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

Bloomberg Businessweek (North America) - - Contents -

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.

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