A (relative) bargain for Dynegy’s new new guard…

June 29, 2011

If you’ve ever wondered what it would look like if the management of a company imploded, look no further than Dynegy (DYN), the electric utility that, once, kept company with the likes of Enron (in everything from the go-go energy bubble it burst, to allegations of price manipulation in California in 2000). In recent months, amid the collapse of two acquisition bids and activist-shareholder campaigns, top executives have resigned in waves, the entire board announced it wouldn’t stand for re-election, and — well, that’s pretty much an implosion right there, isn’t it?

You can get the back-story in a section of the company’s late-April proxy laconically titled “Recent Events”, or in an older but zippier New York Times article. Now a new leadership is coalescing: The outgoing board managed to name four men as their successors, in essence. One of those four became interim chief executive, and now a new addition has gotten the permanent job, announced last week; the company also named a chairman (yet another of the new directors), as well as a chief operating officer and a chief financial officer. And there may be a glimmer of good news for shareholders in the 8-K the company filed yesterday: The new management is getting paid less than their predecessors.

Now, traditional corporate spin on compensation is that you have to pay the big bucks to get the best and the brightest. We aren’t convinced that there’s necessarily a direct correlation between the size of an executive’s paycheck and his (or her) future performance. But in the case of Dynegy, it’s certainly not the case.

Dynegy’s top five executives (the departed) pulled in $13.4 million in total compensation last year, according to the proxy — down from the $16.6 million they clocked the previous year, but still up nicely from the $11.9 million in 2008. (It’s worth noting that Dynegy’s last proxy lists the most recent three years of compensation details from oldest to newest — precisely the opposite of the way most companies do it, making it easy to misinterpret the low figure as this year’s.)

By contrast, the total return on Dynegy shares has trailed the company’s sector for four years running (by between 10 and 28 percentage points), and lagged the S&P 500 by anywhere from 7 points to 53 points in the same period — over the three years ended last quarter, shareholders have lost 48% of their investment, despite a nice run-up in recent weeks as takeover speculation mounted. Nor are operating results much better: The company has booked a net loss from continuing operations of $1.27 billion over the last couple years (and an overall net loss of $1.48 billion).

So it’s something of a relief to see the new guys at least appear to arrive with enough humility to pay the top brass a little less. It’s hard to say just how much they’ll collect in their first year, but incoming CEO Robert C. Flexon is getting a base salary of $875,000, or 12.5% lower than the $1 million salary Dynegy paid former Chairman and CEO Bruce A. Williamson. Similarly, new CFO Clint C. Freeland is getting a salary of $450,000, a good 13.6% below former CFO Holli C. Nichols.

The new crew is getting sign-on bonuses as well, of course — $750,000 cash and $250,000 in stock for Flexon, $150,000 cash and $50,000 in stock for Freeland, $225,000 cash and $75,000 in stock for income COO Kevin T. Howell, whose salary will be $525,000 a year. Their stock-option awards are heavily skewed toward higher stock prices: Flexon is getting a million options with a strike price of $10 a share, 750,000 a $8 apiece, 625,000 at $6.50, and 500,000 at the price on July 11 (his start date). For comparison, Dynegy’s shares closed at $6.17 last night, and $5.95 on June 22, the day Flexon’s agreement was signed.

It’s still a lot of money and stock for a team that has yet to prove itself, but it’s a start.

Image source: Dynegy website

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