Tuesday, January 16, 2007

A Big Payday for Disney CEO Iger-- Who Cares?

Accounting fraud and executive peccadilloes aside, there are few business activities the news media—including us—delights in exposing as much as excessive executive compensation. Add Disney (DIS-$35.21) CEO Bob Iger’s just announced $24.9 million pay package for fiscal year ended September 2006 to that growing list.

According to its Proxy, filed late on Friday, the entertainment-media conglomerate revealed that Messer. Iger’s compensation included $2 million in salary, a $15 million cash bonus, and a $4.3 million payout from the vesting of performance options. Messer. Iger also received $666,000 expense reimbursements for auto benefits ($14,400), personal air travel ($67,879), and security ($578,656); and, $2.92 million in Disney stock options granted (exercise price – $24.87 per share) during the company's fiscal year, ended Sept. 30.

Prior to taking over from Mike Eisner in October 2005, Iger was Disney’s President and COO. He received $9.24 million in salary and cash bonus, $500,000 in restricted stock, 274,241 stock options, and other compensation of $1.02 million.

In setting the target bonus for Iger, the Compensation Committee heavily weighted his bonus to the Company’s actual performance against each of the performance goals established at the outset of the year. Performance goals for fiscal 2006 bonuses were based upon the following four corporate financial measures: operating income; free cash flow; economic profit (net operating profit after tax, minus a charge for capital employed in the business, based on the cost of capital); and, earnings per share.

Since taking over as CEO, Bob Iger has overseen a reinvigorated House of Mouse with the purchase of the Pixar animation studio, a deal with Apple, Inc.’s iTunes to make available content available for download, and a 33% and 50% rise in profits and share price, respectively.

Is Iger worth the $25 million payout? Academics, stakeholders, and policymakers will debate this question ad nauseam.

Ideally, what the 10Q Detective would like to find out is, with multi-million dollar paydays making headlines ad infinitum, does the press exposure make any difference—in influencing Boards to change their pay practices?

According to researchers at The Stanford Graduate School of Management (February 2006),
the answer is a resounding NO! The researchers concluded that there was little evidence that companies changed their compensation practices in response to harsh criticism by the press:

  • “Part of the reason that publication of negative articles about executive pay appears to have little effect may be that it actually satisfies two very different kinds of public demands. On the one hand, excessive compensation is known to be a sign of poor governance—clearly an important issue for shareholders, employees, suppliers, and society at large. At the same time, multimillion-dollar pay packages and the potential scandals surrounding the wealthy individuals who receive this kind of pay can be very entertaining. For example, there were repeated references in the press coverage of Tyco International CEO Dennis Kozlowski’s excessive pay to the $6,000 shower curtain he had purchased for his corporate apartment.”

A leading expert on corporate governance, Charles Elson, the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, postulates a counterintuitive argument on public disclosure:

“There's one theory out there that disclosure may cause greater embarrassment and the greater the embarrassment the less likely it is that someone will overreach. That's based on the assumption that anyone who is a CEO and overreaches is capable of embarrassment. Frankly, anyone who demands those kinds of salaries is incapable of embarrassment.”

In terms of its impact on executive compensation, albeit better transparency is not sufficient in of itself to temper Board governance, in our view, when journalists report on annual pay packages, they need to do more digging—find the additional awards buried in the footnotes—to buttress—often inflammatory—headlines of excessive executive pay.

For example, are stakeholders aware that in ‘under-performing’ years, Mr. Iger is exempt from performance-linked target bonuses? Pursuant to his
Employment Agreement, dated as of October 2, 2005, Iger was not to receive a target cash bonus of no less than $7.25 million.

The Board insists the “minimum annual bonus and long-term incentive award opportunities do not guarantee Mr. Iger any minimum amount of compensation.”

Huh? Ignoring anemic share and financial performance in 2005, Iger still received a ‘non-guaranteed’ cash bonus of $7.7 million.

The value of unexercised in-the-money options that Iger holds, exercisable and unexercisable was valued at an additional $14.4 million and $7.1 million, respectively (as of 9/30/06).

Then there is the issue of ‘phantom pay’—awards granted but not yet earned. The Compensation Committee granted to Iger in 2006 an unrecorded ‘bonus’ of about $17.8 million [Since this stock does not vest until future years (September 2007 – September 2009), the aggregate 714,000 in long-term performance shares went unreported in the press. Prior to vesting, however, dividends distributed on these shares result in credits of additional performance-based restricted stock units that will be distributed when the related units vest].

At fiscal year ended 2006, Iger held—in aggregate—performance based (1,017,509) and bonus related (20,108) stock, valued at $36.5 million (equal to $35.21, the closing price on the NYSE on January 11, 2007).

On December 22, 2006, the SEC amended—simplified—
executive stock option disclosures. The new rule changes the way grants of stock options will be measured in the proxy’s summary table—raising protestations from share activists.

Under the old rule, if a company awarded an options grant valued at $20 million to an executive in 2007, the full amount of $20 million would show up in the summary compensation table.

The new rule, now in effect, says if the grants vest over five years, the amount reflected in the 2007 table would be $5.0 million, with the remaining part of the $20 million included in later years, as the executive qualifies to exercise the options.

“I can’t give you brains, but I can give you a diploma.” – The Wizard of Oz to the Scarecrow

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

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