Three cheers for performance-based incentive awards! That’s the bedrock of American-style executive compensation, right? Pay for performance: It’s good for shareholders, the tax code encourages it, and such (we imagine) is the stuff of Pay Czar Ken Feinberg’s dreams.

Take AOL (AOL) and the proxy it filed Tuesday:

In general, the elements of compensation reflect a focus on performance-driven compensation, a balance between short-term and long-term compensation and a combination of cash and equity-based compensation.

But look closer at the company’s cash incentive plans, and you find a few oddities.

The Global Bonus Plan is a one-year deal, implemented because the usual plan had been suspended “in light of the uncertainty with respect to potential transactions.” The first half, with targets set as a percentage of base salary, “was paid to employees who performed at a satisfactory level and were still active employees on July 15, 2009″ — in other words, bonus to you if you stuck around and did your job. After all, AOL was about to be spun off from Time Warner (TWX). Top execs collected between $119,000 and $206,250 for the first half.

The second half of the year hinged on performance, including meeting targets for free cash flow and “OIBDA,” or operating income before depreciation and amortization. But in the end, none of the convoluted details mattered. That’s because the board gave Chairman and CEO Tim Armstrong “discretion to award additional amounts based on individual performance or to otherwise modify awards regardless of the actual levels of OIBDA and Free Cash Flow achievement.”

And that’s just what he and a board committee did in January, the proxy notes:

Although our actual OIBDA and Free Cash Flow results would not have triggered a payout for the second bonus period under the GBP, upon the exercise of Mr. Armstrong’s discretion pursuant to the terms of the GBP, Mr. Armstrong recommended, and the Compensation Committee approved, a 110% bonus payout for the second bonus period under the GBP.

In other words: do-over! Three top executives did even better. Chief Financial Officer Arthur Minson, who was guaranteed at least $1 million under his employment contract, wound up getting $1.7 million instead, or 110% of his $1.5 million target plus $60,000 “on a discretionary basis in recognition of individual performance” during AOL’s spin-off from Time Warner. Two other execs got $40,000 added to their 110% for the same reason. (Armstrong wasn’t covered by the plan.)

Why this departure from the conditions and targets originally laid out? Among the reasons listed in the proxy: “Our executives did not receive merit-based salary increases in 2009″; bonus targets had fallen from 2008 levels, so even 110% didn’t reach 2008 targets; and “the original 2009 budget was prepared by the prior management and included a number of aggressive assumptions, including growth in advertising revenue …”

AOL’s Annual Incentive Plan for Executive Officers also departs from a tight link between performance and pay. To start with, it uses a performance measure that seems to have been cooked up in some accounting test-kitchen: “Adjusted Net Income,” defined not just as income or loss from continuing operations — thus stripping any foundering lines of business a management team might manage to shed before year’s end — but also excluding some M&A costs, non-cash impairments, gains and losses on sale of operating assets, restructuring charges over $3 million, litigation and tax-audit reserves of more than $3 million, any amount “related to securities litigation and government investigations” and more.

If that crazy-quilt measure of income is negative, no bonus. Good enough. But if the figure is positive, the bonus defaults to the maximum payout allowable: $4 million or 4% of this Adjusted Net Income figure, whichever is less. The board’s compensation committee has to step in to reduce it. (Curiously, the summary of the program  in the proxy doesn’t mention this detail. It just says any award “may not exceed” $4 million or 4%.) It’s not clear what ANI would have been in prior years, so there’s no way of knowing how 4% stacks up to $4 million.

No doubt, it can make sense for some pay to stay separate from immediate performance. That’s what salary is for, after all. But why go to all the trouble of establishing performance measures and bonus targets if you don’t intend to use them?

Image source: RogueSun Media via Flickr

At the beginning of February, CIT Group, Inc. (CIT) announced that its president and Chief Operating Officer, Alexander Mason, would leave the company on February 26th. Mason joined the company June 16, 2008, putting his tenure there at just over 19 months.

When the announcement was made on February 1st, the company issued a press release which quoted interim CEO Peter Tobin as saying, “Alex came to CIT at a time of enormous challenge. We would like to thank him for his contributions during our restructuring, and we wish him continued success in the future.” Simultaneously, it also filed an 8-K with the SEC that stated:  “Mr. Mason has agreed to forego severance and any other compensation other than the earned cash compensation he is entitled to receive for 2009 and until termination under his employment agreement dated June 16, 2008.”

Given the wording of the 8-K, it’s understandable if readers might not know that the company was referring to the “minimum cash bonus” that CIT Group promised to give Mason for both 2008 and 2009. But we found that information in the late annual report that CIT Group filed on March 16th. (Its annual report was really due March 1, 2010, but the company filed a notice with the SEC to explain that it would not be able to meet the deadline “without unreasonable effort and expense.”)

Exhibit 10.20 of the annual report is a confidential letter dated January 29, 2010 from Executive Vice President of Human Resources James Duffy to Mason regarding “Transition Arrangements.” It states in part:

“This letter will confirm that your last day with CIT will be February 26, 2010 (the ‘Separation Date’). At that time, each of your positions as an officer and employee of CIT and its subsidiaries will cease.

From now until your Separation Date, you agree that your compensation will consist only of your base salary and continued participation for you and your applicable dependents in the benefit plans in which you or such dependents currently participate. In addition, you will continue to be entitled to the 2009 guaranteed cash bonus of $1,350,000 provided for in your Letter Agreement, dated June 16, 2008 (your ‘Employment Agreement’). For the avoidance of doubt, this amount will be payable at the time, and will be subject to all of the conditions, currently set forth in your Employment Agreement. For the avoidance of doubt, your termination of employment under this letter will be treated as an Eligible Termination for purposes of 2009 guaranteed cash bonus.”

In exchange for signing the “Transition” agreement – which also promised to reimburse Mason for up to $75,000 in legal fees – CIT Group asked for consideration: he had to sign a General Release that gave up any legal claims he might have asserted against the company.

As we flipped through the preliminary proxy that supermarket chain Safeway (SWY) filed the other day, we found ourselves humming “Let’s Call the Whole Thing Off” — that song by the Gershwin Brothers that was famously sung by Louis Armstrong and Ella Fitzgerald:

You say either and I say either, You say neither and I say neither
Either, either Neither, neither, Let’s call the whole thing off.

You like potato and I like potahto, You like tomato and I like tomahto.

Potato, potahto, Tomato, tomahto, Let’s call the whole thing off

The reason? In a section of the proxy that begins on pg. 30, the company talks about the “modest death benefits” that the company provides to senior vice presidents or higher. The section goes on to note that these benefits were modified in December 2008 to make them less prevalent and that they are no longer available for any employee hired after Dec. 15, 2008.

But deeper into the proxy, there’s a shareholder proposal from the AFSCME Employees Pension Plan that doesn’t see the death benefits as being quite so modest. Instead, they describe them as “golden coffins”, which seems more than a pronunciation preference to us. Here’s a snip:

In our view, golden coffin payments—making payouts to senior executive’s beneficiaries based on salary and bonus that have not been earned by the executive prior to death and/or making post-death payments in lieu of perquisites—are not consistent with these principles. According to the 2009 proxy statement, Safeway provides a special death benefit to all named executive officers that results in a payment of four times salary, up to $4 million maximum, if the executive dies in office or after retirement.

This is the second year that AFSCME has submitted this proposal. But last year, Safeway didn’t use the word modest to describe the perk. In any event, shareholders defeated the proposal with 132 million votes cast in favor and 214 million in opposition.

What would Louis and Ella have to say about all of this?

But oh, if we call the whole thing off Then we must part
And oh, if we ever part, then that might break my heart

While we haven’t yet seen the new movie Alice in Wonderland, we definitely felt like we had fallen down a rabbit hole when we read Airvana, Inc.’s (AIRV) recent merger proxy.

The Chelmsford, Mass-based company, which sells network infrastructure products to the wireless companies that provide mobile broadband services, announced last December that it planned to go private. The list of high-profile players involved in this deal included SAC Private Capital, Zelnick Media, Goldman Sachs (GS), which served as Airvana’s financial advisor, and Boston law firm Ropes & Gray.

But what really caught our attention in the filing was some of the giant-sized paydays that Airvana executives will receive post-deal. In addition to vested stock options and equity shares, the merger will accelerate the vesting of currently unvested stock options. Page 59 of the filing states what each director and executive officer would receive if a “Total Cash Payment” is made (based on assets owned as of Jan. 3, 2010).

The biggest recipient, by far, is Paul Ferri, an Airvana director since 2000, who will get $ 117,335,080 (yes, $117.3 million).  The proxy notes that Ferri is “a founding partner of Matrix Partners, a venture capital firm, where he has been a General Partner since February 1982.” Keep in mind that the size of the deal is valued at around $530 million and it’s still pretty rare to see so much go to one person. But others will benefit too including director Gururaj Deshpande, who stands to collect nearly $66 million.

Several other executive officers will also see big paydays, though not nearly as big as Ferri’s and Deshpande’s. They include VP/Chief Technical Officer Vedat Eyuboglu – $7,696,237; VP/CFO Jeffrey Glidden – $5,250,414; Luis Pajares (who was VP/North American Sales and Services until he resigned on December 31, 2009) – $3,910,866; and VP/Engineering Mark Rau – $3,472,904.

Battat, Verma, and Eyuboglu are “Rollover Stockholders” who will exchange 60% of their common shares of Airvana for equity interests of the new parent company. (The exchange helps them defer paying taxes.) However, p. 57 notes that they “will be paid merger consideration for [the remaining] approximately 40% of the shares of Airvana common stock that they hold.” Each man will also be an executive officer and a director of the new parent company.

But whereas some of the executive officers are retaining an equity interest in the surviving company, it appears that the directors such as Ferri are completely cashing out their interests.  The proxy says they will collectively receive $607,394 for their options; and “[a]dditionally, these directors will receive an aggregate cash payment in respect of their other beneficially owned shares of Airvana common stock in the amount of $184,118,232.” It continues on p. 61:

“The members of the board of directors (excluding Messrs. Battat and Verma) are independent of and have no economic interest or expectancy of an economic interest in Parent or its affiliates, and will not retain an economic interest in the surviving corporation or Parent following the merger.”

According to pp. 33-34 of the proxy, the board of directors (excluding Battat and Verma, who abstained from voting), and Goldman Sachs, which was hired to advise the Board’s special committee, concluded that the offer to pay $7.65 per share for common stock, was “advisable, fair to and in the best interests of the Company and our unaffiliated stockholders.” [Several law firms that filed suit to oppose the merger apparently disagree.] Page 6 states that Goldman Sachs will be paid “a transaction fee equal to approximately $6.3 million, $5.8 million of which is contingent upon consummation of the merger.”

These sorts of big numbers always make us wonder what the purpose of a deal like this is, other than to enrich a few people. Yet, the deal seems inevitable. Page 68 of the filing notes that as of Feb. 23, 2010, directors and executive officers owned about 48.6% of Airvana’s common stock, and they intend to vote all of their shares in favor of the merger agreement at the upcoming April 9 special shareholders’ meeting.

All this brings to mind another of Lewis Carroll’s well-known works. Except, perhaps, it’s the “Mergerwock” of which we should really take heed.

Image source:  sammydavisdog via Flickr

One key principle here at footnoted is that the small stuff does matter. Look no further than Vinod Gupta, who, yesterday evening, became the Securities and Exchange Commission’s poster child for perks run amok.

Of course, in Gupta’s case, the little stuff turned out not to be so little, as the SEC tells it. We’ll spoil the ending: Gupta, infoGroup Inc.’s (IUSA) former chairman and CEO, was formally accused yesterday of fraudulently using nearly $9.5 million in corporate funds “to support his lavish lifestyle,” while hiding another $9.3 million of transactions with companies that he owned at least in part. Two other former executives and a former director of the Omaha-based database and mailing-list vendor were also charged in the case.

Without admitting or denying wrongdoing, Gupta agreed to pay $7.4 million in penalties, interest and disgorgement, and will be banned from serving as a corporate director or officer for life. An attorney for Gupta didn’t return a call seeking comment.

If you’re feeling a little déjà vu, loyal readers, there’s a reason: Gupta’s a frequent flyer here at footnoted — he appeared in August 2008 when the company agreed to pay him $10 million to go away while requiring him to repay $9 million. Then, last year, Gupta and infoGROUP made the 2009 short list for footnoted’s worst footnote of the year contest after the company said that Gupta’s personal use of the company yacht in 2008 totaled more than $870,000 — not the zero previously reported.

But that turns out to have been the tip of the iceberg, by the SEC’s account. Indeed, the agency’s allegations read like a primer on proxy-filing red flags:

“Gupta improperly used corporate funds for more than $3 million worth of personal jet travel for himself, family, and friends to such destinations as South Africa, Italy, and Cancun.  He also used investor money to pay $2.8 million in expenses related to his yacht; $1.3 million in personal credit card expenses; and other costs associated with 28 club memberships, 20 automobiles, homes around the country, and three personal life insurance policies.”

Granted, those totals span 2003 to 2007, but they’re still eye-opening.

The SEC argues that Gupta had plenty of assistance when it came to shielding the largess from prying eyes. Former director Vasant H. Raval, a Creighton University accounting professor who once headed infoGroup’s audit committee, was accused of having omitted “critical facts in a report to the board” about the matter, and of failing to “respond appropriately to various red flags,” even after two internal auditors questioned whether Gupta was seeking reimbursement for personal spending. He has agreed to pay $50,000 to settle the charges against him, without admitting or denying wrongdoing, and will also be banned from serving as a public-company officer or director for five years, the SEC said. His attorney didn’t return a call seeking comment. (A spokeswoman for infoGROUP declined to comment.)

Two former infoGROUP CFOs are also accused of signing off on phony expenses without “sufficient explanation of business purpose.” Neither former CFO has settled as yet. Attorneys for Gupta and former CFO Rajnish K. Das didn’t return calls seeking comment. David Zisser, who represents ex-CFO Stormy Dean, called the SEC “wrong on both the law and the facts.”

“There are a lot of issues about what constitutes a perk and what constitutes a related-party transaction,” Zisser said. “There was a lot of information regarding the things supposedly hidden that shows they weren’t hidden at all.”

However things shake out in court, it looks like the curtain is falling on this chapter of the infoGROUP’s perks saga: Last week, Gupta resigned from the board, and the company announced it would be taken private by CCMP Capital. Once private, they can throw around whatever perks they might want, and we aren’t likely to find out (at least, until CCMP takes the company public again).

In the meantime, when you hear that even lavish perks are a small price to keep a good executive, think back to the long, strange tale of Vinod Gupta, infoGROUP and the corporate yacht that turned out to be more of a pleasure boat than the filings initially let on.

Sometimes, it turns out, the little things aren’t. And if you don’t take a good hard look, you might find out too late.