Public Home Building CEO Pay — Comp and Circumstance
Compensation committees of public company industry sectors in the cross hairs of the economic crisis–housing being one of them–had their work cut out for them in 2009.
Home building company comp panels were no exception. With all but two of the companies in the sector losing money last year–NVR and M.D.C. Holdings recorded profits–what score card could be used to fairly and appropriately pay chief executives for the job they’re doing?
The “tally sheets” for chief executives among home building enterprises continued last year’s trend, for the most part, of greater emphasis on pay for individual vs. company performance. Comp committees needed to tread a fine line on CEO packages: 1) they needed to reality check them against a broader backdrop of industry decline and shareholder disillusionment; 2) they needed to reward leaders for steadying the course for the previous year; and 3) they needed to “incentivize” chief strategists to do what’s needed to position his company and stakeholders for recovery in the months ahead.
Few companies met earnings criteria to trigger targeted or maximum incentives; but in most cases, individual hurdles that recognized CEO’s capacity to improve balance sheets, retain talent, stabilize operations, and set the tone for recovery were eclipsed.
By and large, our sampling of 10 home building company company executive packages (some of the companies’ proxies post later in the year due to varying fiscal year dates), saw total comp down by 26% versus the same metric last year.
It should be noted that totals in many cases factor in stock and options awards whose face value may be at risk depending on stock price performance during the respective vesting periods, ranging in most cases from three to five years.
Bonuses, per se, were scarce, as only one–well deserving, we may add–CEO got a cash bonus to bring his lowest-of-class base pay up a bit. Interestingly, Paul Saville, CEO of the world-beating NVR, came in with the lowest total comp package, which may explain how NVR stays profitable no matter what.
“Negative discretion” was a term that came up more than once in comp committee comments. In these cases, a CEO either fully or partially validated an incentive or bonus, but, given the broader conditions and micro company performance, had his extra cash either axed or reexpressed in future payouts.
The comp committee goals for 2010 focus increasingly on business unit profitability benchmarks torward restoring total corporate earnings and shareholder return on equity.
Here’s the ranking for 2009 among the 10 home building chieftains whose proxies have posted so far (notes on each individual’s performance follow the chart). . We’ve included three company data points to show the respective peformance on cash generation, debt reduction, and return on beginning year equity from a change in basis points from 2008 to 2009:
Source: Big Builder analysis of company proxy data
Here are some “notes” we compiled regarding each CEO’s tally sheet guidelines:
Ian McCarthy, Beazer
• Base salary freeze, … no base salary increase since 2005… remain frozen in 2010
• Incentive compensation, “2006 Bonus Plan” invoked for Merrill & Khoury, but not Ian, altho Comp Committee lauded “McCarthy’s leadership and decisive action, during an extraordinarily tough business environment”
• $4.6 million stock & option comp at risk, tied to stock performance
• McCarthy elected not to receive equity-based longterm incentive
• 2010… balance sheet improvement & economic profit account
Ian Cockwell, Brookfield
• Brookfield pegs lower-than-peers base salary, and less difference between Cockwell comp and his management team
• Key performance: generated net cash from operating activity of $137 million, acquired 3,200 lots, completed entitlements for 1061 lots, completed $250 million equity rights offering and ended year with net debt to cap ratio of 42% vs 71% at dec 31, 2008
• Awarded 1 million options, Feb. 2, 2009 with a grant date fair value of $1.6 million… Options vest at 20% per year over a five year period.
Don Tomnitz, D.R. Horton
• Performance noted includes top of class market cap, leadership in home closings, cash flow generation of $1.1 billion in 09, reduction of $471 million in debt, and reduction of $269 million in SG&A expense
• Due for a big bump in 2010 base salary from $300,00 to $900,000, first salary increase since 2001
• $2.3 million in non-equity annual incentive based on meeting partial pre-tax income and full operating cash flow and SG&A containment hurdles
• SG&A was tier one – 14.5%… “negative discretion” tempered bonus from possible $4 million to $2 million
• For long term comp… Tomnitz gets “performance units” based on stock price, return on investment, and net sales gains percentage relative to peer group performance…
Ara Hovnanian, Hovnanian Enterprises
• Potential bonus – pegged to net debt amount component – limited to less than 50% of fiscal 2008 bonus…Ara met criterium for max $699,500 bonus, based on HOV net debt being $1.8 billion or less.
• 750,000 stock option grant, representing 10% increase in grant date fair value from stock option award in 2008 ($1,380,000 vs. $1,256,250)
• $250k perqs in the “All Other”
• Pearl Meyer & Partners – comp analysts — $2,059,121 is total comp, less at-risk stock price performance based grants…
Jeffrey Mezger, KB Home
• Comp committee says of Mezger: “Unique and critical role in setting and directly overseeing the implementation of our overall operating strategy and significant related strategic initiatives, his broader responsibilities for driving our overall financial and operational performance, and his wide-ranging internal and external duties across all areas of our business.”
• Performance metrics: 09 pretax loss, excluding inventory impairments and other non-recurring items, of $67.2 million and 09 operating cash flow of $349.9 million. i.e. Maximum payout… Mezger’s $4 million reduced to $2,750,000.
• Rolled out Open Series, improved profit margins, maintained balance sheet strength and flexibility, positioned KB to achieve future growth.
• Stock and option awards are stock price performance based, $4.4 million.
Stuart Miller, Lennar
• Achievement metrics: reduced number of associates by more than 70%, reduced Company’s maximum recourse exposure related to indebtedness of unconsolidated JVs by more than 80%, changed product to reduce cost, accumulated more than $1.3 billion of cash.
• Stuart got 500,000 restricted stock awards, 25% of which were vested, worth $1.6 million in 2009 cash.
Larry Mizel, M.D.C. Holdings
• Missed on lofty Stockholders’ Equity Goal, but easily achieved performance goal, achieving a positive EBITDA for the fiscal year ending Dec. 31, 2009, netting a $2.5 million cash bonus and 60,000 shares of restricted common shares (with a grant date fair value of $1,996,800.
• Other performance-based metrics included: minimum operating revenues or sales of homes of $950 million, establishing a land options and/or purchase program with 3rd parties, net operating profit for HomeAmerican Mortgage Corp., and cumulative positive cash flow.
Paul Saville, NVR
• Froze his own base salary at 2006 level for third year running
• Sees “retention risk” as a possibility, so seeks new equity incentive plan
• Annual $400,000 bonus based 80% on consolidated pre-tax profit, and 20% on new orders (net of cancellations)… 50% of his base salary.
Larry Nicholson, Ryland
• Promotion from president to CEO worth $150,000 base salary raise
• Met annual bonus incentive program hurdle of $200 million or greater in net cash provided by operating activities in 2009, worth $1,500,000
• Received 116,482 shares of restricted stock at promotion, and 106,000 stock options at promotion
• Met long-term incentive goal relative to home builder peer group stock price performance.
Bob Toll, Toll Brothers
• Met condition for full “plan year individual performance” bonus at full $5.2 million amount—which was hitting greater than $1.2 billion in consolidated revenue for 2009—but comp committee nixed bonus in favor of long-term incentive compensation.
• Other performance notes: increase in net contracts during 2nd half 2009, maintenance of strong balance sheet, selection by Institutional Investor as top CEO in the home building industry
• Stay tuned for a Toll compensation recovery in 2010 and beyond.
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