MILSTEAD: MDC to seek approval for bad-time bonuses

By David Milstead, Rocky Mountain News (Contact)

Wednesday, March 26, 2008

Regular readers know that MDC Holdings, the parent of Richmond American Homes, has one of the more lucrative executive-bonus plans in Colorado. As the housing market peaked, bonuses for CEO Larry Mizel and President David Mandarich topped $20 million, per a predetermined formula that gave them a slice of the company's profits.

If you were inattentive over the Christmas holidays, you may have missed the news that MDC went ahead and paid Mizel and Mandarich bonuses of $2 million apiece even though the formula suggested zero. (The company posted a net loss of $637 million last year, thanks to huge noncash writedowns.)

Well, guess what MDC shareholders will be asked to approve this spring? A new bonus plan that keeps up the outsize payments when times are good, but also gives the company's comp committee the discretion to pay bonuses when times are bad.

But wait - there's more! MDC shareholders will also consider a plan to reprice MDC stock options, resetting the exercise price at current levels. A number of employees will benefit, but none more so than Mizel and Mandarich.

First, some background. The bonus plan, approved by shareholders in 1994, gives Mizel and Mandarich a slice of the company's profits if it tops a goal of 10 percent return on equity. The formula called for about $300,000 when MDC was much smaller, but the payouts grew as rapidly as the company did. (From 1994 to 2005, MDC's market capitalization rose from $94.5 million to $2.8 billion.)

Mizel and Mandarich collected a total of just over $20 million apiece for both 2004 and 2005. Then things got a little slower and the bonus declined to $9.6 million for 2006.

I think you know how 2007 went. MDC took hundreds of millions of dollars in writedowns on its land and inventory, leading to its net loss. It seemed the bonuses for Mizel and Mandarich would end.

The company's proxy detailed what happened instead.

"When determining the bonus compensation to be awarded to the senior executive officers . . . the compensation committee was confronted with the realization that the performance- based goals contained in the (bonus) plan . . . failed to take into consideration the achievements of the senior executive officers in preserving the financial integrity of the company in view of current market conditions."

So the comp committee decided to change the plan to include "a more diverse set of metrics" (18, to be exact) to provide "an alternative minimum bonus opportunity."

In a sense, this formalizes the comp committee's desire to pay Mizel and Mandarich whatever it wants in bad years, since the list is so all-encompassing and the committee can pick and choose among the metrics. A better discussion, however, might have been whether the plan was too generous in the first place.

That discussion seems unlikely, based on the second proposal.

MDC is asking shareholders to approve a repricing plan for 70 employees and the company's independent directors. They will have the exercise price on their options reset to MDC's share price on the day of its annual meeting, April 29.

The comp committee "recognizes the challenge of retaining, motivating and rewarding existing employees . . . The extraordinary decline in the company's stock price has posed a significant challenge to the company's (compensation) philosophy."

The highest strike prices of recent MDC options approach $70, while the stock has been bouncing around between the high $30s and mid-$40s.

It is worth noting, as MDC does, that the plan overwhelmingly benefits Mizel, Mandarich, and general counsel Michael Touff, who hold more than 2 million options eligible for the repricing. The 67 other employees hold 343,000 options.

For Mizel and Mandarich, the repricing would wipe out a $15.3 million gap between strike prices and an assumed new exercise price of $40.

That would indeed render the options more effective as a motivational tool. But when options get repriced, shareholders who bought on the open market at the highs don't get their money back.

An immense amount of money has been lost in the American housing industry. At MDC, the pain is relative.

David Milstead and James Paton take turns writing Up and Down 17th Street. Contact Milstead at 303-954-2648 or milstead@RockyMountainNews.com.