It is no secret that Sprint Nextel Corporation (NYSE: S) is in trouble. CEO Dan Hesse has been under pressure by holders on and off during his tenure. Many of the problems facing Sprint are not the fault of Hesse because the problems were there before he took control. Still, as CEO he often has to take the blame. Now Hesse is out with a SEC filing showing a voluntary deduction to his own compensation package. Part of the blame may be on the iPhone from Apple Inc. (NASDAQ: AAPL).
The company filed an 8-K after the close of trading Friday. Hesse noted that the company has received feedback from some shareholders relating to the discretionary adjustment the Compensation Committee made under the incentive plan payouts for the impact of the iPhone on its financial results.
Hesse noted in the filing, “I do not want, nor does our Compensation Committee want, to penalize Sprint employees for the company’s investment with Apple, so I will forego this adjustment to my compensation. I have also voluntarily decided to take some additional actions regarding my personal compensation, and the Compensation Committee has agreed. I’m hopeful that these actions will allow the company to remain focused on delivering the best overall customer experience in the wireless industry, which is what will serve the company best in the long run.”
There is a lot more to this story if you look past the raw terms of the cuts. Here are some of the actions being taken on Hesse’s compensation:
- Salary cut on a pro-rata basis over his remaining paychecks in 2012 to repay the $239,760 associated with the discretionary adjustment he received in February under the 2011 Short-Term Incentive Plan.
- Salary cut on a pro-rata basis over his remaining paychecks in 2012 to repay the $106,463 associated with the discretionary adjustment he received in February related to the performance units under the 2009 Long-Term Incentive Plan.
- Forfeits any right to a payment of $250,500 associated with the discretionary adjustment earned with respect to the 2011 performance period for the performance units under the 2010 Long-Term Incentive Plan. Subject to the satisfaction of applicable vesting conditions, this payment would otherwise be payable to Hesse in 2013 under the terms of the plan.
- Forfeit any right to payment of $294,107 associated with the discretionary adjustment earned with respect to the 2011 performance period for the performance units under the 2011 Long-Term Incentive Plan. Subject to the satisfaction of applicable vesting conditions, this payment would otherwise be payable to Hesse in 2014 under the terms of the plan.
- Reduce, from 200% of Hesse’s annual base salary ($2.4 million) to 170% ($2.04 million), his target opportunity under the 2012 Short-Term Incentive Compensation Plan.
- Forfeit two million performance units (valued at $2 million) granted to Hesse on February 22, 2012 under the 2012 Long-Term Incentive Compensation Plan.
Again, this feels like one of those situations where there is just a lot more to the story than meets the eye.
Hesse went on to say, “These voluntary actions regarding my personal compensation, which total $3,250,830, will eliminate any benefit for me to the discretionary adjustment the Compensation Committee made earlier this year, and will set my 2012 incentive compensation target opportunities at my 2010 levels.”
Hesse said this voluntary reduction of his future compensation does not constitute “Good Reason” under his amended and restated employment agreement dated December 31, 2008. Hesse also agreed that if his employment terminates prior to completion of the salary reductions described in the first two bullet points above to a reduction of any amounts otherwise payable to him or his estate in an amount necessary for Sprint Nextel to “fully recover the indicated amounts, and to the extent insufficient to do so, to repay the remainder as soon as reasonably practicable.”
Doesn’t that sound a bit like a clawback of pay similar to what you have heard about for Wall Streeters during the financial crisis?
What is interesting here is that this starts out using the ‘investment’ with Apple over the iPhone. It is not typical for a CEO to take a pay cut and to address dealings with an outside company as one of the first issues. That is particularly the case in a hot product like the iPhone.
Another take here, and perhaps the most important take, is that Hesse is losing serious support from inside the company. The way that the news reports went in February it looks like the board rejected Hesse’s efforts to acquire Dan Hesse, to purchase MetroPCS Communications, Inc. (NYSE: PCS) for the no-contract and ‘pay as you go’ cellphone service offering. It is worth noting that MetroPCS shares hit another 52-week low on Friday and this one has been battered since earnings just over a week ago.
The question we are asking ourselves here is really about the timing of this filing. By sneaking the news out on Friday after the close of trading, it sure seems like the company is hoping that other news will be more front and center besides a ‘voluntary’ pay cut. The news may not be a stock-moving event on its own merit but this certainly feels like the second move from Sprint that would lead us to question just how long Dan Hesse has left as CEO of Sprint Nextel.
Sprint is burdened with debt of more than $20 billion at the end of 2011 and its share price of $2.36 compares to a $2.10 to $6.45 range of the last 52-weeks. The $7.1 billion market capitalization of the common stock is only a small portion of the Sprint Nextel enterprise value.
Blocking a CEO-led acquisition and then sneaking in a filing late on a Friday showing a ‘voluntary’ pay cut for the CEO… Honestly, how much longer does Dan Hesse have as CEO?
JON C. OGG