25% of book value gains above 5% for Biglari?

[farnamstreet]

The Incentive Bonus Agreement provides Mr. Biglari the opportunity to receive annual incentive compensation payments based on the Company’s book value growth for each fiscal year.  If the Company exceeds a 5% annual book value growth hurdle, Mr. Biglari would receive an incentive compensation payment equal to 25% of the Company’s book value in excess of that hurdle.  Mr. Biglari will not receive incentive compensation payments under the Incentive Bonus Agreement unless the Company’s book value exceeds a 5% annual growth rate over the Company’s previous highest book value achieved during the term of the agreement, or the “high water mark.”  Accordingly, in a fiscal year where book value declines, the hurdle for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark, plus a 5% annual growth rate from the last high water mark.  Determinations of book value and the incentive compensation payments to Mr. Biglari under the Incentive Bonus Agreement are subject to the approval of the Governance, Compensation and Nominating Committee of the Board of Directors of the Company.

 

oh and they bought the lion fund.

 

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=7219296-1239-15227&type=sect&TabIndex=2&companyid=11049&ppu=%252fdefault.aspx%253fcompanyid%253d11049

 

[Redskin212]

An unusual compensation arrangement for a public company or should I say a public hedge fund?  No mention of what is happening with his $900,000 salary.  The existence of a large salary and a potentially very lucrative incentive compensation arrangement appears to be very greedy and to an extent double dipping.

 

Redskin

[Dorsia1]

I agree. If he eliminated the 900k salary then this would be applauded and looked upon as a CEO who really cares about his sharehoalders. I am afraid that it didn't take Mr. Biglari very long to show his true colors.

It also shows that those opposed to the name change saw something that some others didn't, a very big ego.

The next thing to be announced will be an annual "Sardar Biglari Day" at the Steak n shake restaurants. Milkshakes double the price: all proceeds to Sardar Biglari and family.

 

[valuecfa]

If he eliminated the 900k salary then this would be applauded and looked upon as a CEO who really cares about his sharehoalders.

 

I would not be clapping.

 

This is not an alignment of interests with those of shareholders. I''m sure there will be attempts to spin this as shareholder friendly and interest alignment. This is not that. This is greed.

 

Just think of how aligned his interests would be if he were allowed 75% of book value gains > 5%  ???

 

While this percentage may not be a large amount initially...With all these mergers he is pursuing (and planning to pursue) BH will be a multi-Billion dollar company in no time. The larger this company gets the larger his compensation will be when he grows book value.

 

This is fine for a hedge fund, as they have to grow AUM legitimately. BH isn't a hedge fund it is a public corporation. All Biglari has to do is empire build to get a raise if this passes.

[Myth465]

I am interested in seeing what some of the guys on the board will say about this one.

Maybe he is aligning his interest with shareholders or something like that. Call a spade a spade.

 

 

[Nnejad]

"(ii)    “Book Value” equals the amount of Total Shareholders’ Equity as set forth in the Consolidated Statement of Financial Position of the Company, prepared in accordance with the accounting principles adopted by Company (as set forth in the Company’s Annual Report on Form 10-K for the applicable fiscal year), as of the applicable Incentive Compensation Calculation Date.  Book Value as of the applicable Incentive Compensation Calculation Date shall be determined by reference to the consolidated net income and other comprehensive income of the Company, and appropriate adjustments to such Book Value shall be made for any dividends, shares issuances or buybacks and other factors in accordance with Exhibit A hereto (but Book Value for the next succeeding Incentive Compensation Calculation Date shall not reflect such prior adjustments).  The computations and procedures required to calculate Book Value, including without limitation, any accounting procedures used to implement any adjustments, allocations and other matters, shall be made in such reasonable manner as the Company in good faith shall determine to be appropriate and in accordance with Exhibit A hereto, and shall be subject to the approval of the Governance, Compensation and Nominating Committee (the “Committee”) of the Board of Directors of the Company (the “Board”)."

[OracleofCarolina]

Sanjeev...what are your initial thoughts?

 

my initial thought is I want a higher hurdle rate and a low

% to Sardar..

[Guest Bronco]

I am disappointed.  I wrote on here that the name change brought up some red flags.  This is another.  But lets break this down.

 

If book value goes up 10% per year, he gets 25% of the amount over 5%, or 12.5%.  So if book value in the future goes from $400 million to $440 million in a given year, he gets 12.5% of $40 million.  That is $5,000,000.  I think of that amount, he is required to buy stock with 30% of that bonus (although I am unsure of the 30%).

 

I will be selling out of my stake next week.

 

I am really tired - someone please check my math.

[Myth465]

Now with my comments I would still invest in BH. FUR has a similar annoying situation. I however would wait until they are below that water mark and are undervalued. I would not hold BH through overvaluation and would basically trade it based on intrinsic value. It would not be a long term buy and hold.

 

He is giving up on what I am guessing was 2 and 20% on the Lion Fund, He also may have lost alot of his control in BH depending on what happened with the Lion Fund shares. Where they canceled?

[shalab]

It's a lot less than that. A $400 million co (in terms of book value, not market value) that grew book value at 10%, would produce a bonus of $500K to him, from an equity growth of 40 million.

 

You got your math wrong. This translates to 5 million pay day. Doing a tender against AAP for at current prices would approximately translate to 25 million pay day for Biglari. This is excluding the retained cash at SNS. If the retained cash is 50 million, we are looking at 12.5 million additional pay for Biglari. Diluting shares shouldn't help Biglari get paid more.

 

I dont expect Biglari to work for free and would like him to measure his compensation by per share increase in value - as is the case with others such as MPIC funds, Pabrai funds etc.

[Guest Bronco]

Shalab - help me out, I think we are saying the same thing - the $40 million increase in book value would equal a $5 million bonus (off a $400 million base).  If I am wrong, my apologies.

 

Keeping the fairness of $5million aside, the thing that is driving me crazy is the whole "I want to be just like Buffett, except when it comes to compensation".  Well in many ways, that is the whole point.  Buffett is shareholder first, all the time.  He makes mistakes, but is all about shareholder value.

 

Biglari doesn't give me the same warm and fuzzy feeling. 

 

 

[shalab]

Keeping the fairness of $5million aside, the thing that is driving me crazy is the whole "I want to be just like Buffett, except when it comes to compensation".  Well in many ways, that is the whole point.  Buffett is shareholder first, all the time.  He makes mistakes, but is all about shareholder value.

 

Biglari doesn't give me the same warm and fuzzy feeling.

 

I think Biglari said in the annual meeting that those who expect BH to be like BRK will be disappointed. He admires Lampert in addition to Buffett and mentioned that BH will be run like a hedge fund. Kind of makes sense as Pabrai Funds is also named after its founder as was the Buffett partnership.

 

That said, this agreement will go into effect a year from now, so there is no need to rush selling the stock.

 

I dont like the AAP tender personally - I would have liked the retained cash to be used for stock purchases as opposed to issuing new stock. The new stock issuance only helps Biglari to pocket more money.

 

 

[Redskin212]

Call me crazy, but isn't it a strange coincidence that all the activity of Sardar's occurred on the eve of the BRK annual meeting/weekend.

 

 

[Parsad]

Here is the math:

 

1)  Take the example of an increase in book value of $40 million on a $400 million base. That means book value went up 10%.  For his incentive, Sardar would get .25*(10%-5%) = 1.25%.  1.25% of $40 million is $500,000.

 

You've got the math wrong!  Book goes up 10%...$40M.  His hurdle is 5%...$20M.  He gets 25% of the difference...$5M!  Cheers!

[Parsad]

Sanjeev...what are your initial thoughts?

 

my initial thought is I want a higher hurdle rate and a low

% to Sardar..

 

We were the only investors to write a letter to the board on the name change...yet he got 90% approval.  I don't like this one iota, but I'm sure it will pass again, as there are too many people on the wagon now.  We will liquidate most of our holdings over time.  I will also be merging the Steak'n Shake message board into the General Discussion board.

 

I dont expect Biglari to work for free and would like him to measure his compensation by per share increase in value - as is the case with others such as MPIC funds, Pabrai funds etc.

 

The only problem with this argument is that Steak'n Shake throws off about $15M in free cash flow and $6M in net earnings every quarter.  Book will grow without doing anything at all, as earnings are the equivalent of an 8% dividend yield.  Hedge fund managers don't have that luxury.  Finally, the most important difference between BH and say MPIC or Pabrai Funds is that Sardar has access to a permanent base of capital...there will never be a redemption.  Hedge funds operate on the assumption that their partners will redeem capital at some point and most institute a multi-year lock-up.  In our case, we don't even have that luxury as we have no lock-up!  Cheers!

[Guest kbateman]

Yep, $5 million.  I removed my earlier post, since it would be confusing to extrapolate the rest of it off my error.  Turns out doing math at midnight EST is not a good idea.

 

I think that 5% hurdle will be much tougher than many think it to be right now.

[Parsad]

I think that 5% hurdle will be much tougher than many think it to be right now.

 

That hurdle is a piece of cake, as he can use overvalued shares to buy up anything he wants as long as it increases book value.  Shareholders are going to give Sardar the best birthday gift ever!  Cheers!

[Parsad]

Whether anyone likes it or not, this move is ABSOLUTELY, SOLELY to prevent anyone from ever taking this company away from him.  He will pour 30% or more of his incentive allocation into the stock, and increase his ownership dramatically over the next couple of decades.  In fact, he could go buy Burger King with stock...increase book by $1B, and he would take home almost $250M!

 

Now if it were an increase in book value per share, then I would have less of a problem.  But as far as I can see from the SEC filing, the incentive allocation is based on 25% of company book, not book value per share.  Cheers! 

[shalab]

We were the only investors to write a letter to the board on the name change...yet he got 90% approval.  I don't like this one iota, but I'm sure it will pass again, as there are too many people on the wagon now.

 

Sanjeev, you atleast showed integrity in voting against Sardar move and writing him a letter. I voted against the name change but didnt write a letter - should have in hindsight.

 

I think you are right, I too expect this vote to pass. It will take one year for the new compensation scheme to take into effect - so there is time for one to clear ones position. No need to rush to sell.

 

 

[shalab]

 

I was mistaken about the SEC filing, the book value is adjusted for share issuance. This is stated in exhibit 2 in the SEC filings.

 

(ii)    “Book Value” equals the amount of Total Shareholders’ Equity as set forth in the Consolidated Statement of Financial Position of the Company, prepared in accordance with the accounting principles adopted by Company (as set forth in the Company’s Annual Report on Form 10-K for the applicable fiscal year), as of the applicable Incentive Compensation Calculation Date.  Book Value as of the applicable Incentive Compensation Calculation Date shall be determined by reference to the consolidated net income and other comprehensive income of the Company, and appropriate adjustments to such Book Value shall be made for any dividends, shares issuances or buybacks and other factors in accordance with Exhibit A hereto (but Book Value for the next succeeding Incentive Compensation Calculation Date shall not reflect such prior adjustments).  The computations and procedures required to calculate Book Value, including without limitation, any accounting procedures used to implement any adjustments, allocations and other matters, shall be made in such reasonable manner as the Company in good faith shall determine to be appropriate and in accordance with Exhibit A hereto, and shall be subject to the approval of the Governance, Compensation and Nominating Committee (the “Committee”) of the Board of Directors of the Company (the “Board”).

[valuecfa]

It's funny to even fathom this being shareholder friendly.

 

 

Using a company the size of Berkshire's $136 Billion in total Consolidated shareholder's equity amount (as of the end of 09'), if Berkshire would have a 15% growth in book value in 2010, and compensated himself in the manner of Biglari's wanting, then Buffett's compensation would be .25(.10)(136 Billion)= $3.4 Billion

 

Not bad for a year's work.

 

 

If Prem Watsa adopted the same policy...

Fairfax increased their total equity from 4.866 Billion to 7.391 Billion or a growth in equity of 52% in 09' (without adjusting for shares issued/purchased). If Prem had the same salary (as Biglari wants), then Prem's paycheck last year would have been .25(.47)(4.86 Billion)= $571 Million

 

It is just insane.

 

 

Edit: Just realized i didn't adjust BRK's Equity Value for non-controlling interests, but this would have a negligible effect on the outcome.

[elltel]

reading the annoucement further... it looks like he HAS to buy with his compensation payment shares in the company within a certain period each year.

it says a minimum of 30% of his compensation.

 

over time... we (shareholders) are going to sell the shares to him.... he will end up owning most of the company.......

[elltel]

and my thoughts on why he has done it now... it will be almost a year until shareholders meet him again to ask him. By then it will be in the bag, so to speak.

 

[omagh]

BUT, if BRK paid out $3.4 billion in cash and FFH paid out $571 million in cash, then book decreases by a similar amount.  Then how is the following snippet from the agreement interpreted?:

Mr. Biglari will not receive incentive compensation payments under the Incentive Bonus Agreement unless the Company’s book value exceeds a 5% annual growth rate over the Company’s previous highest book value achieved during the term of the agreement, or the “high water mark.”  Accordingly, in a fiscal year where book value declines, the hurdle for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark, plus a 5% annual growth rate from the last high water mark.  Determinations of book value and the incentive compensation payments to Mr. Biglari under the Incentive Bonus Agreement are subject to the approval of the Governance, Compensation and Nominating Committee of the Board of Directors of the Company.

 

He then has to buy in shares from the market @ 30% of compensation.  Further, the hurdle continues to grow even though Biglari has taken his comp which decreased overall book by 5%.  He still has to grow the remaining 95% of book.  It's an overall measure rather than a per-share measure which encourages behaviours which are not necessarily value-enhancing.

 

It's still a perverse agreement and completely self-serving -- ego writ large!  This smells of a get rich scheme on the backs of shareholders who provide capital, but receive an unfair share.  The CEO should operate at the leisure of the shareholders, not the other way around.

 

-O

 

It's funny to even fathom this being shareholder friendly.

 

 

Using a company the size of Berkshire's $136 Billion in total Consolidated shareholder's equity amount (as of the end of 09'), if Berkshire would have a 15% growth in book value in 2010, and compensated himself in the manner of Biglari's wanting, then Buffett's compensation would be .25(.10)(136 Billion)= $3.4 Billion

 

Not bad for a year's work.

 

 

If Prem Watsa adopted the same policy...

Fairfax increased their total equity from 4.866 Billion to 7.391 Billion or a growth in equity of 52% in 09' (without adjusting for shares issued/purchased). If Prem had the same salary (as Biglari wants), then Prem's paycheck last year would have been .25(.47)(4.86 Billion)= $571 Million

 

It is just insane.

 

 

Edit: Just realized i didn't adjust BRK's Equity Value for non-controlling interests, but this would have a negligible effect on the outcome.

[claphands22]

fascinating but not a surprising move. he drives an Aston Martin, changed the name of the corporation after himself, and I read somewhere that he aspires to be a billionaire...all of the high dollar-earners last year were hedge fund managers who toil in nice offices shuffling papers and creating little of value for so society at large. why would somebody as smart and ambitious as biglari not want an incentive stricture similar to hedge funds? infact his incentive structure is worse than most hedge funds since he doesn't get 2% of the assets and their is a strong water mark. yes his capital is permenant and the business should do over 5% a year so you might agrue getting 25% of profits after the 5% water mark is little too high and 10~15% is more acceptable but did this incentive structure really surprise people？。 

 

I am not defending the move or overcompensated members of society.

 

I have not  been a shareholder of SNS errrrrrrr BH for several months but I would be a buyer of BH at the right price...but first I will have to readjust my IV for increased G&A.