the disconnect between what the accounting number is, what the true number is and what the banked number is,” said Brian Foley, an independent compensation consultant in White Plains.

“The summary compensation table is supposed to be a snapshot? Not even close.”

The Brookfield case, which may be unusual, reflects the 11th-hour rejiggering of rules governing the valuation of option grants that the S.E.C. made on the eve of Christmas. Christopher Cox, the S.E.C. chairman, said at the time that the option rule change would provide “a fuller and more useful picture of executive compensation than our recently adopted rules.”

Depends how you define “useful.”

Mr. Cockwell is not the only Brookfield executive who made money and showed a “loss” in the same year. Paul G. Kerrigan, chief financial officer, earned a negative $830,413, according to the summary table. But his salary and bonus totaled $463,000, other income was $78,233 and option gains were $2.2 million, while realized deferred stock gains totaled $1.3 million. Total compensation and options gains: $4 million. Summary compensation table amount: negative $830,413.

The negative numbers involve stock option awards the company said were granted to both men in 2006 and before. They fell in value as Brookfield’s stock declined along with that of other builders. “New S.E.C. requirements require us to put in this column the amounts we recognize for financial statements,” said Shane D. Pearson, vice president and secretary at Brookfield Homes. “Where I think people might get confused is they are used to seeing the grant date fair values.”

In meeting the S.E.C.’s new requirements, Brookfield says that because the price of its stock has been declining, the value of Mr. Cockwell’s options also declined — resulting in a reduced compensation benefit for accounting purposes (and that unusual negative income figure Mr. Cockwell must endure).

There are no negative numbers to be found in the compensation received by executives at Toll Brothers, a luxury home builder based near Philadelphia. Indeed, their figures are so far on the plus side of the ledger that they have upset some big shareholders.

THE company will hold its annual meeting on Wednesday in Horsham, Pa., and some shareholders say they will attend to protest the roughly $20 million in salary, bonus and perquisites compensation for the chief executive, Robert I. Toll, in 2006. The shareholders plan to withhold their support from Carl B. Marbach, a director and chairman of the company’s compensation committee.

Here’s Mr. Toll’s pay breakdown: $1.3 million in salary, a bonus of $17.5 million, $336,000 in other compensation and a 250,000-share option grant — more than 17 percent of the options granted companywide. He also booked $10.1 million in option gains in 2006.

“We support good pay for good performance that serves the long-term interest of the corporation and the shareholders, but we don’t believe this passes the sanity test,” said Terry O’Sullivan, general president of the Laborers International Union of North America, which owns Toll stock. “Toll Brothers returned a negative 22 percent for shareholders last year, while the average for home builders was negative 14 percent. We think that the board and Carl Marbach should be held accountable for the limitless compensation that has been granted to Robert Toll.”

Certainly while the real estate mania was in full swing, Toll Brothers stock was a stellar performer. But the word “excess” does come to mind when viewing Mr. Toll’s take. After all, he had $191 million worth of unexercised options at year-end. And he owns 20 million of the company’s shares outstanding — a 13 percent stake — worth $577 million at the closing price of $28.85 last Friday.

And Mr. Toll’s windfall was not limited to last year. Mr. Foley calculates that over the last four years, the executive has received $95 million in bonuses alone. “You have to wonder, ‘Why are they still in the mode of big everything,’ ” Mr. Foley said. “I know that they had a nice run-up in the housing boom but you still look at those last four years of $95 million in bonuses and the question is, when do you pull back?”

Did Mr. Toll need another $20 million in salary and bonus to keep working for his shareholders last year? When is enough, enough?

“I have yet to meet the person who has enough money,” said Joel H. Rassman, chief financial officer at Toll Brothers. “We are a society that tries to pay people for their efforts, and the efforts of Bob in steering this company have been significant and the rewards for shareholders have been significant.”

Mr. Rassman also said that in 2006, and previously, Mr. Toll and the board agreed to reduce his pay. As a result of these negotiations, Mr. Toll took $9 million less last year than he was entitled to, Mr. Rassman said.

At the annual meeting next week, the company and its board will undoubtedly try to sell shareholders on the idea that Mr. Toll has earned his keep. Mr. Marbach, the director who may come under fire, is president of Greater Marbach Airlines and Florida Professional Aviation, companies that provide aviation services and consulting. He has been a director of Toll Brothers since 1991. Too long, some shareholders say.

Mr. Rassman disagreed. “Good people should stay employed and help companies as long as they continue to be positive,” he said. “He provides us tremendous insight into the high-tech world and he’s maybe a genius in the computer world.”

In 2007, because the housing market has slowed, Mr. Rassman said, the bonus paid to Mr. Toll will probably be “much smaller.” So will shareholders’ returns, in all likelihood.

But even if Mr. Toll’s bonus is much smaller in 2007, in the all-is-relative world of executive pay, small it will almost certainly not be.





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