Mattel's Barbie-Brained Board Rewards Failure: Graef Crystal
San Diego, May 3 (Bloomberg) -- Yes Barbie, there is a Santa Claus for failed chief executives. His spirit is embodied in the board of Mattel Inc.
Mattel's board decided to honor the incompetent tenure of former CEO Jill Barad by sending her out the door with a severance package that is a monument to failure. For presiding over a 57 percent plunge in the toymaker's stock and a disastrous foray into the software business, Barad was rewarded with goodies worth more than $50 million.
Much of the absurd size of her severance can be traced back to an employment agreement signed when she became CEO on Jan. 1, 1997. For someone who had never run a major company, she extracted extraordinarily generous terms from her board.
But sadder than the millions of dollars paid to get out of that agreement is that the directors felt compelled to ladle millions more on top of that.
You have to marvel at a board that could so willfully inflict so much damage on its shareholders. It's as if having put a bullet in the heart of the collective shareholder body on Jan. 1, 1997, the Mattel board dug up the corpse on Feb. 3, 2000, and shot it all over again.
Fruits of Contract
The first part of Barad's lavish severance stems from the unbounded generosity shown to a new and untested CEO, in the form of a five-year, monthly renewing employment agreement signed when she was promoted to the top job.
Here's what Barad received from that agreement. First, we have five years of salary and bonuses, including both annual and long-term bonuses. That little package comes to $26.4 million.
Note here that Barad is being paid some $20 million in bonuses when, given her performance, she could well have received de nada had she remained CEO. Note also that this lump-sum was not discounted to its present value to take account of the time value of money. So Barad can invest the proceeds and end up earning even more than five years of pay.
That little lapse in putting in a present value clause is particularly galling given that Mattel's compensation committee chairman is John L. Vogelstein, vice chairman and president of E.M. Warburg, Pincus & Co. On the evidence, Vogelstein needs to take some refresher courses in finance before being permitted to resume his trade as an investment banker.
Vogelstein was aided in enriching Barad by the two other members of Mattel's compensation committee: William D. Rollnick, the retired CEO of privately held Genstar Rental Electronics Inc., and Christopher A. Sinclair, who heads Caribiner International, a publicly traded company with a market value that is a little more than half the value of Barad's severance.
Much, Much More
Barad also gets a pension as if she had worked to age 60, though when she was fired she was only 48. That works out to a payment of $709,000 a year for life, although Barad has opted to take a higher payment for 10 years of $1.2 million a year.
Then the board forgave a loan granted to Barad in 1993 so she could buy a home. The nagging question of why she needed a home loan in the first place was not answered.
Barad also got $5 million of life insurance for the remainder of her life -- a sure $5 million payout at some point.
Next, Barad gets to buy all of the furnishings in her office, as well as her leased car, for a total of two -- yes, Two and No/100 -- dollars. Talk about being a thrifty shopper.
Finally, Barad gets a package of perks and bennies, including medical and dental insurance, outplacement services, a country club membership, personal financial counseling and tax return preparation. The benefits continue until she accepts other employment. That's a great incentive to get her off Mattel's dole, don't you think?
Didn't Stop There
All of that ought to have been more than sufficient to have every outside director of Mattel hang his or her head in shame. But what do you know, the board went and gave her considerably more, when it had no obligation to do so.
Remember that home loan that was forgiven? For good measure, the board decided to give her an extra $3.31 million so she could pay the taxes on the loan and the taxes on the taxes. The extra payment had to be increased to cover more than six years of home loan interest which, of course, was also forgiven.
Barad also had received a $4.2 million loan to cover her tax bill on an award of 292,968 free shares of Mattel stock she earned while still the company's chief operating officer. Under the terms of Barad's original employment agreement, that loan was to be forgiven only if Mattel's stock traded at 45 a share or more for 20 consecutive days by May 20, 2000. Well, it didn't quite make that goal.
From Jan. 1, 1997, through Feb. 2, 2000, the day before she was fired, the total return of Mattel shares was a negative 55.8 percent, compared with a positive 99.2 percent for the Standard & Poor's 500 Index. During that period, the El Segundo, California, company's stock fell to 11 13/16 a share from 27 3/4.
There were three consecutive days when the stock did trade at 45 a share or more: March 13, March 16 and March 17, 1998. I guess three days looked close enough to 20 days for the board, because the directors decided not to quibble and forgave the entire loan.
Give Options More Time
Finally, her original employment agreement gave her full vesting on her stock options, the great majority of which were unexerciseable when she was fired, but required her to exercise them within 90 days of her termination.
However, at the time of her discharge, every one of Barad's 6.4 million unexercised option shares was inconveniently underwater, and badly underwater at that. Her strike prices for options granted after Jan. 1, 1993, ranged from a low of $11.58 a share to a high of $44.83 a share, with a weighted average strike price of $34.97 a share. That compares with a closing price on May 2, the day the options should have expired, of 11 15/16.
To make sure those 6.4 million option shares were not lost when the 90-day exercise period ran out, Mattel's board allowed Barad to exercise them all the way to the end of their normal terms.
Time Is Money
The waiver of the 90-day exercise limitation transformed options that were worth at most $5,000 into options that had a present value of about $5 million to $6 million. Mattel shareholders face a dilution of about 1.5 percent in their shareholdings because of their board's leniency.
Of course, the option shares may still be underwater by 2007. But who knows, perhaps Barad's successor can pick up the pieces of what she left behind and make a success of things. Then she can collect millions more in undeserved pay.
Barad isn't getting away scot-free, however. As part of her severance, she is required to offer consulting services to the board for up to 40 hours per month for the balance of this year. Normally, that sort of requirement is purely cosmetic. But, you know, with a board that has acted this dumbly, they just might decide to call her up.
May/03/2000 8:52 |
