Is R.R. Donnelley's CEO Worth It?

CEO compensation is a hot topic, especially now that the Dodd-Frank Act requires say-on-pay votes. With CEO pay and performance seemingly disconnected at the following company, the Fool invites you to judge for yourself whether this business's boss actually deserves such a hefty paycheck.

R.R. Donnelley (Nasdaq: RRD  ) is a venerated name, founded all the way back during the Civil War. However, its ability to thrive more than a century later looks increasingly in doubt.

This Chicago-based concern provides printing services to businesses. Although our culture may never completely eradicate the desire to have some types of physically printed materials on hand, the digital age's transition to electronic delivery of documents, information, and entertainment has pared down our culture's paper trail, taking a toll on R.R. Donnelley's core business.

Its biggest, most dangerous threat is simply a many-headed monster known as The Internet. Amazon.com's (Nasdaq: AMZN  ) recent announcement that it's selling more e-books than all print books combined gives just one example of a sad, shrinking business outlook for a company like R.R. Donnelley.

Yet that state of things isn't reflected by R.R. Donnelley's CEO pay policies. Corporate governance experts GovernanceMetrics International shared with us several companies that currently merit a "high concern" designation on their executive pay scorecards, and R.R. Donnelley made the list.  

The business isn't exactly thriving, but the CEO is -- and he's entitled to lucrative golden-parachute payouts should he and the company part ways.

The pay
President and CEO Thomas Quinlan's base salary was $1 million in 2010, held steady from the previous year. In 2008, his base salary was $985,641. His total compensation in 2010 was valued at $6.9 million, a slight decrease from $7.9 million in 2009.

Don't worry, that's not all. Quinlan and other major executives also receive a wealth of perks, including a corporate car allowance. The company also foots the bill for some supplemental life and disability insurance premiums.

One of the most galling things in the company's most recent proxy statement is the provision that Quinlan will receive lavish rewards if he ends up vacating his post. If he resigns for a "good reason" or is let go without cause, he's entitled to $5 million in cash. If you count equity awards, and post-termination benefits and perks like car allowance and insurance benefits, his total potential payout rises to $27.5 million.

In the event of a termination after a change of control, the total sum of Quinlan's golden parachute would be $35.9 million, including $7.6 million paid as straight-up cash.

Should Quinlan be terminated with cause, he's entitled to zilch, but that's cold comfort. How often is any CEO terminated with cause? Hewlett-Packard's (NYSE: HPQ  ) board couldn't even summon the cojones to do so to Mark Hurd in the wake of his scandal last year.

The performance
R.R. Donnelley last reported a meaningful annual sales increase in 2007, when it grew revenue by 24.4%. Although the company managed to generate $1.06 in earnings per share last year, that sum followed several years of running losses. R.R. Donnelly's recent annual earnings peaked at $1.83 per share in 2006.

Have shareholders done outrageously well? Not really. Glance at a five-year stock chart, and you'll note the cumulative loss of 16.6% over that timeframe, for an annualized loss of 3.6%.

Earlier this month, R.R. Donnelley's debt grade was downgraded to junk status, and credit default swap data indicated a significant fear of default. In the last 12 months, its debt-to-capital ratio is 60.9%. That's uncomfortably high for a company with anemic revenue, facing a difficult business climate.

Granted, R.R. Donnelley's 5% dividend yield is surely a plus, mitigating some of the disappointing performance, but that's often a sad consolation prize for holding shares in a beleaguered company. Furthermore, when debt starts to drag on companies' financials too heavily, they're often forced to suspend dividends. There is a lot of uncertainty here.

If you're craving an old-school company with a solid dividend yield (and the added bonus of a pretty bulletproof product line), ditch Donnelley and consider the likes of Coca-Cola (NYSE: KO  ) , with its 2.8% yield, or Pepsi (NYSE: PEP  ) , which yields 2.9%. These companies may face their own share of threats from upstarts like SodaStream (Nasdaq: SODA  ) , but hey, it's highly unlikely some industry is going to come along and eradicate thirst.

Now what?
This year, it's too late to vote on R.R. Donnelley's CEO pay policies; investors supported the company's compensation plan in their say-on-pay vote at the annual meeting on May 19. Who knows why, though? Maybe it's some misplaced respect for the elderly, kind of like you might forgive your great-great-grandfather for occasionally being just a tad behind the times. He's been around since the Civil War, after all!

Just kidding. This is a doddering business, not a beloved old relative. Despite its dubious future, the company seems determined to enrich its CEO, however poorly its stock performs. Perhaps next year, shareholders will rethink their opinion of Quinlan's worth.

If you're a concerned shareholder, you can always contact R.R. Donnelley's investor relations department and voice your concern about CEO pay policies. It's time to care -- before it's too late.

The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, Amazon.com, Coca-Cola, and SodaStream International, and creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2011, at 12:30 AM, BrianInColorado wrote:

    Donnelley's program of growth through acquisition of web printers has helped it eke out revenue growth of $700 million, at an investment of $2.8 billion. Its efforts to diversify outside of commercial printing have been in the aggregate an expensive failure. The quarterly write-offs to cover the cost of terminating redundant employees and writing down PP&E and goodwill are a never-ending expense that erodes net worth, but are downplayed by management. The corporate flaks do not even post advice of plant closings on their corporate news page....one learns of them through the local press in affected cities.

    Nor does RRD ever provide pro-forma financials comparing pre-acquisition revenues with post merger revenues. For example, the late 2010 acquisition of Bowne, which had some $700 million of revenue in 2010, is simply added to RRD revenue in Q1 2011 without providing even a footnote to what the combined RRD and Bowne pro-forma revenues were the year prior to the merger.

    The company likes to point out that Donnelley has only a 5% market share in a very unconsolidated commercial printing industry. This is corporate "happy talk". Donnelley has a very large market share in the web printing industry, the only segment of commercial printing that RRD actively participates in.... and a segment that is in rapid terminal decline. They can't buy the few remaining competitors fast enough to cover up the inexorable decline in demand for their core products.

    CAPEX for PP&E the past 5 years has been $1.2 billion less than depreciation & amortization. This produces a nice cash flow, but is built on a foundation of declining demand and decreased need for capacity. At some point, this source of cash will run out. Weakened cash flow, combined with an increase in $1 billion in long term debt, puts the dividend in peril. And the dividend is the only thing supporting the stock price.

    Final note: Fitch recently downgraded RRD based on the clear plan by management to take on more long term debt and use the proceeds to buyback stock. The dividend, at 6%, is more expensive than debt when tax considerations are included. This is the finance department doing what marketing and operations cannot: grow EPS. But it comes at a cost.

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