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News surfaced last week during earnings season on Wall Street just how difficult the economy is making it for many in corporate America and beyond for that matter. It extends to the rank and file that helps to execute on a daily basis for these very same businesses. Last week alone saw announcements from several high profile companies representing the backbone of corporate America in some way shape or form, of more than 70,000 layoffs in sectors from trucks to technology. But it would seem not everyone is feeling the pinch.
Callaway Golf (ELY: NYSE) reported on its 8-K filing with the Securities and Exchange Commission that its board of directors has approved a bonus payout for the company’s senior management. While the amount wasn’t 100% of the targets previously established by the compensation committee, it was nonetheless a healthy return.
A limited payout to the Executive Officers under the 2008 annual incentive plan was approved with several factors taken under advisement in justifying the decision, according to the filing. It appears the factor that weighed the greatest was management’s ability to deliver, “ record sales and earnings in the first half of 2008.”
The incentive payout for 2008 was based as a percentage of base salary, which was 34% for George Fellows, Chairman and CEO and 18.7% for each of the other members of the Executive Officers. In dollar terms, the compensation payout was $311,231 for Fellows; $102,850 for Steve McCracken (Chief Administrator Officer, Sr. Exec. VP and Sec.); $93,500 for Brad Holiday (Sr. EVP and CFO); $71,096 for Thomas Yang (Sr. VP of International); and $66,421 for David Laverty (Sr. VP of Operations).
Staying on the theme of compensation for a moment, the board of directors at Callaway Golf approved the recommendation of its Compensation Committee with respect to the 2009 long-term incentive program for the Company's Executive Officers. It pertains to the same individuals listed above who received partial, but nevertheless, bonuses for 2008. The Committee approved a targeted long-term incentive grant value for each of the Executive Officers as follows: $3.2 million for George Fellows and $350,000 for each of the other Executive Officers. For each Executive Officer, 2/3 of the grant value will be allocated to stock options and 1/3 will be allocated to restricted stock units. Perhaps what’s even most interesting isn’t necessarily the dollar levels but rather the exercise price method that was granted for these stock options, which will play a role in determining the eventual total payout of this plan back to each recipient.
According to the Company’s 8-K filing with the Securities and Exchange Commission, the awards were granted effective on the second trading day following the issuance of the Company's actual earnings release announcing final 2008 results. It begs the question whether management’s was swayed in any way with respect to presenting its opinion to Wall Street analysts regarding its outlook.
In his opening statement to the investment community, Callaway Golf’s CEO, George Fellows stated last week, “The macroeconomic turmoil being faced on a global basis remains relatively unabated. Clearly, we've not seen the bottom as yet and we'll continue to face headwinds into 2009 as we have in the last quarter of 2008.” Appropriate comments given the current plight of the world. However, looking back in time and frankly not that long ago (October 30, 2008) Fellows’ opinion on the economy and a bottom has changed. “I think the election is having a fairly pronounced effect on some consumer confidence which I really believe very strongly will change or begin to change on November 5. I’m increasingly of the opinion that when the benefit of trash talking the economy and everything else that’s going on that currently exists on the part of all political parties, goes by the boards i.e., when the election is over, I think that the tenor of the social discourse is going to begin to improve and I think that will begin to have some effect on later in the year purchases and holiday. I believe that we may very well be bouncing along the bottom a bit now and when the election is over, I think we will begin perhaps a slow, but nevertheless, recovery period.”
At the time Fellows was selling to the street his company’s prospects for the fourth quarter along with hitting sales and earnings targets for 2008. Now, it can be argued these remarks are being taken out of context and with the liberty of hindsight being employed. Fair enough and I will accept the fall out that may or may not deliver. But what isn’t factored in with respect to these comments is that in 2008, prior to the first quarter operating results being released (January 31, 2008), Callaway’s Compensation Committee had already adopted on January 14, 2008, the 2008 Senior Management Incentive Program. On January 16, 2008, Callaway Golf Company announced estimated net sales for the year ended December 31, 2007 to increase approximately by 10% to a record $1.125 billion with corresponding earnings per diluted share of $0.79 to $0.81. The stock options under the 2007 Incentive Program were established with an exercise price of $14.92. The difference this year is in the sequence of events. Management spoke prior to the exercise price being established by market forces versus in the prior year it was already determined ahead of its conference call to Wall Street. Analysts have been known to be influenced by the opinion of a company’s management (in any industry for that matter) and this is where it gets interesting. Callaway shares closed last Thursday at $7.85, which coincides with the second trading day following the issuance of the Company's actual earnings release announcing final 2008 results. Again, recall that the Company’s CEO had a marked change of opinion with respect to the economy which represents the strongest challenge any business is currently faced with this year. At the very least, Callaway management was put in a difficult if not a no win situation given the fact its stock option price hadn’t yet been established. How much of a relationship, if at all, its words had on the fundamental movement of its stock price is difficult to determine. The overall market swings, influenced by the macro economy, are also to be considered in the equation.
The 2009 exercise price for stock options represents a 47% haircut from the price established in 2008, despite partial bonuses being awarded for a job well done to senior management. As a footnote on the cash bonuses generated for the 2008 performance, the Compensation Committee agreed to pay 68% of the established targets, which is well within its rights to do so. Time will tell whether the exercise price under the 2009 Incentive Program is a good or bad trade... No word yet what the management team must achieve in 2009 in order to qualify for some or the entire bonus program.