At Six Flags, executive compensation is the real thrill ride

Awards tied to lofty goals are worth nothing—or millions A practice “more common among hedge funds” hits the C-suite

Lavish executive pay packages tend to attract attention. But a few companies are using a little-known technique that keeps potential payouts under the radar. Six Flags Entertainment and Tempur Sealy International have awarded incentive stock grants to top bosses and valued them at zero, because the grants come with performance targets they said were unlikely to be met. Even so, Six Flags reached some of those goals, resulting in windfalls since 2011 worth tens of millions of dollars for James Reid-Anderson, the chairman and former chief executive officer. Tempur Sealy’s managers face their first target in 2017.

“It’s very unusual for a compensation committee to grant a performance award that really has no hope of being earned,” says John Roe, a managing director at a unit of Institutional Shareholder Services, which advises large investors on proxy votes.

Even equity awards considered valueless are disclosed in regulatory documents, but they can be omitted from an executive’s pay figures listed in the summary compensation table in proxy filings. That number is closely scrutinized by investors and governance experts. The pay practice is rare: No company in the S&P 500-stock index that’s disclosed 2015 pay awarded zero-value stock that year.

The largest investor in Six Flags and Tempur Sealy is the hedge fund H Partners Management. The uncommon pay practice was put in place after H Partners amassed stakes in the companies, and the idea is an import from the hedge fund world. “Giving a big equity award upfront is much more common among hedge funds and private equity firms than public companies,” says Steven Hall Jr., a consultant at compensation firm Steven Hall & Partners.

Six Flags disclosed the first of three zero-value grants after emerging from bankruptcy in April 2010. H Partners had become the largest shareholder after gobbling up Six Flags’ debt during its reorganization. Reid-Anderson was named the new CEO, and he and five other

managers were awarded shares that would vest only if the company reached $330 million in adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2011. That was 12 percent above the number posted in 2010.

According to a Six Flags regulatory filing, those stock grants were excluded from summary pay figures because the goal was “not considered to be probable of being earned.” Estimates of what the executives could take home if the award vested were disclosed in a footnote. Six Flags exceeded the target, and the six executives received shares worth $49.6 million. Reid-Anderson got $34.5 million of that.

The practice has helped improve the company’s performance, Jon Luther, chairman of the Six Flags compensation committee, said in an e-mail. “The board believes longterm aspirational targets are a good way to stretch management to achieve certain goals—and that approach has been highly successful,” he said. Six Flags’ shares have risen sixfold since June 2010, compared with an 87 percent increase in the S&P 500.

Luther said reporting of the pay formula was transparent and followed legal and regulatory requirements. H Partners didn’t respond to requests for comment.

In August 2011, Six Flags disclosed a second stock award valued at zero. The executive team again defied the company’s predictions, met the goal, and received shares worth $72 million when the award paid out, including $47.9 million earmarked for Reid-Anderson. A third zero-value award disclosed in 2014 will be split among about 180 employees if the next goal is achieved in 2017.

H Partners waged a proxy battle at Tempur Sealy last year that led to the ouster of three directors including the then-CEO. Shortly after the board shake-up, five senior executives, including new CEO Scott Thompson, were granted stock awards tied to increasing adjusted Ebitda by 43 percent in 2017 from its 2015 level. The shares were listed without a value in the proxy because the goal was considered “not probable.” Executives will earn part of the award if the target is met by 2018. A company spokesman didn’t provide a comment.

If Tempur Sealy had assigned a value to the stock 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 shown on the table. But to get there, of course, he’ll have to prove his own company’s forecast wrong. Anders Melin

The bottom line Companies can value stock grants at zero if they’re linked to improbable goals. But improbable doesn’t mean impossible.