Is MBIA's Executive Compensation Fair?

In the MBI forum, CT Programmer recently commented favorably on CEO Brown's performance: "I could kiss Jay Brown. He's doing an incredible job taking a company that everyone said was gone, and building it back up bit by bit." I too think Jay Brown is doing a good job, and thought it would be apropos to talk about what his rewards will be if and when the rebuilding job is complete.

Part of Brown's compensation is in the form of a grant of 1,634,000 shares of restricted stock, received 5/01/2008 when the stock stood at $11.74. The grant is subject to the following terms: "The restricted stock will vest fully if, on or before 2/18/2013, the average share price of MBIA's (MBI) common stock over any twenty consecutive trading days is at least $40 per share." Lesser prices get lower vesting: $16.20 gets 0%, $20.96 gets 20%, 25.72 gets 40%, 30.48 gets 60%, and 35.24 gets 80%. Amounts in between are pro-rated.

On the first quarter conference call, Brown encouraged owners to regard the "analytical adjusted book value," 42.15 at the time, as the fair value of their shares. So, as you can see, all he has to do is get the shares to trade at their fair value and he will have a very nice payday, 65 million.

All he has to do is get the shares to trade at their fair value. It is not really all that easy: he has Ackman, Moody's, S&P, Fitch, Dinallo, Mr. Market, the credit crisis, demoralized staff, apathetic analysts, hostile news media, disgruntled shareholders, etc., to contend with. Meanwhile we have the end of the credit rating and bond insurance system as we know it. It was not that long ago that double donuts seemed like a possible outcome.

Often we read articles bemoaning the excessive compensation management receives: they send all the jobs to China and then pay themselves millions while honest working folk starve and freeze, or eke out a meager livelihood as wage-slaves for WalMart. They mismanage a company into bankruptcy and then depart with golden parachute payments while loyal employees lose their pensions. So on and so forth, and some of it true.

But as far as I'm concerned, Mr. Brown works for me, and if he can get my stock up to $40 by 2/18/13, I will be only too happy to see him get his reward. It's pay for performance, pure and simple, and if he gets partial results, he will be rewarded pro rata., fair and square. I like the pay plan: it aligns his interests with mine; I too would like to see MBIA shares trade above $40. If he can make that happen he has earned 65 million. After all, it is not an easy task he has ahead of him, and he has made a very promising start.

Implication for Investors: look for MBIA to trade over $40 per share by 2/18/13.

Disclosure: Long.

Comments

[CT Programmer:]

Wow, I'm famous. ;-)

I hope he gets the full $65 million, because that will mean he's taken this stock from the dumpster back up 2/3 of the way to where it was before. How? I don't know. They've got a lot of money and will figure out a way to leverage that to make a return. If I knew enough about how that could be done, then I would be a CEO making $65 million. But I don't and that's why I, like most everyone else, invest in companies and don't run them. And some of the damage will be mitigated merely by time. Part of the share appreciation has been just that. But I give kudos to Brown for what he's done --- taking on the shorts, explaining things clearly to shareholders to avoid panics, and devising plans to make money. I have no problem with compensation for performance. Maybe he'll take me out for a spin in his yacht.

2008 Aug 29 11:27 AM

[glassbox:]

Hi! I'm surprise by this vesting conditions. Whilst it sounds like it aligns my interest, it does however increase the danger of the management team more interested in managing stock price rather than profits or stability of business. That said, I'm new to these sort of vesting conditions and wonder what is the impact so far on this stock and others.

2008 Aug 29 11:27 AM

[Big Al45:]

You may want to revise your comment that:
"But as far as I'm concerned, Mr. Brown works for me, and if he can get my stock up to $40 by 2/18/08"

If he can do that, maybe he can walk on water, too

2008 Aug 29 01:49 PM

[Tom Armistead:]

It was a typo, time flies when you're having fun


On Aug 29 01:49 PM Big Al45 wrote:

> You may want to revise your comment that:
> "But as far as I'm concerned, Mr. Brown works for me, and if he can
> get my stock up to $40 by 2/18/08"
>
> If he can do that, maybe he can walk on water, too

2008 Aug 29 02:39 PM

[Ishortyou:]

well no one can predict the market, who would have thought that they are going to be in their teens in less than a week, 40 price target could be just around the corner specially when you have hegders to show profits to their clients by the end of the year, hedger are looking to hedge good on finantials, and the big bond insurers are the best tool to do that so far.

2008 Aug 29 06:27 PM

[1worldcurrency:]

"Part of Brown's compensation..."
Part of...

One man adding more than $65 million of value to the insurance industry. He must be able to come up with one sensational Ponzi scheme because all the other ones are unraveling.

2008 Aug 30 12:39 AM