Simon Stays: Retaining the already retained at Simon Property

By Scott Patterson – Compensation Analyst Manager

Thanks to an employment agreement effective July 6, 2011 there is a very good chance David Simon will be celebrating his 25th anniversary as CEO of Simon Property Group in 2019. The new contract has provided Mr. Simon with millions of reasons to stay on with the company for eight more years. As a member of the Simon family that founded the company and co-owner of all the Class B Common Stock that allows for the election of three directors as a separate class, one would imagine Mr. Simon would already be willing to remain with the company. Perhaps it is with this family clout that Mr. Simon was able to obtain such a lucrative deal; one that would make him a fool to walk away from. The agreement may also be the reason for shareholder approval on executive compensation dropping from 97% last year to 25.75% this year.

Let us look at some highlights of this new deal:

During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) at the rate of $1,250,000…. The Committee may, but shall not be required to, increase the Annual Base Salary at any time for any reason…. The Annual Base Salary shall not be reduced at any time, including after any such increase….

Although a base salary of $1.25M is not extraordinary for an S&P 500 company, it is reassuring for Mr. Simon that for the next eight years his salary will not be decreased and may “at any time” have the chance of being increased. Definitely not a bad starting point.

The target Annual Bonus, which shall be attained if the Committee determines that target performance is achieved, shall be 200% of the Annual Base Salary in effect on the last day of the applicable fiscal year (the “Target Bonus”). 

Again, not atypical of a 500 company, but more interesting is the compensation discussion and analysis’ (CD&A’s) description of the annual cash bonus. As for the performance targets: “There is no mechanical formula that determines the amount of these bonuses, and the committee considers individual performance as well as company performance in determining cash bonuses”. In other words the award is discretionary. And the 200% target stated in the contract is stated a little differently: “… his annual target cash bonus will be not less than 200% of his base salary” and “the committee has the discretion to award cash bonuses above the 200% level when it believes it is appropriate”. So it turns out the annual cash bonus is attained at the whim of the committee and “appropriate” for increase, as it paid out $4M to Mr. Simon for FY2011.

So far we have an initial base salary of $1.25M that can only go up and a bonus that seems to have no bounds. Now for the big bucks.

Under long-term awards Mr. Simon will be granted at least $12M in LTIP units that are “subject to the achievement of objective performance measures over a given period and then vest in two installments, subject to the executive maintaining employment, on January 1 of the second and third years after the end of the performance period”. Although a baseline of $12M is nice, this plan does appear to have some constraints due to the award vesting depending on set TSR targets relative to: the MSCI US REIT Index (60%), the S&P 500 (20%) and Absolute TSR (20%). In addition to these performance targets, the deferred vesting also contains some retention factors. All of Mr. Simon’s pay will not simply be based on discretion.

This would seem to be enough to keep a CEO happy, but the ultimate payoff for Mr. Simon is the one million LTIP units with a grant date value of nearly $120M awarded as a retention grant. These units will vest one-third on the 6th, 7th and 8th anniversaries of the grant date. With an annualized $15M over the total vesting period at stake shareholders should have comfort that Mr. Simon will stay.

Overall it appears that this new contract will keep Simon Property Group’s CEO in place for years and one can see why it met with his approval. However, with only a quarter of votes cast approving executive pay at the 2012 annual meeting, shareholders seem to be less concerned whether Mr. Simon stays, but eagerly awaiting what Simon Says.