Simon Property Group Inc. is firing back at a corporate governance advisory firm that recommended Simon shareholders vote against a $120 million retention award for CEO David Simon.
Institutional Shareholder Services Inc. argues in a 20-page report issued May 1 that the employment agreement's incentive award "lacks performance conditions" and creates the potential for "pay-for-failure" since it requires only that Simon remain at the company, not that he continue performing at a high level.
Simon, 50, would have to remain as CEO of the world's largest real estate company through 2019 to collect the entire $120 million in special stock awards; he's entitled to collect the payout in thirds starting in 2017. His new employment agreement, signed in July, also calls for Simon to earn a minimum $1.25 million per year, a targeted cash bonus of double his salary, and annual stock awards worth at least $12 million.
That adds up to $30.8 million per year, ISS wrote, a sum that's about three times the median pay for "similarly situated peers." ISS said the board makes a "strong case" that Simon's service is vital to the company's future, but concerns remain.
"While currently the company's performance may warrant high pay, the bulk of the opportunity is subject to no performance conditions and the board has no discretion to adjust its incentive approach for the next eight years," ISS wrote. "It cannot add performance conditions to the retention award or adjust the mix of equity and nonequity incentives."
ISS also recommends shareholders vote against adding 6 million additional shares to an existing stock incentive plan for top Simon executives, but it suggests votes in support of the company's slate of board members. The say-on-pay vote, scheduled for the company's annual meeting May 17 at its Indianapolis headquarters, is advisory only and nonbinding.
In a letter to shareholders, Simon said ISS' recommendation ignores the company's size, growth and performance compared to peers.
The letter notes several performance metrics the company attributes to David Simon: a 10-year return of 597 percent compared with 58 percent for the Standard & Poor's 500; the highest investment grade rating among public U.S. retail real estate firms; and a jump in equity market value during Simon's tenure from $2 billion in 1995, when he took over as CEO, to $57 billion on May 3.
The company this year joined the Standard & Poor's 100 Index, a listing of the nation’s largest and most established companies, including Apple, Coca-Cola and McDonald’s.
"Our long-term record of creating stockholder value leads our industry and is among the best in all of corporate America," the company said in its shareholder letter, a copy of which it filed with the SEC. "This value creation is directly and demonstrably a result of David Simon's leadership. He is recognized as the best CEO in our business and that is why your board of directors believed it was critical to retain [him] for the foreseeable future."
The company noted that more than 90 percent of David Simon's annual target compensation will continue to be "at-risk" and realized only if Simon sticks around and the company's stock price continues to rise.
ISS classifies the $120 million retention award as part of Simon's 2011 pay, for a total of more than $137 million on the year, giving him a payday that's 12 times the median level of peer CEOs.
But Simon disagrees with the firm's intepretation, saying it will account for the award over the eight years of the contract.
The company's compensation committee, in explaining the rationale for the award, said David Simon had been offered jobs in other industries that would pay him far more than he had been making as leader of the company founded by his late father, Melvin Simon, and uncle Herb Simon.
The committee concluded its rationale for Simon’s special award by stating, “The decision was subjective and not determined by reference to any peer group or formula.”
That's a problem in the eyes of ISS.
"The reason given by the compensation committee for the retention award is the board's confidence that Mr. Simon's leadership is necessary for the future success of the company," ISS wrote. "It follows that the future success of the company should be a condition for the significant payment that is required to secure his continued service."