CEO Pay at KB Homes Insulated Against Poor Performance

On February 28, 2007, KB Home (KBH-$48.67) entered into an employment agreement with Jeffrey T. Mezger, who in November 2006, was promoted to the position of Company President and Chief Executive Officer.

The Employment Agreement details a previously announced decision of the Board of Directors setting Mr. Mezger’s annual base salary at $1 million, effective as of December 1, 2006. The Employment Agreement also provides that he is eligible to receive an annual incentive bonus and equity grant, each determined by objective guidelines set by the Management Development and Compensation Committee.

His employment agreement also provides for a one-time promotion grant of stock options valued at $4 million, annual grants of 10-year term stock options valued at $4 million; and, performance shares that could pay-out up to 81,000 performance shares, depending on KB Home's performance relative to 11 publicly traded peer companies.

The Compensation Committee says its core compensation directive is to “closely link executive bonuses to the creation of stockholder value.” For example, Metger’s employment agreement memorializes that he earns a cash bonus based on the pre-tax, pre-incentive profits of the Company. [This philosophy, according to the Board, encourages Mr. Mezger to drive sustainable returns.]

On February 13, however, KB Home reported a November-quarter loss per share of 64 cents, including $343 million of pretax inventory and other charges, vs. a [fourth-quarter] year-earlier share-net of $3.44.

New home sales saw their steepest plunge in thirteen years in January, a commerce report said last week, as a rising glut of new houses on the market pushed prices lower. In addition, there is Street concern that the current crisis among sub-prime lenders could spread to prime mortgages. Flagging demand for new homes, high inventories—as homebuilders enter the primary spring selling season—and concerns that lenders may tighten credit requirements—these factors spell that the much talked about industry turnaround is probably more fiction than reality.

On its February 13 conference call, Metzger announced that it “expects the next two quarters to be challenging, with continued pressure on pricing until supply and demand become more in balance.”

The public will believe anything, so long as it is not founded on truth. – Dame Edith Sitwell (1887 – 1964)

Since earnings visibility has dimmed—not too mention ROE—Messer. Metzger employment agreement permits the Compensation Committee to consider other factors, like “customer satisfaction and backlog,” when deciding how much to pay him in an under-performing year!

Another example where a CEO is held accountable to one, save himself and friends on the board, and where egregious compensation can be arbitrarily received--even when [possibly] not ‘earned.’

If Mr. Mezger resigns for ‘personal reasons,’ he will be entitled to receive $2.0 million in aggregate salary plus 200% of his average annual bonus for the prior three years, or about $5.0 million (excluding value of vesting options).

No reference in the Proxy Statement, as to how much money the Board will grant to him for the 2007 fiscal year for financial planning and tax preparation services, automobile and gasoline allowance, tickets to sporting events, personal gifts, personal meal and lodging expenses, club membership fees, and personal use of Company-owned aircraft.

[Ed. note. His predecessor as CEO, Bruce Karatz, was ‘motivated’ to ring up about $629,000 in ‘other annual’ compensation.]

Since Metzger took the helm of CEO, the Common Stock of KB Homes has tumbled about six percent in value.

So much for “closely linking executive bonuses to the creation of stockholder value.”

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.