Sprint Filings

A few days ago, when I touched upon Sprint's payments to former Executives, I promised to look at how the objectives of compensation and retention do not necessarily match the results. And I almost always sometimes keep my promises. So let's take a look, shall we?

One factor in compensation, eloquently titled "Retention Programs," is listed in the 2009 proxy. Here's the money quote (not to be confused with money shot; I hear that's slightly different...) from page 38: (bold is my emphasis)

The Compensation Committee periodically evaluates whether we are at risk of losing the services of any of our named executive officers and other key personnel who we believe are critical to the success of our business. To ensure that we retain the employment of our named executive officers and other key personnel who we believe may be at particular risk of voluntarily terminating employment, the Compensation Committee from time to time awards cash bonuses, RSUs or stock options to further our retention objectives and promote a commonality of interests with shareholders.

So, the goal of the retention program is to provide some type of bonus to "named executive officers and other key personnel who we believe may be at particular risk of voluntarily terminating employment" because, doing so, promotes "a commonality of interests with shareholders." Beautiful! Well stated too, I might add. These people are key personnel in the company, they are in high demand, they have amazing skills that cause other companies to viciously seek out their services, and losing them would just be disastrous to the shareholders. That makes perfect sense to me. Yet, let's keep reading (again, page 38 and bolding is mine):

During 2008, the Compensation Committee awarded Mr. Arendt 20,824 RSUs that were scheduled to vest on June 9, 2009. This award vested upon Mr. Arendt’s involuntary termination without cause on November 14, 2008 and is included in the Grants of Plan-Based Awards table. During 2008, the Compensation Committee also awarded Mr. Kennedy 29,462 RSUs that were scheduled to vest on June 9, 2009. This award vested upon Mr. Kennedy’s involuntary termination without cause on December 19, 2008, and is included in the Grants of Plan-Based Awards table.

Uh huh. So, umm, let me see if I understand this. Mr. Arendt was awarded 20,824 Restrictued Stock Units (essentially shares of stock, in this case) because he was at high-risk for voluntarily leaving Sprint. Yet, during the same year he received those RSUs, he is involuntary terminated. But he still gets to keep his bonus. A bonus in which the sole intent was to keep him from leaving! Not only that but his RSUs vest (i.e. they are convertible to common stock) on the day he was fired! Hahaha! Brilliant! Sprint paid out, if the stock were held through today, roughly a $90,000 bonus ($4.29 share x 20,824 shares) to an executive whom they terminated because they were afraid he voluntarily leave! You know, leave at a cost of $0 to Sprint and Sprint shareholders.

Mr. Kennedy's situation, of course, is no better. He received 29,462 RSUs (that's over $125,000 in today's prices if you're keeping track) as a retention bonus and then was subsequently terminated in December 2008. Tell me again how this lines up to shareholder value?

If I were one of these gentlemen and received such a payment, I'd be happier than Michael Jackson on Boy Scout Day at Disney World. Alas, I am not. So at this point, in order to dull the pain, I need to go take some Zoloft (for my depression), wash it down with some Valium (for my anxiety), and pop some OxyContin (they taste like candy).

As such, here are the official 2008 salaries of the named executives in the title of this post. Their "official" salaries are based on what the options were worth on the day each was involuntarily terminated. As of today, the stock price (of the RSUs that were granted) has gone down in Mr. Angelino's case but up for Mr. Kennedy and Mr. Arendt. As I mentioned in a prior post, if the stock had not tanked then their overall pay would have been significantly higher. That can be viewed in this table. Note, all tables shown come directly from the proxy.

• Mr. Angelino, former President of Sales and Distribution. Terminated on January 25, 2008 - $3,535,498

• Mr. Arendt, former Acting Chief Financial Officer. Terminated on November 14, 2008 - $1,742,366
  

• Mr. Kennedy, former General Counsel and Corporate Secretary. Terminated December 19, 2008 - $2,627,179

It has been said that "a fish rots from the head" and nowhere is this more evident than at Sprint. That subject, namely the Board of Directors, will be explored fully in another post. Yet one symptom of this failure will be explored now; namely, Sprint's payments to former Executives. You may ask, "how is this a failure? They were paid to do a job and did it just like you and I." Yet, their job, ultimately, was to enhance shareholder value; these former Executives, along with the Board, have decimated shareholder value. To reinforce that failure by providing large payouts upon involuntary termination is ludicrous. But, I am getting slightly ahead of myself. Let's take a look...

What, exactly, makes up Executive Pay?

This information, from page 30 in Sprint’s latest proxy filing, should be quite simple. Please note this does not include any other forms of compensation such as 401k matching, health benefits, etc. There are 3 main components for Executive pay (I quote from the proxy filing where applicable) :

1. Base Salary - fixed pay in the form of cash
2. Short Term Incentive (STI) - based on near-term objectives and paid in cash
3. Long Term Incentive (LTI) – “Non-qualified stock options and time-based RSUs, as well as performance-based RSUs granted under the ENTI.”

Items #1 and #2 really are straight-forward. However, let’s take a closer look at the LTI. The ENTI referenced above stands for “Enhanced Near-Term Incentive“. What does that mean? Let’s have the proxy filing explain:

“To further the focus of senior management on these critical objectives, the Compensation Committee allocated one half of each participant’s 2008 LTIC plan targeted opportunity, which we refer to as the ENTI, to be in the form of dollar denominated performance units, or Performance Units, payable in RSU awards, based on our actual performance in the second, third and fourth quarters of 2008 using the same performance objectives as the second, third and fourth quarter 2008 STIC plan. The 50% portion of each 2008 LTIC plan participant’s targeted objective to be made in the form of Performance Units were equally allocated to each of the second, third and fourth quarters of 2008 under the ENTI.”

In other words, 50% of the long-term incentive plan was shifted into a shorter-term incentive plan (called the ENTI) that was to be payable in Restricted Stock Units. So, what is a RSU? Quite simply, it is a grant of company stock although no stock is issued at that time. After the recipient of a unit satisfies the vesting requirement, the company distributes shares or the cash equivalent of the number of shares used to value the unit.

So, to make this perfectly clear, the ENTI shifted long-term stock options and RSUs into short-term RSUs that vest 6 months after they were granted. These RSUs were granted based on the STI’s objectives at the end of each the 2^nd, 3^rd, and 4^th quarters of 2008. The ENTI was, essentially, a STI on top of the STI but only for Executives.

If the LTI is supposed to be a long-term incentive designed to align executive values with shareholder values, why was part of the LTI changed to the shorter-term ENTI and then implemented? There was already a short term incentive plan!

The rest of the LTI for 2008 (the other 50% of the LTI plan) included stock options that will vest “in equal amounts on February 11, 2009, February 11, 2010 and February 11, 2011 and have an exercise price equal to the closing price of a share of our common stock on the date of the grant.”

Now that that ugliness is out of the way, let’s look at the pay received by some of the illustrious former executives at Sprint.

So, what did they make?

This, like everything else, isn’t quite as simple as it appears. A picture, though, is worth a thousand words.

(click the picture to enlarge)

To be completely fair, this table overstates their pay due to the simple fact that the stock price collapsed and the total value listed in the table was the total value at the time the options and stock were granted. Of course, their decisions directly attributed to this decline in the stock price so it is more than reasonable their pay would also decline. However, by the same token, if the stock price had gone up in 2008, they would’ve made more than that what’s listed in their respective total columns.

Either way, don’t cry too much for them as here is what they took home at the end of December 2008 (based on what their options were worth on the date they were terminated; these figures come directly from Sprint's proxy filing).

• Mr. Saleh, former Chief Financial Officer and interim Chief Executive Officer - $7,606,225
• Mr. Arendt, former Acting Chief Financial Officer - $1,742,366
• Mr. Kennedy, former General Counsel and Corporate Secretary - $2,627,179
• Mr. Angelino, former President of Sales and Distribution - $3,535,498

That is over $15.5 million in severance for 4 people. In the next few days I will detail out their pay and comment on how the stated objectives of Executive Compensation do not match the results. Stay tuned...