Executive Compensation Dips Along With Performance

Those are the main findings of Buyouts‘s annual look at executive compensation of CEOs, CFOs and COOs working at 10 of the largest companies acquired by LBO shops in 2006. Because these companies issued publicly-traded debt, they report the earnings of their highest-paid managers in period financial statements filed with the Securities and Exchange Commission (see accompanying table for details).

All told, CEOs in our sample saw their median total compensation fall almost 27 percent in 2008, to $5.2 million from $7.0 million in 2007, on average. Meanwhile, CFOs and COOs both took an average hit of 31 percent to their respective median total incomes last year, notching them down to $1.8 million and $3.3 million, respectively.

Executive suffering was perhaps best illustrated at Apollo Management’s Momentive Performance Materials Inc., a Albany, N.Y.-based specialty materials maker that reported an operating loss of $836.6 million in 2008, down from operating income of $82.2 million in 2007. The company, which handed out bonuses and performance-based pay to executives in 2007, deemed that no such payments would be administered in 2008. Momentive Performance CEO Dr. Jonathan Rich and CFO Steven Delarge were the lowest compensated executives in our sample among their peers.

Perhaps not surprisingly, given falling stock valuations, the average percentage of income tied to company performance—which includes stock and option awards and other non-equity incentives, excluding annual bonus—fell across all three titles. To better align interests, general partners traditionally like to keep executive compensation at their portfolio companies tied tightly to performance.

Indeed, among the three highest paid executives that served in their respective posts for all of 2008, all saw year-over-year declines in the amount of their compensation tied to company performance, while two of them also saw reductions in the amount of total compensation earned for the year.

Jeff Clarke, the CEO of travel services company Travelport Ltd., is one such executive. Clarke was recruited to his role in September 2006 by The Blackstone Group and Technology Crossover Ventures, following the company’s $4.3 billion buyout a couple months earlier. In 2008, Clarke earned total compensation of $5.4 million, 62 percent of which was tied to performance based pay. The previous year, Clarke was the highest-compensated executive in our sample with $42.6 million in total pay, 94 percent of which was performance-based. Thanks to cost cuts and synergies, Travelport was generally able to weather 2008’s decline in travel demand, reporting adjusted EBITDA of $716 million, compared to $688 million the year before. Revenues, however, fell to $2.5 billion from 2.8 billion in 2008.

David Calhoun is another notable buyout-backed chief executive that saw a decline in total compensation, while his percentage of performance-based pay also declined. Calhoun took his post at the helm of Nielsen Co., a media services provider, in September 2006, following the company’s $9.7 billion buyout by a group including Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners.

While 2008 revenue at Nielsen rose slightly to $5.0 billion from the previous year’s $4.7 billion, “covenant” EBITDA at the company remained flat at $1.3 billion. Calhoun’s total compensation, meanwhile, fell by 46 percent in 2008 to about $9.7 million, down from roughly $18 million the year before. The percentage of his pay tied to performance also fell last year, to 61 percent from 80 percent in 2007.

Elsewhere, Jack Bovender, CEO of hospital operator HCA Inc. actually saw a meaningful boost in total compensation to $12.1 million from the prior year’s $6.9 million, while the percentage of his pay tied to performance dropped to 54 percent in 2008, down from 73 percent the year before. HCA Inc was acquired in November 2006 in a $32.1 billion deal led by Bain Capital, KKR, and Merrill Lynch Global Private Equity. Adjusted EBITDA at the company held steady last year at $4.6 billion; 2008 revenue rose to $28.4 billion from $26.9 billion the year before.

Musical Chairs

Turnover hit the CEO ranks of three companies in our sample in 2008.

Among those who left was Michel Mayer, who stepped down as CEO of semiconductor company Freescale Semiconductor Inc. Mayer, who was our sample’s second-highest paid executive in 2007, announced his departure from the company in February 2008, just 15 months after Freescale was acquired by Blackstone Group, Carlyle Group, Permira and TPG for $17.6 billion. With his departure, Mayer received more than $31 million in compensation in 2008, including $22 million in stock awards and a $7.2 million lump-sum severance payment, making him our sample’s highest-compensated executive of 2008. (Given Mayer’s limited time with Freescale Semiconductor last year, his 2008 compensation figures are not featured in our table.)

Net sales at Freescale Semiconductor for 2008 declined to $5.2 billion from $5.7 billion the year before, while adjusted EBITDA came in at $1.4 billion, approximately $100 million less than 2007’s count.

Mayer’s replacement at Freescale Semiconductor is Richard Beyer, previously CEO at Intersil Corp., a publicly-traded designer and manufacturer of high performance analog semiconductors. For his nine months at Freescale in 2008, Beyer earned a total of $14.7 million, including $11 million in stock awards, a $1.1 million minimum bonus payment and a $1 million cash hiring bonus, making him our sample’s second-highest overall compensated executive of 2008.

Cerberus Capital Management’s troubled automotive lender GMAC LLC also saw turnover at the top when Eric Feldstein was replaced as CEO by Alvaro de Molina, who joined GMAC as COO in September 2007 and took the company’s reigns in April 2008. Feldstein, who was given a $1 million “retention payment” for sticking around in 2007, pocketed a $5 million severance payment upon his departure last year. Meanwhile, de Molina’s promotion helped him earn more than $11 million in 2008, making him the fourth-highest compensated executive in our sample. Cerberus Capital acquired GMAC in November 2006 in a deal valued at about $14 billion. Last year the company generated revenue of $18.4 billion, down from $21.2 billion the year before. (de Molina’s 2008 compensation is listed under the COO section of the accompanying table.)

Executive turnover also hit Capmark Financial Group Inc., a troubled commercial real estate finance company acquired by KKR, Five Mile Capital Partners, GS Capital Partners and Dune Capital Management for about $9 billion in March 2006. Having held the CEO post at the company since June 2006, William Aldinger III resigned effective Dec. 4, 2008. Despite his brief, 18-month stay with Capmark Financial, and the company’s 2008 net loss of $1.4 billion, Aldinger walked away with a $2.3 million severance payment and $3.4 million in option awards on top of his annual base salary of $1.5 million. Aldinger was replaced by Jay Levine, former president and CEO of RBS Global Banking & Markets, who signed on with a base salary of $5 million, well above the $1.5 million his predecessor was entitled to. For 2008, Capmark Financial reported negative net revenue of $671.7, compared to positive net revenue of $1.2 billion the year before. (Given his brief time with Capmark in 2008, Levine is not featured in the accompanying table.)

Looking forward, 2009 is already shaping up to be another down year for executive compensation for at least some of the companies in our survey. This past February, Freescale Semiconductor said that its executives were taking a voluntary and temporary base salary reduction as “one of a number of cost savings measures.” CEO Bayer accepted a 20 percent reduction in his 2009 base salary, lowering it to $880,000 from its original $1.1 million. Freescale Semiconductor employees, including its executive officers, were also compelled to take one week off without pay during the first and second quarters of 2009.

GMAC, meanwhile, has been forced to comply with limitations on executive compensation related to its participation in the government’s Troubled Asset Relief Program, or TARP, which has pumped billions of dollars of rescue financing into the company. New limitations include a prohibition on incentives that could cause senior executives to take “unnecessary or excessive risks” with the company; a ban on owning or leasing private aircraft and on other expenditures for corporate events, including travel, real estate, and corporate offices; restrictions on the amount of bonus and incentive pay awarded to the company’s 25 most highly-compensated employees; and a ban on most severance payments to senior executive officers.