SKARBECK: Executive pay packages must reflect performance

May 19, 2012

Ken Skarbeck InvestingBy now, Simon Property Group shareholders will have weighed in on a controversial executive pay plan for CEO David Simon. Last July, the company’s board awarded him a $120 million retention bonus, to be paid out over eight years. Institutional Shareholder Services, a consulting group that advises investors on corporate governance issues, urged shareholders to vote against the award at the May 17 annual meeting, saying it is not tied to business performance.

When it comes to corporate governance, my firm has been roundly critical of the unending escalation in executive compensation. Therefore it may surprise some readers that, in this case, I concede that a big number is justified for CEO Simon. Although stakeholders may differ over what the absolute level of pay should be, no one can debate Simon Property’s exceptional performance under David Simon.

In a May 7 regulatory filing, the company laid out its case to support the CEO pay package. Simon Property’s total stockholder return over the last 10 years totaled 597 percent, ranking in the top 7 percent of S&P 500 companies. Under David Simon’s watch, the company’s market value has increased from $2 billion in 1995 to $57 billion today.

We generally dislike the “relative pay” line of reasoning commonly used to defend the high paychecks of mediocre CEOs. Reading annual proxy statements, it’s as if every CEO hails from Lake Wobegon, with the corporate spin trying to paint each executive’s performance above the peer group average.

With that in mind, however, it can be argued that David Simon has been underpaid for years relative to his company’s business performance. Before 2010, he averaged well under $3 million per year and even declined bonuses from 2003 to 2005. Now he stands to make up that ground, collecting $30 million per year over the eight-year period.

Another argument often floated to shareholders is that an aggressive pay package is needed to retain a company’s CEO. We view this with suspicion. In most cases, you want a business where the executive bench is deep enough that a candidate could step in and replace the CEO without a loss of business continuity.

To think that the presiding CEO is irreplaceable or would leave the firm in a tantrum if he/she doesn’t get a massive pay raise seems juvenile. Shareholders might find the company is better off without an imperial CEO whose demands are outrageous. And, the pool of capable executives willing to work for rational paychecks seems to be plentiful.

Again, perhaps David Simon is an exception. In our view, his value to Simon Property has been demonstrated by an ability to negotiate value-added acquisitions for the company. Take, for example, the recent acquisition of a European property from Bank Paribas: Simon Property got an attractive price from a French bank desperate to unload assets.

And even more important, David Simon has shown that he is willing to walk away from deals if his price isn’t met. In May 2010, Simon withdrew the company’s $6.5 billion offer to buy Chicago-based General Growth Properties out of bankruptcy, unwilling to boost his price. That is the kind of discipline you want in a CEO.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebaran.com.


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