[C]onsider AK Steel Holding Corp., the country's third-largest publicly traded steel manufacturer. Until recently, the Middletown, Ohio, company's executive bonus plans contained a simple ground rule: If the company doesn't report net income, its executives don't receive bonuses that year.
For several years, the company's pension plans helped drive executive pay higher. Pension plans can boost earnings because, under accounting rules, companies must indirectly record as income some of the investment gains that pension-plan assets earn, a benefit that really took off during the torrid bull stock market of the late 1990s.
AK Steel benefited more than many: In 2000, for example, the company reported total pretax profit of $212 million -- 22% of which could be traced to its pension. By 2001, however, that changed. The company started recording pension expense, which rose to $625 million in 2002, contributing to a full-year loss of $502.4 million.
AK Steel executives didn't need to worry, however, because the terms for receiving bonuses quietly changed, too.
In describing the plan, the company effectively overrode the clause prohibiting payment of long-term bonuses if the company had no net income, inserting the words "except as otherwise approved by the Compensation Committee," according to a proxy filed with the SEC in April of 2002. The changes became official earlier this year.
In January 2003, two weeks before announcing the full-year loss for 2002, the company amended the terms of its annual bonus plan, so that bonuses would be pegged to net income "excluding special, unusual and extraordinary items." (The company similarly amended its long-term incentive plan.)
As a result, bonuses went unharmed by the new pension expense, which AK Steel classified as "unusual." Over the past two years, under the new rules, AK Steel has paid bonuses to its top five executives totaling $12.2 million, $7.7 million for me, a 77% loss for you.including $7.7 million to Chief Executive Richard M. Wardrop Jr., according to proxies filed with the SEC.
AK shareholders haven't been quite so fortunate: The company's shares are off 77% during the past two years, well behind its larger rivals U.S. Steel Corp. and Nucor Corp.
A spokesman for AK Steel declined to discuss the company's moves, including how much the bonuses would have been reduced if pension expense had been taken into account. Compensation consultants say it is nearly impossible to determine that from company filings.
So if you owned $1,000 worth of AK Steel stock in your 401(k) account over the last two years, it would now be worth $230 — while CEO Wardrop "quietly" took home $7.7 million in bonuses (in addition to his salary of $2 million).
Do these actions demonstrate business competence? I don't think so. But what do we do with a CEO who decimates his investors' confidence (not to mention their investments) and endangers the health of his company?
AK Steel today [12/12/02] said that President George W. Bush intends to appoint Richard M. Wardrop Jr., Chairman, President and CEO of AK Steel, to the Advisory Committee for Trade Policy and Negotiations (ACTPN) for a two-year term.
The purpose of the ACTPN is to provide the U.S. Trade Representative with overall policy advice on matters concerning objectives and bargaining positions on trade agreements, according to a statement released Tuesday by the White House. According to the statement, the ACTPN consists of representatives of non-federal governments and labor, industry, agriculture, small business, service industries, retailer and consumer interests. Mr. Wardrop is the only representative of a steelmaker among the appointees.
According to Bush, Richard M. Wardrop Jr. is qualifed to give "overall policy advice on matters concerning objectives and bargaining positions on trade agreements," having given himself $7.7 million in bonuses over the last two years while losing $41 million in the first quarter of 2003 alone.
This is Bush's America, the Peter Principle writ large: not so much an avoidance as a hatred of competence — a culture and a national economy of meritopathy, nominally led by the AWOL business-failure son of a one-term president.