Every time a CEO gets fired — and that’s essentially what happened to Tom Ward yesterday — we’re often amazed at how well failing pays. After all, it’s hard to argue that Ward’s performance as CEO was beneficial to shareholders, judging by this chart.
But even in an industry known for outsized compensation, Ward’s exit seems unusually rich. And we’re not even sure what the exact number is. Yesterday’s 8-K was somewhat vague and required a careful reading of where the commas and semi-colons were placed. The filing clearly notes that Ward will get $53.5 million in a lump sum, plus the vesting of 6.33 million shares of stock, and another three years of salary. The WSJ estimated the number at $90 million. The Oklahoma City paper pins the number is more than $90 million.
We think it’s actually a lot more than $90 million.
We decided to go straight to Ward’s most recent employment contract, since yesterday’s 8-K specifically referred to that agreement, which was filed Dec. 27, 2011. While that agreement is also somewhat vague — the base salary is described as “not less than” $1.545 million dollars a year and does not give any number for Ford’s annual bonus, one thing is pretty clear: Ward is likely to get a gross-up to cover the tax bill. Gross-up math isn’t exactly straightforward, but based on other gross-ups we’ve seen, this could add another $60 million (or more) to the final bill.
Indeed, the proxy that Sandridge filed last month provides a bit more detail on the gross-up:
Mr. Ward is entitled to receive a gross-up payment equal to the amount of excise tax imposed plus all taxes imposed on the gross-up payment.
In plain English, that means a gross-up to cover the gross-up, which should add a few million more. Let’s put that at around $75 million, which could bring the total up to $165 million for Ward’s exit.
Given that the proxy was just filed, we doubt that Sandridge investors will ever really know the true number (and whether other things, like continued access to the corporate jet) will also be part of Ward’s deal. Sandridge didn’t say anything about a special charge to earnings as a result of Ward’s deal, but we’d imagine that’s just a matter of time.
As the WSJ noted in its story, Ward’s exit is even richer than ex-Chesapeake Energy CEO Aubrey McClendon’s. The two men started Chesapeake together and both are owners of the Oklahoma City Thunder basketball team. Now they have one more thing in common too: getting paid an incredible amount of money to destroy shareholder value.