In the flourishing consolidation business, Stephen C. Hilbert is one of the masters. After founding Conseco Inc. in 1979, he focused on the highly fragmented insurance industry. Since going public in 1985, he bought up more than 40 life and health insurers, typically slashing costs and shutting down unprofitable operations. Last June, he bought subprime loan company Green Tree Financial Corp. Hilbert has achieved an enviable record for Conseco's shareholders: Over the past 12 years, the company has produced a 48% average annual total return, vs. a 17% return for the Standard & Poor's 500-stock index.
For his achievements, Hilbert has been well compensated. Very, very, very well compensated. Last year, he pocketed about $119 million, making him one of the highest-compensated CEOs in the country. His fellow senior execs have also done well. It's routine to see bountiful pay packages in the executive suite these days. But when it comes to treating top executives like kings, Conseco could still teach other senior officers some new tricks.
"UNHEARD OF." The most dramatic perk at Conseco is an exceptionally lavish stock option program--never seen before by most compensation experts--which kicks in when there is a change of control. The company would buy out these executives' options as if they were stock; in other words, if the company were taken over at the current price of 33, the executives would get $33 for each option. This would increase their value by tens of millions of dollars. To top it off, if a buyout deal went through, the three highest-ranking executives (all of whom sit on the board of directors) would get five times their annual salaries plus five times their annual bonuses. Hilbert, who gets an annual bonus of 3% of the company's pretax profits, would get a severance "bonus" of more than $70 million. Altogether, a takeover deal would give Conseco's top three executives more than $590 million, about 6% of the company's market cap.
When the unique buyout options program was shown to various compensation experts, their reactions were telling: "Pass me the smelling salts," says Graef S. Crystal, a San Diego compensation expert and editor of The Crystal Report, after reading about the options in Conseco's 1998 proxy. "I've never seen anything like this before."
"This type of option package is unheard of," says Alan Johnson, managing director of compensation firm Johnson Associates in New York. "It's hard to justify it; it's bizarre. Essentially, these executives are double-dipping....They will make more money than the shares are even worth. I have never seen this before. Obviously, management has an enormous incentive to sell this company, because that's the only way they can receive more than the full value on the stock options."
INAPPROPRIATE EXPOSURE? When asked to confirm this option plan, Conseco spokesman James W. Rosensteele said that he would not be able to "give a detailed response" before BUSINESS WEEK's deadline. He did say that the $590 million figure was too high, but he declined to provide a specific number. "The real issue here is the long-term shareholder value that has been created by this management team," Rosensteele says.
Buyout bonanzas don't exhaust Conseco's generosity to its executives. In 1996, the company organized a program to extend and guarantee personal loans through Bank of America for its executives to buy Conseco stock.
On top of that, Conseco is lending money directly to employees to pay interest on those loans at a modest 6.5%. Technically, the bank has recourse to the employees for the borrowed amount. But they have been guaranteed by Conseco. Loan and interest payments aren't due until 2001.
While the bank loans themselves aren't highly unusual, the amount is. So far, $428.7 million has been lent to 175 top employees (including all the members of the board of directors--and the outside directors as well) to buy stock. That amounts to three-quarters of last year's net earnings of $567 million. Hilbert has borrowed over $100 million, while Conseco Executive Vice-President Ngaire E. Cuneo has borrowed about $30 million and Rollin M. Dick, chief financial officer, more than $50 million.
As of last December, Conseco itself lent $9.3 million for interest payments on the executive loans. If those loans were to be lumped into Conseco's total debt, the amount would increase by over 8%.
Says one major shareholder, who asked not to be named: "I think it is highly questionable that the company put themselves on the hook for this amount for their officers to buy stock in the company. I don't think this is an appropriate exposure for shareholders to take."
MORE COLLATERAL? Conseco executives, of course, could end up with an exposure problem of their own. What happens if the stock, now about 33, really tanks? Many of the stock purchases in 1997 and 1998 were made at around the 45 range by such executives as Rollin M. Dick and Dennis E. Murray. According to Johnson Associates, if the stock falls back to below 22, as it did in October, Dick's loan-related stock purchases would be underwater by about $25 million. For Murray, the number would be about $21.5 million. For the top 10 executives, it would be a loss of about $146 million, and that doesn't include interest. While the company insists that the employees are ultimately responsible for repaying the loans, what happens if someone declares personal bankruptcy?
Even if Conseco stock again falls steeply, Bank of America won't be knocking on the doors of Conseco employees asking for more collateral to meet the margin calls. Rosensteele says the loans do not stipulate the need for more collateral if the stock declines because those loans are guaranteed by the company.
While Rosensteele says Conseco's incentive plans promote "longtime shareholder value," the incentive structure at the company seems to be skewed otherwise. Says Crystal: "I'd be surprised if Hilbert isn't walking in front of corporate headquarters today with a billboard saying, `Company for sale. Inquire within."'