Bargain hunters in Scientific Games Corp. should know that those shares come with high accounting and governance risk. The New York lottery service provider's managers have prioritized their own interests in the past and reported on the company's finances with optimism.

Scientific Games's financial statements reflect that it's had a very aggressive AGR since September, indicating higher accounting and governance risk than 93% of the companies in North America.

To be sure, some market players see a bright future for the company. Chairman and CEO A. Lorne Weil said in a statement this February that he hopes to grow the business by taking steps such as investing overseas. And as cash-strapped state governments search for ways to make revenue, the U.S. Justice Department said in recent months that using the internet to sell lottery tickets doesn't violate the Wire Act. The opinion "could provide substantial growth opportunities for the industry in the years to come," Weil said.

Scientific Games' stock price traded at $10 per share near closing time on Tuesday, down around 1.6% for the day after having risen in earlier trading, according to Yahoo. It had plunged more than 8% on Monday. The chart below shows that recently, for a short period, investors had been growing more optimistic about the company's prospects. However, this trend has reversed. Scientific Games has underperformed its benchmark index over the last year, as it faces continued accounting and governance risk."

Investors should consider the company with caution. Scientific Games is effectively controlled by one person, the billionaire Ron Perelman. He owns a third of the company through MacAndrews & Forbes, the holding company of which he is the sole stockholder.

The managers have awarded themselves remarkable payments over the years. For example, Weil has been board chairman since October 1991, but he took a brief hiatus from his role as CEO in 2008. When he returned to the post in 2010, he received sign-on equity awards consisting of two million options and two million restricted stock units. The extraordinary size of this award, highly concerning even as a "golden hello" to a new executive, is even more so as a "golden welcome-back."

In another example, the company employed Weil's brother Richard as vice president of international business development under an agreement dated January 1, 2003. In July 2004 he received a complex severance package that involved $498,100 in cash as well as other components such as options and deferred stock valued at $918,000 and $385,000, respectively.

Meanwhile the company's accounting of past acquisitions, such as its purchase of the U.K.-based fixed odds betting terminal supplier Global Draw Limited in 2006, reflects that Scientific Games paid more than the market price for its investments and continues expecting a return at some later date. Time will tell whether Scientific eventually is able to realize the revenue potential implied by the high price it paid for its acquisitions.

GMI Ratings gives Scientific Games an F on its corporate governance. The company's spokeswoman did not respond within press time to a request for an interview.

Region: North America
Sector: Cyclical Consumer Goods / Services
Industry: Casinos / Gaming
Market Cap: $1,044.8mm (Mid Cap)

ESG Rating: F
AGR: Very Aggressive (7)

The post GMI Ratings Governance Issue | Scientific Games Corp. appeared first on GMI Ratings.

What is the price of failure? With 14 million Americans unemployed, more people are paying attention to CEO pay packages. The unemployment rate has been over 9% since April 2009, but CEOs continue to collect multi-million dollar payouts, even as their companies deliver lack-luster returns to shareholders.

Even though many investors are frustrated with executive pay packages, firing CEOs can be an expensive option.

For example, when executives at Hewlett-Packard, Bank of New York Mellon, Burger King and Yahoo were asked to step down this year, they walked away with severance packages that cost shareholders a combined $60 million. For instance, when Léo Apotheker stepped down as CEO at Hewlett-Packard, he walked away with $13.2 million in cash and stock severance.

According to data from GMI, the corporate governance research firm, more than a quarter of the companies in the S&P 500 reported declining income or net losses last year. It would cost a fortune, however, to fire these companies’ CEOs. GMI data shows that executives at these struggling companies are in line to receive severance payments worth $2.6 billion. More broadly, in the S&P 500, CEOs are entitled to receive an average of $22 million in the event they are fired. In total, it would cost shareholders $10.8 billion to fire the CEOs of all of the companies in the S&P 500.

CVS’s CEO, Larry Merlo, will be well cared for if he’s ever fired; he’s eligible for a severance package worth $170 million. Likewise, Ralph Lauren the founder and CEO of the Ralph Lauren Corporation would still be living in style if he were asked to step down; he’s eligible for a severance payout worth $148 million.

CVS, The Chubb Corporation, Lockheed Martin, Comcast, and Verizon all reported declining net incomes or losses last year, and yet their shareholders would be on the line for almost half a billion dollars in severance packages if they moved to fire these companies’ CEOs.

Severance packages for under-performing CEOs reflect a broader trend in the U.S. economy. Currently the richest 1% of households earns as much as the bottom 60% and possesses as much wealth as the bottom 90% of Americans put together. One tenth of U.S. workers are currently unemployed and almost half of these people have been unemployed for six months or more. Ben Bernanke, the Chairman of the U.S. Federal Reserve, recently said, “this unemployment situation we have is really a national crisis.”

If shareholders want to take action on executive compensation, they should make sure that executives’ interests are aligned with their own, they should look for bonus schemes that link payout to targets for metrics like Total Shareholder Returns. In the wake of the financial crisis, U.S. legislators have already acted to implement new rules regarding so-called “golden parachute” payments for departing executives. These rules however, apply to cash payments only, and not to stock-linked compensation. As the most recent data show, the new rules have done little to clamp down on excessive CEO severance packages.

On both sides of the political spectrum, Americans are speaking out about what they see as an uneven playing field emerging in the U.S. economy. Executives at publicly listed companies should be aware that if they fail to align pay policies with performance, regulators might be inclined to intervene to change the rules of the game.

After all, Lloyd Doggett, a Democratic representative of Texas and senior member of the House Ways and Means Committee, recently called outsized severance packages for executives “outrageous.”

“The whole concept that the only way to get rid of bad management is to buy them off is fundamentally wrong” he said.

The post Compensation Policy: CEO Severance Pay and the Cost of Failure appeared first on GMI Ratings.

Director pay rose 7% in the last year at middle market size companies according to a recent study by accounting form BDO USA. The study notes a median change increase to $110,155 in 2010 from $102,089 in 2009, across a sample of 600 companies. The rise was explained primarily as a result of increased equity grants over more traditional cash fees, except at banks.

“Companies are shifting away from cash compensation in favor of equity vehicles, continuing to focus on pay-for-performance while at the same time providing a level of cushion for attracting and retaining the most qualified board members,” said Randy Ramirez, Director in the Compensation and Benefits Practice at BDO.

Health-care sector directors saw the sharpest increase at an average of 13.3% while technology and energy industry directors have remained the highest paid since 2008 at $149,428 and $139,930, respectively. The lack of equity profits resulted in financial services directors earning an average of just $77,022 per directorship while banking directors earned just $50,284.

According to the study, vested equity was up 22% for the group from last year and industry was the most important benchmarking factor. This coincides with preliminary 2010 results for CEO pay, where stock option and vested stock profits pushed median realized compensation up 28 percent. While performance at companies of all sizes improved in 2010, industries such as healthcare, technology, electronics, and pharmaceuticals saw the largest equity gains and therefore the highest amount of pay for directors and executives.

The post Director Pay Rising at Mid-Market Boards appeared first on GMI Ratings.

The report, titled “2010 Proxy Season Foresights #2: Director Benefits and Red Flags—Things to Watch Out For,” is available for $15 from The Corporate Library’s online store.

Greg Ruel – Research Associate

The post Director Perquisites: Are these really non-employee forms of compensation? appeared first on GMI Ratings.