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Michael Brush

Company Focus4/16/2009 12:01 AM ET

CEOs earn big bonuses for bad year

As their companies shed jobs and stocks plummeted, hundreds of chief execs collected extra pay last year. Here's how boards justify these rewards.

[Related content: stocks, Deere, Qwest, earnings, Michael Brush]
By Michael Brush
MSN Money

As millions of Americans cope with job losses and struggle to make ends meet, there's been only a little belt tightening in the corner offices.

Despite terrible performances that cost lots of jobs and produced huge shareholder losses, hundreds of CEOs pocketed millions in bonus pay last year -- thanks to good friends on company boards.

Consider the Ryland Group (RYL, news, msgs) CEO whose bonus went up in 2008 compared with 2007, though more than a third of the homebuilder's employees got the boot. Or the Honeywell International (HON, news, msgs) chief who missed the benchmarks for his annual bonus -- and got $3.5 million anyway.

All told:

  • Among all the Fortune 1,000 companies, nearly 400 CEOs got bonuses last year, taking home $402 million in annual bonus pay, according to Equilar, an executive compensation research firm. But that's only part of the picture; more bonus pay figures will roll in as additional companies file reports on 2008.

  • These privileged CEOs got an additional $66 million in "discretionary" bonus pay. Annual bonuses are linked to some performance target, while boards can hand out discretionary bonuses for whatever reason they choose.

  • These bonuses topped off already-large pay packages. CEOs at larger companies earned about $10 million on average last year, according to Equilar.

How does a CEO earn a big bonus when his company is staggering?

Experts chalk it up to a broken pay system. The compensation committees that determine CEO paydays set up vague and flexible criteria that keep bonuses rolling no matter how badly a company performs.

"Compensation committees are on automatic pilot," says Timothy Smith of Walden Asset Management, a social and environmental investment shop that monitors compensation. "They continue to reward top management while shareholders and employees suffer."

I hunted through Equilar's list of more than 100 Fortune 1,000 companies that gave CEOs bonuses of more than $1 million each last year to find some of the most striking examples. Here are five that really stand out -- and that illustrate the common tricks.

Ryland, Qwest move the goal posts

There's always some metric that can be used as an excuse to dole out a bonus.

Ryland offers a great example. Last year was a horrible year for homebuilders, and the California company performed particularly badly. Ryland lost $9.33 a share, compared to a loss of $7.92 the year before. Gross profit margins slipped to 11.6% from 17%. Ryland's stock fell 34%. The company shed 723 employees, 36% of its work force.

Ryland chief R. Chad Dreier, though, didn't take a loss. His annual bonus leapt from zero in 2007 to $2.5 million in 2008 as part of a $10.9 million pay package. He gained $6 million more from stock options.

How did Dreier earn this largesse? Simple: The board moved the goal posts. In 2007, bonuses were linked to pretax income. No bonuses were earned on that basis.

So in 2008, the board tied bonus pay to changes in net cash flow from Ryland's operating business. Voilà! Ryland met the target, in part because so many jobs were cut.

The switcheroo came just in time for Dreier to cash in. He is leaving the CEO job in May.

The board at Denver phone and Internet service provider Qwest Communications (Q, news, msgs) made a similar move last year, to the benefit of chairman and chief Edward Mueller.

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Should shareholders get a say on pay? © Larry Dale Gordon/zefa/Corbis
Should shareholders get a say on pay?
Weighing in on whether shareholders should have an input on executive compensation, with David Hirschmann of the U.S. Chamber of Commerce; Richard Ferlauto of AFSCME and CNBC's Mary Thompson.

Qwest had a bad 2008. Revenue declined by just 2%, but earnings per share and net income dropped by 74% and 77%, respectively. Qwest stock fell 43%. Thousands of employees lost their jobs.

But Mueller got an annual bonus of $2.25 million, up from zero in 2007. That was on top of $8.2 million in salary and other compensation.

How did this happen? In part, because in late 2007 the Qwest board switched one of the metrics used to award bonuses. In place of net income, it used a measure of cash flow that gauges earnings before interest, taxes and the accounting charges depreciation and amortization, known as "EBITDA."

In a way, the switch makes sense. Execs wouldn't be penalized for a decline in 2008 earnings compared to an artificial jump in 2007 earnings caused by a one-time tax benefit.

But did EBITDA really rise enough to justify a big annual bonus? It increased by just 3%, and much of that gain came as the company bolstered cash flow by shedding 3,906 jobs, 11% of Qwest's work force. In effect, Mueller got a boost to his annual bonus for cutting jobs.

Company filings say Mueller also got the bonus for the company's sales and cash-flow performance, as well as for forging a partnership with Verizon Wireless and new collective bargaining agreements with unions.

(If this still seems unfair and you're on Twitter, you can tweet your thoughts to Qwest.)

Continued: Covering all the bases

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Wednesday, April 15, 2009 9:49:46 PM
Compensation committees have been out of control for twenty years or more. These so called committees are in bed with CEO's and other well placed thieves. They have robbed stock holders blind, we must pass laws to get it under control. No CEO should receive more than 50 times the average pay of its employees. Angry
Thursday, April 16, 2009 3:23:44 AM

Charter Communication files bankruptcy last month but its executives collected a nice bonus during the past 3 years.

How can these Executives sleep at night?

Where were Board of Directors and SEC?Open-mouthed

 

We got what we deserved. Please do not drag a great leaders down with you.

Thursday, April 16, 2009 6:55:51 AM
What irritates me the most is when someone justifies these bonuses by saying it helps retain the top talent and keeps certain execs from leaving,if the company lost money  why would anyone get a bonus!!!! They truly believe that shareholders believe there bull and good ol obama is giving bailout money to these companies going broke and then acts surprised to hear bonuses were paid,he a liar,most of these bonuses were paid before they got bailout money,;and he acts surprised,God help us if we are ever surprised like 9/11, he is just about as big of an idiot as bush was
Thursday, April 16, 2009 7:42:51 AM
I absolutely agree that these folks really deserve far less than we as investors are giving them, and we have far less than our fair say in what they do with the money we invest in them, but knowing where the bear is in the woods does nothing for knowing where the good guys are and whom we need to be investing in to curtail the exploitation of the common investor.  I'd love to invest in companies that don't over reward the CEO or any other member of the company for their lack of performance, but would someone tell me who those companies are?  I'm seeing lots of folks who I would like not to put my money toward, but the trick is knowing where I can safely put my money for a retirement and not screw the employees or myself with over paid management.  Sort of like not investing in folks who send all the jobs to India or Iran, like 7/11 gets its fuel from those who are against America, (I'll drive miles to avoid buying from 7/11, I haven't bought from "Little Ceasers" for literally years, and won't give them any money to conduct business) tell me who is a good guy with good returns, helping and not damaging stockholders and employees alike and I will invest in them.  I am seeing a lot of what I don't want, but not much info on what I do want.  Common guy's I love to gripe as much as anyone, but I want (NEED) an honest someone to tell me who are the good guys.  If we as a sum total move our monies to those folks rewarding them for their good works the others will follow or die, this is the only way I can see to solve this issue.Sad  SEARCHING FOR A PLACE TO GET BACK IN WITHOUT STICKING MY FOOT IN IT!
Thursday, April 16, 2009 8:07:56 AM
Greed!  If upper management really cared about their companies they wouldn't be so willing to hurt the people that have kept their businesses afloat this long - the lowest paid people on the company payrolls - you and me!  This country is going to hell in a hand-basket!  I just want to Sick!!
Thursday, April 16, 2009 8:12:00 AM
These CEOs and their interlocking Board of Directors and Compensation Committees follow THE GOLDEN RULE...

He who holds the Gold, makes the Rules.

Thursday, April 16, 2009 8:14:33 AM

The major part of this overpayment process is that corporate governance is a joke.  If you look at the people on the board across the top 500 corporations, you see the same faces over and over, CEO's at other companies. 

 

The fact is good CEO's are not as rare as they like to believe.  If they don't like their pay package, go ahead, leave.  I say this about actors on TV shows, too.  Try that guy who has been with the company for years and knows the business inside out. 

 

One other major issue, they have too much money to play with.  Either dividends have to be forced by law.  (Of course, they will whine about it and not admit their lack of rational governance caused the problem.) Or it has to be legislated out like Europe did, like 6 weeks of vacation for every employee, period.  That decreases the pool of "play" money that the CEO and Board Members are splashing away in.  Note that Europe pays far less to their CEOs.  Last I looked, Mercedes Benz and North Sea Oil were doing as well or better as American companies.

 

The President is right.  It is a sense of entitlement far stronger than the people who overbought houses or are on welfare all their lives.

Thursday, April 16, 2009 8:14:52 AM

checkitout;

Unfortunately,

Thursday, April 16, 2009 8:15:27 AM

checkitout;

Unfortunately, our government is making a habit of removing the repercussions of bad business decisions - and forcing us to give over money, anyway.

Someday, good business sense and actual success will be what's rewarded - not fairly arbitrary milestones, benchmarks, performance indicators (or whatever they may be called). 

I do not believe in extra bonus pay for CEO's; they are being well compensated to run the business and need nothing further. If such additional compensation is required, limit it to 50% of the base contractural wage (money - minus all the stock or options trappings) and offer the same percentage all the way down to the bottom, where the work gets done. 

 

Nice dream, huh?

Thursday, April 16, 2009 8:21:29 AM
Personally, I don't care how these folks "justify" their extra pay. Why?? Because liars will be liars, crooks will be crooks and the little guy will alway's be thrown under the bus,,,,just for laughs.
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