CSC issued its FY2011 Proxy Statement to Shareholders last week in preparation for its Annual Meeting in August. It reports that the cosy clique of 8 non-executive directors who have presided over the steady decline of CSC together with CEO Michael W Laphen since 2007 are all putting themselves up for re-election. Clearly none of these directors feels sufficiently accountable for their contribution to CSC's current situation to offer their resignation. Erik Brynjolfsson, who was nominated to the Board in December 2010, is also seeking re-election.
The Proxy Statement gives details of the compensation of CSC's top executives,Messrs Laphen, Mancuso, Cook, Owens and Sheaffer. The Statement is exemplary in its transparency with full disclosure of executive compensation and their performance against the company's key financial targets.
Mr Laphen's FY2011 total compensation was $12.5 million, down from FY2010's $15.5million. It is still a remarkable reward for non-performance. Here’s why. CSC's share price has declined by 22% since June 2010, while the Dow Jones Index has increased by 17.5% and Accenture's share price rose by 40%. In other words, a $1000 investment made a year ago in Accenture is today worth $1400; a simple Dow tracker investment would be worth some $1175. In contrast, the $1000 invested in CSC a year ago would be worth $780. This is the level of relative poor performance we are dealing with regarding CSC. Note that Accenture shares are double the value of CSC’s for the same period.
Here are some of the surprising elements in Mr Laphen's FY2011 compensation:
a) Fixed base salary was increased by 7% to $1,125,000 this year to put him "at the median of the market". Why? His performance is below the median of the market.
b) Long Term Incentive compensation (LTI) target increased in FY2011 FY2011 from 700% to 750% of his base salary, an increase of over $550,000 per year. This was in recognition of his "strong FY2010 performance". What strong FY2010 performance is this? There was a 3% year-on-year revenue decline and $90mln of accounting irregularities.
c) The bonus included over $600,000 for having achieved revenue growth of only 1.2% in FY2011 (after inflation that is not growth but shrinkage).
You will now see that Mr Laphen's compensation package is based solely on achieving financial numbers. It ignores building a sound business, growing customer satisfaction or anything that could be considered as strategic. There are two problems with this, irrespective of whether he deserves the total amount he receives. Firstly, he receives by default bonuses at 75% or 80% of budgeted financial achievement. This is truly reward for failure because he would still get a bonus even if CSC suffered a catastrophic 15% drop in total revenue.
But more importantly and as indicated above, the CEO compensation does not take account of non-financial impacts. Some of the critical events for CSC impacting or arising from FY2011 do not directly enter the pay calculation, e.g.:
a) Major accounting irregularities remaining undetected for so long in Nordic
b) Mr Laphen and CFO Michael Mancuso being unable to certify to the SEC that CSC's financial records were reliable
c) The SEC investigation and the CSC Audit Committee investigation into the MSS irregularities
d) The flawed communication of the Q4 financial results, resulting in two profit warnings, the second one given 5 weeks after the end of the quarter while CSC still failed to meet the analyst consensus.
e) The class action lawsuit and long-term-investor investigation.
f) A stock buyback program which has wasted $13million in just 3 months, being fully 20% of the cost to CSC of the shares bought.
g) The NHS project issues in the UK. The damage the project has done to CSC's reputation and the poor image CSC gave of itself testifying at the UK parliament's Public Accounts Select Committee. Also Mr David Cameron the Prime Minister of the UK, leader of one of the top ten economies in the world is declaring that no new contracts will be signed with CSC.
h) The view expressed in the Wall St Journal that CSC has got itself into a poor market position and that it is being caught by its lack of earlier investment
As CEO, Mr Laphen needs to be address issues such as those above, and particularly build a long-term future for CSC. But his "financial only" compensation and bonus criteria may tell us why he spends so much time micro-managing "the current quarter".
The CSC Compensating Committee's stated objective is to "align pay with operating performance and increases in shareholder value". A remuneration package of $12.5million for Mr Laphen is not pay for performance in view of what has happened at CSC. It is reward for failure. The Compensation Committee need to go back to the drawing board and redesign the CEO compensation criteria.
In view of the losses borne by his shareholders. Mr Laphen should voluntarily waive this year's bonuses . Other CEO's have done this. Some have been fired for lesser failings. As an example see what has happened to the CEO of Cable & Wireless. Will Mr Laphen do this? It seems very doubtful.
If you ever wondered how much Mr Laphen's compensation would be on change of control of CSC, e.g. if CSC was acquired, the SEC Proxy Statement tells us. Subject to certain conditions Mr Laphen's payoff is estimated at up to $38million. Yes, that is thirty-eight million dollars. What motivation could that kind of pay-off create in any person?
Full details of the Proxy Statement can be found on http://assets1.csc.com/investor_relations/downloads/2011_Proxy.pdf
In conclusion, while Mr Laphen's rewards are some 180% higher than when he became CEO in 2007, shareholders have seen a decline in their investment of 35% during that period, while peer companies like Accenture, Serco, IBM have continued to achieve profitable growth. The non-executive directors are paid to look after the interests of the shareholders. When one looks at what has happened to the share price and Mr Laphen's compensation over these 4 years, whose interests does it look like the non-exec directors on the Compensation Committee are really looking after?
posted by Littlejohn and Will Scarlet