Mattel Inc.’s board hasn’t learned a thing from experience.
Fresh from granting an obscene amount of severance pay to fired-CEO Jill Barad, the directors of Mattel fashioned an equally galling package for her replacement, Robert Eckert. If he doesn’t work out, shareholders will again foot an expensive bill for failure.
Eckert’s contract should be called “Jill 2,” to use the fitting lingo of a Grade-B slasher movie. Nothing in its terms should give shareholders confidence that this is a company doing what it takes to dig itself out of its hole.
In case you banished the sordid details of “Jill 1” from your brain, recall that Barad received a severance package worth more than $50 million when she was ousted in February after a 57 percent drop in Mattel’s stock on her watch.
After Barad’s performance, you’d expect Mattel’s board to look for a CEO willing to put something on the line to demonstrate commitment to turning the toymaker around. What they got was a CEO with a contract laden with protection for himself.
For contrast with what follows, consider another troubled company, Chrysler Corp., that years ago also brought in someone from the outside, Lee Iacocca. Chrysler was even more troubled than Mattel already on a ventilator, with a priest at the bedside ready to grant extreme unction.
To his everlasting credit, Iacocca didn’t press the Chrysler board for every last protection known to man in case he failed to turn the company around. On the contrary, he took a pay package that, in the event of a disaster, would have netted him precisely $1 a year. In return, he got a ton of stock options. His successful revival of Chrysler made him a very wealthy man. And no one that I know ever said he didn’t deserve every penny of what he ended up making.
Face it, a person coming in from the outside to revive an ailing company can’t be a wimp. And if he isn’t a wimp, then why should he get a wimp’s pay package?
Let’s take a look at Eckert’s contract. There is one piece of good news in it. Under Jill 1, a fired CEO stood to receive five years of salary and bonus. Under Jill 2, the most Eckert can receive is three years of salary and bonus.
Mattel didn’t stint on the rest of Eckert’s package, however.
To start, he gets a signing bonus of $2.8 million. Add to that an annual base salary of $1.25 million and a guaranteed bonus for the year 2000 equal to his salary.
Next, Eckert received a grant of free shares worth $7.7 million. Theoretically, he could forfeit 25 percent of the shares if his employment is terminated before June 2008. But does anyone want to bet those forfeiture restrictions won’t be lifted if Eckert is ushered out the door?
He received options on 3 million shares, which, by my estimation, had a present value of $11.3 million when they were granted May 16. The strike price was $11.25, which means at the May 31 closing price of $13.56, they were already in the money to the tune of $6.9 million. Given what happened under Jill 1, it seems likely he would be allowed to exercise his options during their full 10-year term, even if he departed much earlier.
Going further, Eckert can receive more than $4 million under a long-term incentive plan based on Mattel’s performance during the 1999-through-2001 period, virtually half of which is already over. Given that his predecessor earned almost $4 million for terrible performance during the 1996-through-1998 period, Eckert’s receipt of the bulk of his long-term incentive award opportunity should be roughly as difficult as using a hot knife to slice through butter.
Money to lend
And then we have the obligatory loan. Under Jill 1, Barad was loaned $3 million under her employment agreement, with the principal and interest to be forgiven if she was fired. Then, just as she was being sacked, her board decided to give her an additional payment of $3.31 million to pay the taxes on the loan and interest forgiveness, and the taxes on the taxes, etc.
In contrast, Eckert starts out, not with a $3 million loan, but with a $5.5 million loan. And what do you know, the tax gross-up provision has been thoughtfully included right in his original employment agreement. No one will be able to criticize the Mattel board this time for adding an extra benefit at the end. (Eckert will, however, have to avoid getting the axe before May 18, 2004, to get the tax gross-up feature.) I figure that loan deal, including tax gross-ups, is worth around $11 million.
Finally, Eckert has been given a sweetened pension opportunity. Even if he is fired after a short amount of service, he is still entitled to receive a hefty pension. For example, if he is let go after three years as Barad was, at which time he will be 48 years old, he could immediately start receiving a pension on the order of $550,000 a year. The present value of this little pension sweetener is worth, by my estimation, around $7 million.
So this is what we have come to in America. This is Iacocca, Release 2.0. And we call this progress?
While it was at it, Mattel’s board also gave some outsized raises in base salary to three of Eckert’s key subordinates. They are Adrienne Fontanella, president of the Girls/Barbie business; Matt Bousquette, president of Boys/Entertainment; and Neil Friedman, president of Fisher-Price Brands.
When a company is in the financial straits that Mattel is currently in, the last thing it ought to do is increase its fixed costs. Yet, Mattel’s board decided to give each of these three executives a 42 percent raise in their base salaries, to $850,000 a year, as well as sweetened pension benefits.
We can’t be sure how this extra pay will be spent, except that we know Fontanella probably won’t be spending it on travel. Under her employment agreement, she is entitled to reimbursement for up to 24 round-trip business-class tickets each year for two years.
No one made Eckert structure his pay package the way it turned out. Presumably, he could have said to the Mattel board, in the manner of Lee Iacocca: “Give me only a small salary, and no guaranteed bonuses, and no front-end bonuses, and no cushy loans with principal and interest forgiveness and tax gross-ups, and no free shares of stock, and no pension sweeteners. How about 10 million option shares, and I’ll take my chances.”
That he didn’t, that he decided to take a wimp’s pay package, may be an indication that he sees a glass at Mattel that is half-empty rather than half-full.
Graef Crystal is a columnist with Bloomberg News.