The Shareholder ForumTM


"Say on Pay" Proposals

Forum Home Page

"Say on Pay" Home Page

Program Reference


Wall Street Journal, March 18, 2009 article


Need a Real Sponsor here

MANAGEMENT   |   MARCH 18, 2009

Poor Year Doesn't Stop CEO Bonuses

Some Boards Use Discretion to Reward Top Executives Amid Signs Compensation Generally Fell in 2008

By most measures, 2008 was a terrible year for home builder Hovnanian Enterprises Inc. Its stock plunged 62%, revenue fell 31% and the company posted a $1.1 billion loss in the fiscal year ended Oct. 31.

Yet Hovnanian's board awarded Chief Executive Ara Hovnanian a bonus of $1.5 million in cash and stock. The reason: Mr. Hovnanian had helped the company stockpile cash, according to Hovnanian's Feb. 4 proxy statement.

Ara Hovnanian received a $1.5 million bonus as the homebuilder's stock fell 62%. The company said he earned the bonus by helping the company stockpile cash.

Pay Plateau

Executive compensation may have dropped in 2008, for the second time in two decades. Below, median pay levels and other financial details for 50 large non-financial companies.



... % change from 2007:


Annual incentives


... % change from 2007:


Salary plus annual incentives


... % change from 2007:


Total long-term incentives


... % change from 2007:


Total direct compensation*


... % change from 2007:




Net income


... % change from 2007


One-year shareholder return



Note: All figures are medians, so may not total properly.

*salary + annual + long-term incentives

Source: Hay Group


What happened at Hovnanian shows how some CEOs were able to profit handsomely last year even as their companies -- and their shareholders -- fared poorly by traditional measures. In some cases, directors also tweaked performance targets to make goals easier to achieve.

Other companies that paid million-dollar-plus bonuses despite weak results include stock-exchange operator NYSE Euronext Inc. and financial-index firm MSCI Inc. NYSE CEO Duncan Niederauer got a $4 million bonus despite a net loss of $738 million and a stock decline of 69%. MSCI CEO Henry Fernandez received a $3 million annual incentive payment even though the company's share price fell 44% and net income declined 16%.

Such payments stand out amid indications that CEO compensation overall may have fallen last year for only the second time in the past two decades. Median CEO compensation, including salary, bonus and the value of equity grants, fell nearly 1% at 50 big nonfinancial companies that filed proxy statements between Oct. 1 and early March, according to the Hay Group. Of the 50 companies, 16 cut bonuses and two others didn't award them. Many financial-services firms that accepted government aid didn't pay annual bonuses to top executives.

Bonus payments remain an inscrutable part of executive compensation. They're the portion of an executive's pay most closely tied to annual performance. Yet boards have a lot of discretion; some use formulas, others rely on judgment. Payouts may also be tied to goals -- like retaining executives or promoting diversity -- that aren't related to profitability, yielding awards even when earnings sag. In general, bonuses aren't closely tied to stock prices.

Warner Music Group Corp. paid CEO Edgar Bronfman Jr. a $3 million bonus for a fiscal year in which the company had a $56 million loss and its stock fell 25%. In response to a request for comment, Warner said it outperformed peers and rewarded "strong operational performance in a historically challenging industry environment."

Varian Semiconductor Equipment Associates Inc. CEO Gary Dickerson received $1 million in incentive pay despite a 53% stock decline and a 31% drop in net income, which missed the company's profit target. In its proxy statement, Varian said Mr. Dickerson and his executive team topped targets for market share and new business development. The company declined to comment further.

Texas Instruments Inc.'s compensation committee said it cut CEO Richard Templeton's annual bonus 40% from a year earlier in light of a 54% share decline, 28% net income drop and subpar performance relative to peers, according to its March 5 proxy. Mr. Templeton still received a bonus of $1.5 million. "While the decline in markets made it a tough year, it was solid performance," a company spokeswoman said, noting that the company's operating margin was good and its cash position was strong.

But there are critics. "Discretion is fine; the problem is when you're bending over backwards" to make sure executives get awards, said Michael McCauley, senior corporate governance officer of the Florida State Board of Administration, which manages about $123 billion in state retirement funds.

[ceo bonus]  

The Florida SBA registered its disapproval of Hovnanian's compensation practices by voting its 63,353 shares to withhold support from most directors at the company's annual meeting, to be held Thursday.

Historically, Hovnanian, whose founding family controls more than half of its stock, has granted annual bonuses based on return on equity. With last year's loss, the company had no return on equity, but directors decided top executives should be rewarded for reducing the company's net debt.

"That is the most critical metric for us to weather the unprecedented homebuilding-industry downturn," said Hovnanian Chief Financial Officer J. Larry Sorsby, who sits on the board.

Mr. Sorsby added that Mr. Hovnanian had declined raises to his $1.1 million annual salary for the last two years. The CEO owns some 6.7 million shares, now valued at $6.7 million, down from $57.6 million a year ago. This year, Mr. Sorsby said, the compensation committee will limit bonuses related to reducing debt to half of last year's bonuses.

The Florida state board hasn't yet voted its shares for NYSE Euronext's or MSCI's April shareholder meetings. But Mr. McCauley said it will likely heed recommendations from proxy advisers. One such adviser, Glass Lewis & Co., has recommended that investors withhold votes for the re-election of some directors at each company.

NYSE Euronext and MSCI said their CEOs earned bonuses for good performances. Under the guidelines NYSE directors set out a year ago, Mr. Niederauer wouldn't have been eligible for a bonus because the company posted a loss.

But the compensation committee chose to ignore a $1.5 billion write-down on its 2007 acquisition of Euronext, saying that market conditions rather than management performance were to blame. Without that charge, NYSE would have been profitable. The committee awarded Mr. Niederauer $4 million in cash and stock -- 80% of his target $5 million annual bonus, according to the March 2 proxy statement.

NYSE Euronext's compensation is "aligned with the interests of our stockholders and is tied to achieving our business performance goals," said spokesman Richard Adamonis. "In 2008, NYSE Euronext met nearly all of our performance goals."

MSCI doesn't use formulas, leaving bonuses to directors' discretion. In considering profitability, its compensation committee chose to overlook expenses related to stock grants to employees and executives when the company, formerly part of Morgan Stanley, went public in November 2007. The committee concluded that MSCI had had a strong year, with revenue up 16.5% and increased profit, excluding the stock-grant costs.

In mulling bonuses, the compensation committee considered the drop in MSCI's stock price to $15.43 in the fiscal year ended Nov. 30, a spokesman said. But the committee measured the decline against the IPO price of $18 rather than the closing price of $27.65 at the end of the previous fiscal year, he said.

Write to Phred Dvorak at

Printed in The Wall Street Journal, page B1

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved




This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.