Buyout Shops Stay True To Pay-For-Performance Creed

Buyout professionals, thanks to their 20 percent profit share, know something about alignment of interest with their backers. A proprietary analysis by Buyouts Magazine finds that management teams have also embraced the philosophy.

All told, Buyouts looked at the compensation of CEOs, CFOs and COOs involved in 10 of the largest LBOs of 2006; because they issued publicly-traded debt, all 10 report the earnings of their highest-paid managers, just as any other public company would. According to our analysis, a large part of the compensation for portfolio company managers comes in the form of stock and option awards, as well as in non-equity-based incentives tied to performance.

Appropriately, the compensation of CEOs in our sample tends to be tied to performance to a greater extent than it does for executives further down the totem pole. The seven CEOs that served with their respective companies for all of 2007 had an average of 68 percent of their total compensation tied to company performance in the form of stock and option awards and other non-equity incentives, excluding annual bonus. By comparison, the six CFOs that fit that profile had an average of 62 percent of their compensation tied to performance, while the two COOs had an average of 49 percent of total compensation tied to performance.

Jeff Clarke, who in was recruited by The Blackstone Group and Technology Crossover Ventures in Sept. 2006 to serve as CEO of Travelport, led our sample as the highest-paid executive, earning more than $42.6 million in total compensation in 2007. More than 94 percent of that figure came from performance-based pay, including more than $35.0 million in stock awards and a $5.2 million non-equity incentive bonus. That made Clarke the executive in our sample to have the largest portion of his total compensation tied to performance.

Michel Mayer, CEO of semiconductor company Freescale Semiconductor Inc. since 2004, was the second-highest compensated executive in our sample. Mayer walked away from 2007 with about $19.0 million in total compensation, including more than $16.5 million (87 percent of his total pay) in performance-based stock awards. Freescale was acquired in Dec. 2006 by Blackstone Group, The Carlyle Group, and Permira.

The third, fourth and fifth highest compensated executives in our sample also had above-average portions of their total compensation tied to performance. These include Nielsen Co. CEO David Calhoun, whose 2007 compensation of $18.7 million was tied nearly 80.0 percent to performance; Travelport’s CFO, Michael Rescoe, whose $13.9 million for the year was 92.6 percent tied to performance; and William Aldinger III, president and CEO of Capmark, whose $8.3 million in compensation last year was 81.8 percent tied to performance.

That such a significant piece of an executive’s compensation is tied to performance certainly speaks to the desire of general partners to generate substantial returns on their investments. Comparatively, even the substantial base salaries and annual bonuses paid to these managers seem proportionately small. The median 2007 base salary for CEOs in our sample came out to an even $1 million, while for COOs and CFOs it was $842,936 and $500,000 respectively. In terms of annual bonuses, CEOs were awarded a median of $900,000 in 2007 and CFOs were granted a median bonus of $430,000. Data regarding the median bonus of COOs in our sample was determined “not meaningful” given that only one CFO received a bonus. Noteworthy is the wide spread in base salaries and annual bonuses in our sample due to factors such as company size and issues relating to the compensation philosophies of the different companies in our sample.

Another finding from our analysis: Buyout firms often pay up when recruiting new managers to the team. For example, when David Calhoun was hired away from his post at General Electric in 2006 to serve as CEO of The Nielsen Co., the buyout firm owners made his decision to leave GE a little easier by paying a $10.6 million signing bonus. And in 2007, Eric Feldstein was awarded a $1.0 million “retention payment” for sticking around as CEO of Apollo Management-owned GMAC LLC—a post he had only been in since Nov. 2006.

Some other notable perks of landing a job as executive of a multi-billion-dollar portfolio company include:

• $2.5 million signing bonus (Brian Cornell, CEO, Michaels Stores)

• $868,521 allocation for private / business use of corporate jet (Alvaro de Molina, COO, GMAC LLC)

• $1.5 million signing bonus and $189,977 housing allowance bonus (Jeff Clarke, President & CEO, Travelport)

• $7,631 subsidy for any model GE vehicle and $10,000 a year for New York City parking fees (Eric Feldstein, CEO, GMAC LLC)

• $18.8 million in compensation for stock and options forfeited upon leaving former employer (David Calhoun, Chairman & CEO, Nielsen)

• $15,000 annual compensation in lieu of foregone automobile benefits at previous employer (Steven Delarge, CFO, Momentive Performance Materials)