- Boards tie equity grants to goals deemed unlikely to be met
- Potention pay can then be left off company compensation tables
As scrutiny of executive compensation intensifies, some companies are using a little-known technique that keeps potential payouts under the radar.
Six Flags Entertainment Corp. and Tempur Sealy International Inc. have awarded millions of dollars in stock to top bosses and given the equity a unique value: zero. To use that figure, the companies set performance targets they said were unlikely to be met.
Doing so is rare. Few boards set impossible goals and even the loftiest targets typically have some chance of being met. That’s been the case at Six Flags. Two of three improbable goals have been achieved, resulting in windfalls for executives. The third is still outstanding.
“It’s very unusual for a compensation committee to grant a performance award that really has no hope of being earned,” said John Roe, a managing director at a unit of proxy adviser Institutional Shareholder Services Inc. Even if the award likely won’t be earned, “that’s not the same as it having a zero value at the date of grant.”
At a time when investors are voicing concern about CEO salaries and bonuses, equity awards considered valueless can be omitted from an executive’s pay figures listed in the summary compensation table in proxy filings. Those numbers are closely scrutinized by investors and governance experts.
While U.S. accounting rules say performance-based equity should be valued on the probability it will vest, not a single company in the Standard & Poor’s 500 Index that’s disclosed pay for 2015 awarded zero-value stock that year, according to data compiled by Bloomberg. So why did Six Flags and Tempur Sealy? The answer may lie with their largest investor, hedge fund H Partners Management.
As H Partners amassed stakes in amusement park operator Six Flags and Tempur Sealy, a mattress maker, and took seats on their boards, the companies adopted new pay-for-performance goals. They promised executives tens of millions of dollars for achieving ambitious targets, a practice resembling how hedge funds pay managers, said Steven Hall Jr., a consultant at compensation firm Steven Hall & Partners.
“Giving a big equity award upfront is much more common among hedge funds and private equity firms than public companies,” Hall said.
The practice has helped improve Six Flags’s performance and boosted shareholder value, Jon Luther, chairman of the company’s compensation committee, said in an e-mail.
“The board believes long-term aspirational targets are a good way to stretch management to achieve certain goals -- and that approach has been highly successful,’’ said Luther, who’s also the company’s lead independent director.
The first grant was disclosed about three months after Six Flags exited Chapter 11 bankruptcy in April 2010. H Partners had become the largest shareholder after gobbling up debt during the reorganization. In August of that year, the company named James Reid-Anderson CEO. The board’s search committee was led by Usman Nabi, a senior partner at H Partners, who at the time was Six Flags executive chairman. He remains a director.
The shares set aside for Reid-Anderson and five other top managers would vest only if the company reached $330 million in adjusted earnings before interest, taxes, depreciation and amortization for 2011 -- 12 percent above the 2010 result. They were given a value of zero because the goal was “not considered to be probable of being earned,” according to a regulatory filing. Estimates of what the executives could take home if the award vested were disclosed in a footnote.
Six Flags exceeded the target, posting $350 million of Ebitda in 2011, and the six executives received shares worth $49.6 million on the day they paid out, according to regulatory filings. Reid-Anderson got $34.5 million of that.
“The approach to reporting compensation was absolutely transparent and followed all SEC and legal reporting requirements,” Luther said. It also resulted in “significantly higher accounting charges” than if the awards had been expensed at target values on the grant date.
E-mails and phone calls seeking comment from representatives of H Partners weren’t returned. Nabi didn’t return e-mails and calls to his office.
In August 2011, Six Flags disclosed a second stock award valued at zero that was tied to a target of $500 million in modified Ebitda for fiscal 2015 -- a goal the company said was unlikely to be achieved. The executive team defied the odds and received shares worth $72 million as the award paid out, including $47.9 million earmarked for the CEO.
In October 2014, a third award valued at zero was disclosed, linked to $600 million in modified Ebitda. Roughly 2.4 million shares will be split among about 180 employees if the goal is achieved in 2017, the company said on a conference call in April.
Investors have also been rewarded. Six Flags shares have risen sixfold since June 2010, compared with an 87 percent increase in the S&P 500.
H Partners was founded in 2005 by Rehan Jaffer, an alumnus of activist Dan Loeb’s Third Point LLC. Last year, the fund waged a proxy campaign at Tempur Sealy that led to the ouster of three directors including the then-CEO. Nabi joined the board’s compensation committee and lead its CEO search group. The hedge fund began buying shares of Tempur Sealy in 2012 and now owns 11 percent of the company.
Shortly after the board shake-up, at least five senior executives, including new CEO Scott Thompson, were granted stock tied to posting $650 million in adjusted Ebitda in 2017, a 43 percent increase from 2015. The shares were worth $81 million on the day they were granted but were listed without a value in the summary compensation table since the goal was considered “not probable.”
Nabi joined the board in May 2015. Tempur Sealy shares have fallen less than 1 percent since then. Luther sits on the compensation committee. Rick Maynard, a company spokesman, didn’t provide a comment.
If Tempur Sealy had assigned a value to the grant and included it in its 2015 compensation table, Thompson’s reported pay could have been as much as $68 million. That’s almost triple the $23.3 million that was shown in the table.