June 18 (Bloomberg) -- Pay for performance. That equation is a pillar of good corporate governance.

In Barry Diller's case, at least to the casual eye, it looks like it holds in the inverse.

In 2007, IAC/InterActiveCorp, the company Diller heads, posted a negative total return of 28 percent compared with a 6 percent gain for the Standard & Poor's 500 Index.

So how is it possible that Diller wound up receiving almost $200 million, depending on how you want to crunch the figures?

One number that deserves a close look is the $183 million Diller received on Oct. 8, 2007, by exercising an option covering 9.5 million shares and carrying a strike price of $10.73 each.

Diller had to exercise that option because its 10-year term was set to expire on Oct. 19, 2007, just 11 days later.

Very few executives wait until a few days before the end of an option's term to exercise. Among other things, stocks don't always go up and up, and in waiting, you might end up losing.

And so it was with Diller. The close for IACI stock on the date of exercise was $29.95.

But back on July 7, 2003, it was $47.47. Had Diller exercised then, his gains would have been $349 million, not $183 million. There were 38 other days when his profits would have been north of $300 million and another 529 days when his profits would have exceeded $200 million. That's 38 percent of the days in his grant following the first four years when the option wouldn't have been fully exercisable.

Betting Wrong

Had Diller exercised earlier and made even more, the outcry would paradoxically have been less, because shareholders, though seeing a larger pay figure, would have been feasting on the then higher stock price.

So Diller bet wrong.

Although his recent performance for shareholders has been poor, with negative total returns in three of the last four full fiscal years, his long-term performance has been good. Between Jan. 18, 1993, when the first trading price for IACI was recorded by Bloomberg, and the close on June 13, total return was 19 percent a year, a figure that exceeded the Standard & Poor's 500 Index return by nine percentage points.

So what about the $15 million figure showing as his total pay in IACI's 2007 preliminary proxy statement, which was filed with the U.S. Securities and Exchange Commission on June 9?

Well, among other things, that figure includes option awards of $14 million. That option number shows up now because of SEC rules that require disclosure of accrued cost. It turns out that the entire $14 million stems from two other stock options granted to Diller in 2005, not in 2007.

Little Left

What's more, the 3.8 million option shares he received back on June 7, 2005, were quite gutsy in their design. One grant covering 2.4 million shares carried a strike price that was 30 percent above the market price at grant. The second, covering 1.4 million shares, carried a strike price that was 75 percent above the then market price.

With his recent performance, it goes without saying that both those options are sitting down in Davy Jones's locker.

So what are we left with for Diller's real 2007 pay? Well, he received a salary of $500,000. That's pretty low compared with the going rate for corporate bosses. But he received no bonus. The only other pay he received was $927,000 of miscellaneous compensation, the bulk of which was for his personal use of the company's aircraft.

In the interest of fairness and full disclosure, I was once Diller's pay consultant. That was back in the mid-1980s when he was running 20th Century Fox, then a unit of Rupert Murdoch's News Corp. Not only was that more than 20 years ago, but Murdoch vetoed my recommendations.

So I rise to Diller's defense, but not because I like him, which I do. The bottom line for me is that the actions that his board compensation committee took in 2007 were appropriate -- in other words, scant pay for poor performance. All the rest of that stuff -- mostly options that can't be exercised at a profit -- traces back to decisions made in 1997 and 2005.

My only hope for Diller is that he bounces back and produces meaningful results for his shareholders and for himself.

(Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.

To contact the writer of this column: Graef Crystal in Santa Rosa, California, at at graefc@bloomberg.net.

Last Updated: June 18, 2008 04:16 EDT