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

Page 63 of Sprint's 2009 proxy filing, under the header of Mr. Saleh, states "On January 25, 2008, we terminated Paul N. Saleh’s, our former Chief Financial Officer, employment without cause. The following table and narrative describe the payments Mr. Saleh is entitled to receive due to his termination." (See table taken directly from the proxy. Click to enlarge)



Is $7,606,225 a fair severance for someone was "terminated without cause" (get used to seeing those words) 25 calendars into 2008? Over $7 million dollars for someone who was with Sprint (Nextel, at that time) since September 2001? I contend that in Sprint's current financial and operational situation that such a payment is, shall we say, more than fair especially considering his compensation was over $6 million a year in both 2006 and 2007 . Of course, my opinion in this matter (or virtually any matter) does not matter. But, I would like to highlight a few things regarded Mr. Saleh's package:

• If not for the change in the stock price in '08 (it went down faster than a Las Vegas call girl...not that I, um, would know), some accounting mumbo-jumbo, and various vesting periods for prior stock awards, his total compensation for the 2008 year would have been $13,645,385 (page 42 of the proxy) .
  
• He received a $250,000 one-time payment on March 15th, 2008 in recognition of his service as interim Chief Executive Officer. This payment came almost two months after he was terminated.
• He can possibly receive a Short Term Incentive (STI) payment through the beginning of 2010. Not a bad deal if you can get it.
• He gets continued participation in the medical and welfare plans for a period of two years

Ultimately, unless you are his accountant, there is no way to find out Mr. Saleh's exact total compensation as his stock awards and options are variable and dependent on Sprint's stock price. His stock options have different vesting periods, probably different strike prices, and he may or may not have sold some or all of them.

Lest you think Sprint did not get anything out of providing this package, au contraire! In exchange for his severance, Mr. Saleh did actually have to meet a couple conditions.

1. He executed a release in favor of Sprint and entered into a lifelong confidentiality agreement (take that, Verizon!).
2. He entered into a "non-competition" and "non-solicitation provisions" for a period of 24 months after his termination.

Whew! Sprint really took it to him during those negotiations. Just so you don't get the wrong idea, I don't begrudge Mr. Saleh for taking what he can get (earned?) from his employer; in fact, I am quite jealous. After all, he's probably laying on a golden beach somewhere sipping Mai Tai's and I'm stuck here blogging about him. Well done, Mr. Saleh, well done.

Among the 56 Sherlock Holmes stories written by Sir Arthur Conan Doyle one in particular, Silver Blaze, has caught my attention. In the story, a prize race horse is stolen in the night and the lack of the dog barking the night the horse was stolen led Holmes to deduce that the culprit was not a stranger but someone that the dog knew and knew well.

How is this relevant to Sprint? Simple. The lack of information regarding Kathy Walker's severance in the latest proxy filing is, by its very absence, quite telling. So, what does it tell us? To me, it says that Sprint is trying to hide her full severance package. Let me explain...

What is a proxy filing (SEC form 14A)?
A proxy statement is a document which is intended to provide security holders (i.e. shareholders) with the information necessary to enable them to vote in an informed manner on matters intended to be acted upon at meetings, whether the traditional annual meeting or a special meeting. Typically, a security holder is also provided with a "proxy" to authorize designated persons to vote his or her securities in the event the holder does not attend the meeting. It also, legally, must contain information about top officers and their compensation. That is why you see information regarding Dan Hesse's, Bob Brust's, and Steve Elfman's compensation, among others.

So, why isn't Kathy Walker included?
As best as I can tell, Ms. Walker, who was Chief Information and Network Officer is more than qualified to be labeled as an Executive Officer. And, in fact, she was labeled as such on Sprint's 2008 proxy filing. So, why the change from 2008 to 2009? At this time, I can't say for absolute certainty why she was not included. But, what can I say is this: Sprint's 2009 proxy filing was filed on March 30, 2009. Ms. Walker's "termination without cause" was announced on January 23rd, 2009. However, her termination was not effective until March 31st.

So, 1 day after the proxy filing was, officially, Ms. Walker's last day worked. Is this not highly coincidental? If she had been terminated on the day of the announcement, would Sprint have been legally required to include her severance package? I'm not a lawyer (but I did stay a Holiday Inn Express once) but I believe (but am not positive) Sprint would've had to have included her severance package.

Oh, and there is one other slightly curious fact. According to SEC filings, about one month before her termination, Ms. Walker agreed into an amended contract with Sprint. You can view the announcement here. Why would the Board change her contract if her she were to possibly be terminated soon? What were the changes to her contract? I haven't been able to find that information.

Either way, the fact that Ms. Walker is missing from the proxy filing is telling by its very omission. We already have the data for 9 current and former Executives in the 2009 filing so why exclude her? Shareholders have the right to review this data and it's time Sprint made it publicly available.

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...