Simon Property Group Says — Pay CEO $120 Million for Being David Simon

Categories: Corporate Governance, Executive Compensation, Standards, Ethics & Regulations (SER)
Matt Orsagh, CFA, CIPM

To me, one of the most interesting things about following developments in the governance world is that there are always interesting stories out there full of the kind of human drama you don’t find in most corners of finance. In the past few months we’ve seen intrigue at Best Buy, Duke Energy, and Chesapeake Energy, to name a few.

Recently, developments at Simon Property Group Inc. (NYSE: SPG) have caught my eye for similar reasons. A recent shareholder lawsuit brought by the Louisiana Municipal Police Employees Retirement System (Louisiana system) claims that Simon Property Group directors improperly increased CEO David Simon’s compensation last year without seeking shareholder approval.

Here are the highlights can you guess what has shareholders most exercised? :

  • $1.25 million in annual salary seems ok
  • $4 million bonus nothing crazy here, the company has done well recently
  • $120 million in special stock awards as long as the CEO sticks around for seven years bingo

The Louisiana system complains that the company’s board illegally amended the company’s stock-incentive plan without shareowner approval. The company’s stock plan allowed the board to change its terms unilaterally unless shareholder approval was “required by law, regulation, or listing requirement,” the pension fund said.  According to the lawsuit, because amendments allowing service-based awards (meaning essentially you just have to show up to work) are material and should be approved by shareholders under NYSE requirements and that such changes further implicate tax laws, the board was required to have investors vote on them. The lawsuit aims to overturn the pay package pending shareholder approval and return any recovery from insurance covering the company’s officers and directors to the company’s coffers.

The Louisiana system is concerned with awarding mega-compensation with no company performance requirement. In this case, to “retain” a person whose name is on the door.  This is commonly referred to in corporate governance circles as being “paid for pulse” or as our old friend and long- time compensation consultant Bud Crystal called these types of compensation metrics the ability of a CEO to “fog a mirror“ when placed directly under said CEO’s nose.  Meanwhile, Simon Property Group claims that the suit is meritless and that it will vigorously defend the matter.

Interestingly, the lawsuit follows in the wake of a 73% vote against the company’s pay package for executives (say on pay), with most of the negativity of the vote focused on the $120 million bonus. The dissatisfaction with pay certainly wasn’t about past performance as the company has enjoyed a good run over the past few years, with the stock price rising from less than $100 per share two years ago, to more than $150 per share as of this post.

The Delaware Court of Chancery is due to take up the case in the coming months, so stay tuned for developments.

Where Would He Go, Anyway?

The supersized retention bonus begs the questions is such a payment necessary? Where would the current CEO namesake of Simon properties go, anyway?

As noted in our latest corporate governance roundup, a recent study from the University of Delaware noted that such retention bonuses are flawed because there is no natural “market” for CEOs to jump from one company to the next, as expertise in one firm does not easily translate at another. CEOs, therefore, typically cannot get jobs at firms in different industries very easily.

Add to that the fact that David Simon is the son of the late Simon Property Group founder Melvin Simon and helps control a special class of stock (Class B shares), which solely elects three board members. And you begin to wonder whether he could find a better gig than the one he has now.

According to the company’s most recent proxy statement, Mr. Simon served as the CEO or its predecessor for the past 17 years, but before that he worked on Wall Street. Perhaps the board is concerned he will jump ship and go back to high finance. A $120 million dollar pay day should do the trick for at least seven years and a day.


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6 comments on “Simon Property Group Says — Pay CEO $120 Million for Being David Simon

  1. Matt,

    Is CEO David Simon worth $120 million? If not, then the board of directors has made a big mistake. If he is worth $120 million, then the company is overly dependent on the talents of one person. This cannot be in the best interests of shareholders, and is also a big mistake.
    Compensation committees seem to treat stock awards like funny money, to be tossed about with abandon as if it were not real money. A stock award with no performance condition is giving away shareholders’ money.

    This reminds me of the 2004 article by Cliff Asness of AQR Capital: . Stock options and stock awards represent real money, and need to be treated accordingly. I hope that Simon Realty has a line item in their earnings report to deduct the cost of this award to their CEO. Even better, why not just deduct the cost directly from the quarterly dividend? I’m sure that would be quite popular with shareholders of a REIT.
    Rob

  2. Matt Orsagh, CFA, CIPM said:

    Robert, thank you for your comment. We will be interested in the Delaware court’s thought on this issue.

    We expect that investors will also have something to say to Simon’s board, with next proxy season particularly interesting.

  3. Raymond said:

    Thanks for highlighting this case. I am confuse. Does the pension fund has to pay for the expenses of their fund manager? Shouldn’t their fees be based on the performance of the property fund, and not bother with how the manager pays its management?

  4. Richard Martinez said:

    Who are we kidding? exec comp is nothing more than “good ‘ole boy” networking at its best. Once you’re connected, there is no way any BOD is going to expect you to live on a salary they themselves would’nt accept (i.e., since Boards are made up of other Execs, it is in their best interest to ensure fat packages for all!). Afterall, the regular man is the one who pays in the way of higher prices for the goods/services sold, lower wages to justify the pay for these fat cats, and what a better way to ensure that funny money stock comp makes it big by encouraging employees to invest in stocks via 401k plans (which they can’t vote the shares even as they help pump up the stock price). Isn’t it wonderful to have power/clout? (read: money).

  5. Matt Orsagh, CFA, CIPM said:

    Thank you for your comments. It will be interesting to see if these events influence future say-on-pay votes, and if the board addresses the compensation concerns of investors.

  6. Gloria said:

    I’m privy to some of the going’s on at some of Simon’s Malls. I know a few employees and I know how David’s dad used to run things. His reputation is still remembered fondly.

    A good man once told me that people are to be loved; things are to be used. David Simon’s philosophy is the antithesis to this. He uses people so that he can have things to love.

    He must be oblivious to the rampant discontent of his own employees who are overworked to the point of being chronically distressed; who are underpaid for their efforts and who are so understaffed that they must answer the phone during their lunch breaks, which means they don’t really get a break. (I believe that’s in conflict with labor laws in most states.)

    The disconnect is undeniable. The apathy towards his employee’s needs is unquestionable. I surmise that Simon stock won’t be staying above $150 a share for long but he won’t care. He’ll have an unearned bonus of $125 million.

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