IEC Electronics (AMEX: IEC) is a great American manufacturing success story. If you do not know the story of IEC, here is a brief summary. For many years it was a contract manufacturer that built non-differentiated printed circuit boards (PCBs). In other words, they pretty much competed on price and nothing else. When they lost their largest customer at the beginning of the last decade, the company nearly folded. However, new management was brought in, and the company switched their business model to low volume, highly complex, highly reliable PCBs for applications such as military, medical, railroads, and satellite communications, where having the PCBs work correctly all the time could literally be the difference between life and death.
The company has grown revenues from $20M in 2005 to $133M in the fiscal year that ended on September 30, 2011. This impressive growth was accomplished through both acquisitions financed with cheap debt and organic growth. Still, the business remains a low margin one, where tight expense management and production controls are key to driving profitability. In the fiscal year that just ended, the company earned $6.76M in net income. That is a tight 5 percent profit margin. So when an investor sees executive compensation nearly double from 2010 to 2011, they should stand up and take notice.
The proxy statement (click here for proxy) for the annual meeting was released on December 22 and it contains some interesting tidbits.
Tidbit #1: Executive compensation nearly doubled in 2011 for the named executive officers.
W. Barry Gilbert - Chairman & CEO
2010 Total Compensation - $582,913
2011 Total Compensation - $1,019,357
Compensation increase of 75%
Jeffrey T. Schlarbaum - President
2010 Total Compensation - $359,799
2011 Total Compensation - $610,239
Compensation increase of 70%
Donald S. Doody - Exec. VP of Operations
2010 Total Compensation - $283,734
2011 Total Compensation - $467,155
Compensation increase of 65%
Wouldn’t it be nice if we all got raises like this? Okay, so their pay didn't almost double, but the increases do certainly seem out of line with the increase in EPS from 2010 to 2011. EPS grew 42%. However, a large acquisition in early 2011 that highly levered the balance sheet contributed to nearly all of that increase. Does management really deserve these kind of raises for making an acquisition that has not turned out according to plan (by management's own admission) and has significantly increased costs for the company overall?
Tidbit #2: In 2010 IEC used a compensation consultant to review total compensation for the named executives. In 2011, they did not.
Quote from the Proxy Statement:
In order to maintain market competitiveness the Committee periodically reviews relevant competitive data provided by third party compensation professionals for the purpose of ensuring the compensation structure is designed to achieve the stated objectives. In Fiscal 2010, the Company engaged Grahall Partners LLC (“Grahall”), a leading provider of compensation consulting services and survey data, to assist the Committee in reviewing total compensation for our named executive officers and other key employees. Services included an executive compensation review and presentation of an overview of executive compensation trends and developments to the Committee (the “2010 Report”). During Fiscal 2010, the Committee also reviewed with Grahall certain data regarding director compensation. No further assessment regarding executive or director compensation was conducted by Grahall in Fiscal 2011.
Interesting. So in 2010 they took the correct route of comparing their executive compensation with that of the industry, and in 2011 they decided to go it alone and salaries increased 65-75% in one year.
[Ed note: An earlier version of this article had several paragraphs which have been removed by the author to reflect the revised proxy released 12/30/11.]
Disclosure: I am long IEC.
Additional disclosure: I am considering selling my position within the next few weeks.