General Growth Properties

Proxy published: 3/5/2015

Annual meeting: 4/16/2015

The total compensation package for General Growth CEO Sandeep Mathrani is down from last year, but the board recently signed an astonishing employment agreement which guarantees compensation will rise again, considerably. It insulates the executive from performance failures, and may incentivize a future change in control that would allow Mathrani to reap astonishing rewards, whatever the outcome for shareholders.

In February 2015, before a prior agreement expired, the company entered into a new employment agreement with Mathrani for an initial five-year term beginning January 1, 2015. Employment agreements for CEOs have become rarer, and any 5 year agreement – particularly one the company cannot fail to renew without incurring consequences – would be problematic, but several components of this agreement are of particular concern.

For example, the agreement not only provides for annual salary ($1.2 million) and target bonus ($3 million), but “a guaranteed minimum annual bonus of $2,000,000” for 2015 and 2016. In addition, under the agreement Mathrani was granted $25,000,000, “in the form of restricted shares of Common Stock or LTIP Units, at the election of Mr. Mathrani, which vests in full on the fifth anniversary of the Commencement Date.” Given that this award was made in 2015 it doesn’t show up in the summary compensation table, but shareholders should consider it as they evaluate the pay package they are voting on.

If the company terminates Mathrani’s employment without “cause” or does not renew the 2015 Employment Agreement following the initial term, or if Mr. Mathrani terminates his employment for “good reason,” . . . then Mathrani would receive two years of salary and “two times his annual bonus for the previous year.” Given the guaranteed minimum bonus, if the agreement is broken in 2017, the bonus would be $4,000,000 minimum.  He would also receive full vesting of the $25,000,000 award and “two years of welfare benefit continuation.”  Definitions for good reason include: “reduction of the Executive’s salary,” or “the relocation of the Executive’s principal place of employment to anywhere other than the Company’s office in New York.” Likewise, if employment “is terminated due to death or disability,” then he is eligible to receive a partial bonus, as well as full vesting of all awards.

In addition, under the agreement,  Mathrani’s annual Awards commencing with the 2015 fiscal year and the LTIP Units granted on February 12, 2015 vest upon a change of control. Under pressure from shareholders many companies have moved away from such vesting.  It creates a situation where if the requirements of long-term incentive payment become too challenging to achieve – perhaps due to external factors – the executive has a reason to push for a sale of the company at any price. With the agreement, the long-term incentive for Mathrani may have been separated from the long-term interests of shareholders.

Under the employment agreement, if this package qualifies as “excessive” under IRS definitions, incurring serious tax consequences for the company and the executive, the company and shareholders will foot the bill.  This payment, known as a gross up, was once a more common practice, but faded quickly as they became harder to justify, and the idea that such features were necessary because peers were doing them became a mirage.

Here’s the language from the agreement:  if payment “would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Company shall pay to Executive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-Up Payment in Executive’s adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made.”

In English: they/we are going to pay him and pay him and pay him until it is as if the tax limit were not triggered at all.

It should be noted that pay at General Growth has been criticized by shareholders as excessive for some time. As noted in the proxy, “The aggregate annual compensation paid to Mr. Mathrani fell between the median and 75th percentile of the peer group.”  The peer group itself includes larger companies, and three that appear on our “overpaid” list, so paying on the high side of these peers is particularly troublesome. Now the new agreement gives shareholders even more reason for concern.