CEO Gaffe of the Week: Beazer Homes

This year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!

This week, we're going to take a look at homebuilder Beazer Homes (NYSE: BZH  ) and put its CEO, Allan Merrill, on the hot seat.

The dunce cap
This has truly been a remarkable year for many homebuilders as a long awaited bottom in the housing market appears to have finally come to fruition. According to the latest housing data in November, housing permits are tracking along at a healthy annual pace of 861,000, home prices are slowly rebounding, and homebuilder sentiment is at a six-and-a-half-year high.

Not surprisingly we've seen double-digit order jumps from all facets of builders -- from luxury to entry-level. On the high-end, KB Home (NYSE: KBH  ) eked out a net delivery rise of 6% but was boosted most by a 14% jump in home sale prices. The model of consistency, Lennar (NYSE: LEN  ) reported a 210 basis-point improvement in its sector-leading homebuilding margin. Even previous troubled entry level builders that struggled, like Standard Pacific (NYSE: SPF  ) and Hovnanian (NYSE: HOV  ) , have even shocked Wall Street with their turnarounds. Hovnanian recently reported a pre-tax quarterly profit -- it's first since 2006 -- while Standard Pacific has returned to consistent profitability and recorded a 29% increase in net new orders in the third-quarter. 

And then we have Beazer Homes. Since 2006 Beazer hasn't turned an annual profit, has seen its annual revenue decline by more than 80%, and has seen book value dip by 95%. Furthermore, over the past two years shareholders have witnessed the company burn cash as it's nearly doubled it share base to raise cash. 

Now, here's where things really get interesting. In mid-November, Beazer reported its fiscal 2012 results that highlighted a 25% increase in new orders and a 90 basis-point improvement in its homebuilding margin, but still managed to lose $135.6 million for the year . Despite this loss, it was noted in a recent filing with the Securities and Exchange Commission that Allan Merrill is up for a 67% increase in pay this year to $2.94 million. That's right -- 67% for a $135.6 million loss.

To the corner, Mr. Merrill
But wait -- there's more!

It's not just that Merrill is due for just any pay raise. According to the regulatory filing:

During fiscal year 2012, the company delivered significantly improved operating results, meeting or exceeding virtually all of the operational goals it set out to achieve at the beginning of the year.

That's right... losing only $135.6 million completely exceeding the threshold Beazer's management set for itself and Merrill is therefore "deserving" of a 67% boost in pay. In addition to Merrill, Beazer's chief financial officer, Robert Salomon, has a proposed 95% pay raise on the table.

Thankfully shareholders have a say-on-pay vote and I can't, on this planet or any other, see why they wouldn't vote this down with every fiber of their being. It'd be one thing if Beazer were profitable, or even cash-flow positive, but the company isn't! Beazer is in the second inning of a nine-inning recovery, and it'll be lucky to get back into the black by 2015 at the pace it's going.

This is another ridiculous attempt at an executive board to line their pockets at a truly inappropriate time, and I wag my finger in disdain at Mr. Merrill and the Beazer Homes board.

Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may see your suggestion in the spotlight. 

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Comments from our Foolish Readers

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 December 21, 2012, at 4:20 PM, CareyPhelps wrote:

    Clearly the author here failed to do any research at all and instead based his conclusions on erroneous and subsequently corrected media headlines. A little homework on this matter would quickly find that Mr. Merrill was CEO for only 3.5 months during fiscal 2011. Therefore, the pay raise quoted in this article is absolutely misleading as it compares the compensation for Mr. Merrill when he was CEO for 3.5 months during fiscal 2011 to a full year as CEO during fiscal 2012. Also, Mr. Salomon was CFO for only 3.5 months during fiscal 2011. As stated in the company’s proxy filing, the annualized salaries for its CEO and CFO were unchanged from fiscal 2011 to fiscal 2012.

    Carey Phelps

    Director, Investor Relations

    Beazer Homes

  • Report this Comment On December 22, 2012, at 8:53 PM, kthor wrote:

    @ CareyPhelps

    I see your point but for a stock that hasn't done anything 2012, it would be smart for the CEO to forfeit this pay raise for lack of performance ... this might give investors confidence in BZH more going towards 2013 ...

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