Reviewing the warning signs at Polycom…

Almost two months ago, we noticed some unsettling disclosures in the 10-K that Polycom (PLCM) filed with the SEC after the market closed on the Friday before President’s Day: The company had added several new and very specific risk factors. Today, the stock is down about 35% from that day’s close, trailing the Nasdaq by nearly 38 points.

A good chunk of the decline came on Thursday of last week, after the video and audio services company issued an 8-K and press release before the market opened, warning of net revenue growth below expectations. The company’s shares fell 20% on the open.

We bring this up for a couple of reasons. First, we warned subscribers to our footnotedPro service about the new risk factors in the weekly Red Flag Alert report (pdf, subscription required) that we sent out at the end of the long weekend, more than 12 hours before the markets reopened that Tuesday and long before the stock started to slide in earnest.

But we were also reminded of Polycom’s troubles by a happy subscriber, and then very soon after by the proxy the company filed on Monday.

The proxy didn’t shed any direct light on the company’s operational troubles, but it did disclose some of the highest director compensation we’ve seen so far this proxy season — or ever, really.

Total compensation for each Polycom director ranged from $627,000 to $672,000 in 2011, with an average right about in the middle, at $648,033. The company has six directors, so you’re talking about $3.9 million for the lot of them. The pay is especially striking given the company’s relatively small size: $2.5 billion in market-capitalization.

Compare it to pay at some bigger companies: Thermo Fisher Scientific (TMO) has a market-cap of about $19.5 billion, yet it managed to spend just $2.4 million on 10 directors (an average of $236,148). At Xerox (XRX), with a $10.5 billion market-cap, directors made no more than $217,500 (and most made less than $207,500). Total pay for nine Xerox directors worked out to $1.9 million, or roughly half what Polycom’s smaller board took home.

Granted, Xerox has some of the lowest big-company board pay we’ve seen lately, but still, any way you cut it, Polycom is an outlier, way out in the other direction. And Polycom didn’t exactly cover itself in glory, in terms of its stock performance last year relative to these other companies (or the Nasdaq).

Moreover, the big pay for Polycom’s board amounts to a massive 60% raise: According to last year’s proxy, directors made just $390,983 on average in 2010. In both years, most of the pay was in restricted stock, but the difference isn’t explained by the vagaries of Polycom’s share price — the company’s shares had actually fallen to $28.36 a share as of the May 26, 2011, grant to directors, from $30.99 at the May 27, 2010, grant. Rather, the board had seen fit to double the number of shares each director received in 2011, to 20,000 from 10,000 the year before.

True, the board is exposed to the same stock fluctuations as other shareholders, but hey, if they sit tight, they’ll get another tranche. And since the shares vest over just one year, at 25% a quarter, they can limit their downside if they choose (since all of them long ago met the $135,000 minimum holding requirement).

As for the signals we saw in Polycom’s 10-K, they were pretty straightforward, if unsettling. New risk-factor language warned about unpredictable results, noting “a higher percentage of our bookings and resulting revenue in the third month of the quarter” since the second quarter of 2011. The company also disclosed plans to increase financing for end-users,

“to support our Software-as-a-Service and cloud business models, which will also increase our credit risk. Efforts to develop these programs will require significant resources that may not generate the revenue we anticipate or yield intended benefits.”

The company also warned about increased competition, and about a 20% increase in “days sales outstanding”, to 49 days from 41, because expansion in Asia and Europe, the Middle East and Africa had lengthened credit terms.

All in all, it was a worrying picture, and our subscribers had a chance to look into it and take action. Add to that a board that just gave itself a big raise, and we aren’t inclined to breathe easy yet.

In the meantime, we wish Polycom shareholders — essentially all of whom are large institutional investors — the best of luck.

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