Thursday, October 04, 2007

Pay for Performance --Tilting at Windmills at Quixote Corp.

In the ‘Compensation Discussion and Analysis’ of its Proxy Statement, Quixote Corp. (QUIX-$19.93), a manufacturer of highway and transportation safety products, said its “Compensation Committee does not utilize objective guidelines or formulae, performance targets or short-term changes in its stock price to determine the elements and levels of compensation for our executive officers.”

Frustrated shareholders have witnessed the bull market from the sidelines, for the stock price of has treaded water for four years, as the maker of energy-absorbing highway crash cushions continues to report pretax losses (last reported profit was for fiscal year ended June 30, 2003).

Instead, the Committee typically “relies upon its collective judgment as applied to the challenges confronting the Company, together with advice from independent consultants, information provided by the Company and independent agencies” in its pay practices.

Pay for performance is tilting at windmills at Quixote Corp.

On August 21, 2007, the Committee approved base salary increases (effective July 1, 2007) for the executive officers, ranging from 6% to 6.8 percent. The salary for CEO Leslie J. Jezuit was increased to $510,000 from $480,000; the salary for CFO Daniel P. Gorey was increased to $318,000 from $300,000.

Irrespective of the Company’s financial performance, Mr. Jerzuit and Mr. Gorey continue to receive annual cash bonuses, too. In fiscal 2007 and fiscal 2006, Quixote paid bonuses of $240,000 and $200,000, respectively, to Jerzuit, and $145,000 and $120,000, respectively, to Gorey.

Management is optimistic that end-market conditions will improve in fiscal 2008, citing an expected increase in highway construction activity (federal transportation bill
SAFETEA-LU). A favorable sales mix, including international growth in the Asia-Pacific region, coupled with cost structure initiatives, should yield a profitable outcome in fiscal 2008, according to management.

In our view, operating profits will continue to be pressured by higher raw material (aluminum, steel and resin), fuel, and freight costs.

In a village in La Mancha (whose name I do not care to recall) there lived, not very long ago, one of those gentlemen who keep a lance in the lance-rack, an ancient shield, a skinny old horse, and a fast greyhound. ~ Spanish novelist Miguel de Cervantes Saavedra, Don Quixote (1605)

Senior management is not as chivalrous as Don Quixote de la Mancha, and it is doubtful that they would take up the order of knight-errantry: “ to defend maidens, to protect widows, and to rescue orphans and distressed persons."

Regardless of financial or stock performance, if history is a guide, senior management will still get paid their bonuses.

Perhaps someone should remind Quixote’s Compensation Committee—and management—that they are in the service of shareholders.

Editor David J. Phillips does not hold a financial interest in Quixote Corp. The 10Q Detective has a Full Diclosure Policy.

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