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On clawbacks & CEO subsidies at Beazer Homes…

Image of coins by Colliefan, on Flickr

We’ve never competed in the International Mathematics Olympiad, but the next one is coming up in July, and so in its honor we’ll offer this morning’s footnote in the form of a story problem:

A homebuilding company pays its chief executive more than $21 million in cash, stock and other benefits over three years. Then, early this March, the CEO signs a settlement with the Securities and Exchange Commission agreeing to fork over $6.5 million in cash, nearly 79,000 restricted shares and more than 40,000 restricted stock units, to settle a complaint related to earlier fraud allegations against his company.

A little over three months later, the CEO steps down and his company pays him $1.75 million in cash, covers up to $10,000 in legal fees for negotiating his departure, and promises to keep providing health-care and other benefits for up to three years. Remaining restricted stock continues to vest according to its terms.

How did the CEO fare compared to his shareholders?

As you might expect, this is a story drawn from real life: Beazer Homes (BZH) filed an 8-K yesterday with a press release about the appointment of its new CEO and the departure of its old one, Ian J. McCarthy, and a copy of McCarthy’s separation agreement.

McCarthy is the CEO who settled with the SEC in early March: While he wasn’t charged with misconduct in the fraud cases previously brought [PDF] against Beazer and another executive, the SEC sought to claw back

“bonuses, other incentive-based or equity-based compensation, and profits from Beazer stock sales that he received during the 12-month periods after his company filed fraudulent financial statements during fiscal year 2006.”

In the words of the SEC’s Atlanta regional director, Rhea Kemble Dignam:

—McCarthy was receiving millions of dollars in bonuses and other incentive compensation while Beazer was misleading investors and fraudulently overstating its income. Section 304 requires McCarthy to reimburse Beazer for that compensation and profits on the sale of Beazer stock.

McCarthy didn’t admit or deny wrongdoing as part of the settlement. In any case, he’s gone from Beazer; the Charlotte News & Observer quoted a company spokeswoman as saying that McCarthy was “ousted”; and yesterday’s 8-K describes his severance in terms of “termination from the Company other than for cause.” It’s that determination, presumably, that wins him his severance.

So let’s do the math, starting with the cash component:

$21.2 million total pay for 2008-2010 + $1.75 million cash severance – $6.5 million in cash = $16.45 million

There’s also the matter of the equity. The SEC settlement stripped McCarthy of a bunch of restricted stock and RSUs — the equivalent of 118,866 shares in all, according to the SEC’s release — but he also had a bunch more, from other years that didn’t come under investigation by the SEC. According to the table of outstanding equity awards in the company’s December proxy filing, he had 462,444 unvested restricted shares valued at $1.9 million as of September 30, 2010.

That was a while ago, and plenty has changed (including a decline in Beazer’s stock price since then, and the clawback of 78,763 shares granted in 2006) but even assuming 383,684 shares and RSUs remained, they’d be worth about $1.3 million at yesterday’s closing price of $3.40 a share. In a separate table, the proxy says he would have gotten a little over $610,000 for his unvested stock, had he been terminated without cause on September 30. In any case, it’s a decent chunk of change to balance against the clawbacks.

OK, so it’s not quite the precision you’d want with a true story problem. But it gives a sense of how McCarthy has fared. Let’s look now at Beazer shareholders.

Since 2006, the company’s shares are down 95%, and they’re down 52% since early 2008. Granted, that’s during a historic collapse of the housing market, but total return for the company’s shares over the last 12 months, 3 years and 5 years has been deeply negative, badly trailing even the rest of the residential construction business.

Here’s hoping the new guy will give Beazer shareholders some better numbers before too long.

Image source: Colliefan via Flickr

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