As board finalizes top executive bonuses, will committee repeat last year's surprise decision?

Four directors set annual pay for CEO Craig Dubow and other top Gannett executives, clockwise from top: Arthur Harper, Marjorie Magner, Karen Hastie Williams and Duncan McFarland:

If it hasn't already, the board of directors' executive compensation committee is now finalizing 2009 bonuses for Chairman and CEO Craig Dubow and other top managers. We'll likely get details the middle of next month, when the shareholders proxy report is filed with federal regulators.

As much as the dollar amounts, an intriguing unknown is whether the four-member committee repeats last year's unexpected decision to give all-cash bonuses, rather than mandating 25% in stock, as was common practice in earlier years. After all, stock compensation more closely aligns performance with shareholder interests, as executives share some of the risk taken by a company's owners.

In 2007, for example, Dubow was given a $1.75 million bonus on top of his $1.2 million in base salary, that year's proxy report shows. (With stock options and other benefits, his total pay was $7.5 million.) Of that bonus, $437,500 was in company stock. (Full 2007 compensation table.)

But for 2008, the board gave Dubow, then-Chief Financial Officer Gracia Martore (left) and others six-figure bonuses entirely in cash. The reasoning? The short answer was this: The five highest-paid executives already owned enough stock to align their interests with those of shareholders, the committeee said. (The committee's executive pay section in last year's proxy report is on Pages 18-49.)

A strange rationale for bonuses
A close reading of the committee's voluminous report reveals a backstory on the 100% cash bonuses that's based on two broad arguments -- both of which undermine the philosophy of pay for performance:

1. The executives could not be held solely responsible for the stock's precipitous decline, given the deep recession that gripped the country -- "particularly in Arizona, California, Florida and Nevada and in specific markets such as Ft. Myers, Brevard, Phoenix, Detroit and Honolulu'' -- areas that overlapped "to a great extent with the areas of our country most impacted by the recession." This is an odd rationale. Isn't it management's responsibility to ensure the portfolio is sufficiently diverse to withstand financial tumult?
2. The committee blamed itself for forcing executives to take too much stock in prior years. Moreover, many of those stock awards "have experienced a decline in value the committee did not and could not anticipate when those awards were made." In fact, the committee absolutely could have anticipated a stock decline; nowhere is it written that stocks rise resolutely. Indeed, the purpose of stock-based compensation is so executives share the gain -- or pain -- experienced by their employers: the company's shareholders.

Ironic outcome for Dubow
The committee set the 2008 bonus amounts based at least partly if not entirely on figures recommended by Dubow himself, the proxy report says. I suspect the CEO (left) and the other top executives agitated for cash, too. In that move, they were effectively betting against GCI's stock -- a jaw-dropping gambit, since that meant they were actually aligning their interests against their owner-employers.

But ironically, that decision turned out to be costly. Dubow, for example, was paid $875,000 cash when bonuses were given in late February 2009. Shares were trading around $3.75 at the time. Had Dubow's bonus been paid 25% in stock, he would have received $656,250 in cash plus about 58,000 shares. Based on Friday's closing price, those shares alone would be worth nearly $829,000.

The question now: Will the compensation committee, and the top executives, make the same bet against Gannett's stock this time around? We'll find out next month.

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