Wednesday, June 20, 2007

Bloomberg Opinion: Yahoo's Semel Pays for Performance With Options: Graef Crystal

Graef Crystal is one of the most respected voices on executive compensation in the world. I have followed his works since the late 90s. He came out today with an opinion on Terry Semel's pay, which is below.

By Graef Crystal

June 20 (Bloomberg) -- Terry Semel, who stepped down as chief executive officer of Yahoo! Inc., is one of a handful of U.S. CEOs who really understand what pay-for-performance is all about.

In moving from CEO to non-executive chairman on June 18, Semel gave back to the company 4.5 million of the 6 million- share stock option he received in May 2006. He will get no severance pay, either.

That's the way performance-based pay is supposed to work, which almost all U.S. CEOs simply don't get. To them, if something goes wrong, it is the fault of exogenous events, like higher oil prices or the decisions of the Federal Reserve. They believe they are entitled to high pay during bad times as well as good.

Although Semel's long-term performance had been excellent, the last year to June 18 presented a different picture, with total return dropping to negative 7.4 percent at a time when the return on the Standard & Poor's 500 Index was 25 percent.

More recently, Semel wasn't criticized just for his performance. His pay became an issue, too, with some proxy advisory services urging shareholders to withhold their votes from the three directors who comprise the company's compensation committee.

Why the uproar? On May 31, 2006, Semel was handed the monstrously large option covering 6 million shares and carrying a strike price of $31.59 a share. Yahoo declared the option to have a present value at grant of $63 million. I scored the option a bit higher, $66 million, but who's quibbling.

What made that option all the more galling was that between Dec. 30, 2005, and the date of grant the stock had dropped 19 percent.

Other Things

There are, however, three other things that should be considered when looking at Semel's compensation:

* His 6 million-share option grant carried with it a decision not to grant him any more stock options during a three- year period. So if you amortize that $66 million of present value over three years, the figure drops to a much lower $22 million.

* From 2003 on, Semel hadn't taken his annual bonus in the form of cash. Rather, he was, in 2006, given additional stock options -- 1.3 million.

* Then at the same time he took that giant stock option in May 2006, Semel agreed to cut his base salary to $1 a year from $600,000.

So, Semel effectively went on an all-options diet. Since a stock option is the riskiest form of executive pay, he had one of the most risky pay packages among U.S. CEOs.

Still, even if you charge only a third of that monster option grant to his 2006 compensation, Semel would have turned up in the overpaid column.

Total Pay

Looking at the total pay received by 533 other U.S. CEOs running companies with market values of $4 billion or more, Semel's total pay (after counting only a third of the options' present value) of $34 million positioned him 106 percent above the average. That's after adjusting the average for differences in company size, company total return in 2006 and the degree of risk in the pay package.

You certainly can't criticize Semel for what has come to be known as opportunistic grant timing. The stock didn't take off after the May 2006 grant was made. It declined, and it kept declining. On the day of his resignation, all 6 million option shares were underwater.

Now, when your typical U.S. CEO steps down, he is showered with money, even though the reason for the departure is lousy performance. There is salary and bonus for a number of years, and all the free and option shares that haven't yet vested miraculously become vested.

No Cushion

Semel worked with no employment agreement to cushion his fall, and Yahoo spokeswoman Joanna Stevens said Semel returned to the company ``anything not vested.''

According to the terms of his May 2006 option grant, as detailed in the company's proxy statement filed on April 30, 25 percent of Semel's 6 million option shares vested on May 31, 2007, and the remainder were returned to the company.

As non-executive chairman, Stevens said that Semel will be paid just like any other outside director of the company. In 2006, outside directors received free shares worth $165,000 and a stock option with a grant-date fair value of $159,000.

Semel should be the role model for other CEOs who find themselves in a similar situation.
I take particular offense at the fun poked at him just a week ago by California Governor Arnold Schwarzenegger. Speaking at a dinner with Semel in the audience, Schwarzenegger pointed out that he gave up his multimillion-dollar movie career to work for no salary as governor. Then he added: ``Unlike Terry.''

When Schwarzenegger was in his prime as a movie star, I very much doubt that he worked for a percentage of the net. My guess is that he worked for a percentage of the gross, something for which all movie stars lust. Working for a percentage of the net could cause you to earn nothing if your movie is a turkey.

Well, governor, Terry Semel has always worked for a percentage of the net. And yes, his latest movie has indeed proved to be a turkey, though probably unlike you, he didn't walk away with a pile of bucks.

(Graef Crystal is a columnist for Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Graef Crystal in Las Vegas at at . Last Updated: June 20, 2007 00:44 EDT

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