Among the SEC documents investors should be familiar with is a company's proxy statement, or the DEF 14A, as the Securities and Exchange Commission itself refers to it. Within the proxy's pages you can find information about executive compensation, a comparison of a stock's performance, so-called "related-party transactions" -- the self-dealing arrangements between companies and their executives or relatives -- and the nitty-gritty details that companies would rather you didn't know but are required to tell you about.
While companies often mention that executive compensation is based on performance, you just may not be so sure what performance it is they're talking about. Take sporting-goods retailer K2 (NYSE:KTO), whose proxy statement reads:
"Depending on the overall financial performance of K2, salaries are adjusted from time to time to reflect increased responsibilities, to keep pace with competitive practices, and to reflect the performance of individual executives."
So when you see that CEO Richard Heckmann's base salary increased 25% in 2005 to more than $690,000, you'd expect that K2's stock had an equally impressive performance. Add in a bonus that nearly doubled his salary for the year, plus restricted stock awards worth $534,000, and you wouldn't be remiss for thinking that K2's stock must have had a blockbuster showing for the year.
Logical thinking, but wrong. Fortunately, the SEC requires companies to chart their performance (though that may change under some proposed new rules), and we can see that K2 compares itself not only to the Russell 2000 -- an index that's a stand-in for the small-cap universe -- but also a peer group of companies that includes the skate and surf crowd at Quiksilver (NYSE:ZQK), sunglasses maker Oakley (NYSE:OO), and athletic-apparel manufacturer Russell (NYSE:RML), among others.
Unfortunately, we also see that K2 underperformed both the index and its peers. After hitting a 52-week high of $14 in early 2005, the stock proceeded to collapse, dropping as low as $8.52, a 40% change in direction. While the stock has recovered some since those dark days, it is still some 12% below the former highs. Heckmann's cumulative compensation also sits 12% lower than last year, but only because he didn't receive as many restricted stock options. You still have to wonder what the bonus was for.
Moreover, when you check into K2's related-party transactions, you find that Heckmann is also entitled to receive compensation for company use of his personal jet. Despite a relatively quiet time for acquisitions, Heckmann and other executives were apparently still winging it around the globe; he was reimbursed more than $900,000 for the plane, three times more than just two years ago, when K2 was on a buying binge and ostensibly would have racked up more air miles as its leaders met with other corporate executives.
K2 remains a leading player in the sporting-goods industry, and it has rightly taken a breather in trying to roll up the market under its own roof. That's why when K2's stock took that tumble last year, I used it as an opportunity to buy more shares. But that doesn't excuse an executive team that has squandered investor resources, or a board of directors that condones the fall by awarding bonuses and long-term rewards for subpar performance.
Maybe K2's related-party transactions aren't as egregious as some others, such as Aaron Rents (NYSE:RNT) and its use of shareholder largesse -- nearly $900,000, as Michelle Leder reports in her blog footnoted.org -- to bankroll the NASCAR dreams of the president's two sons. Still, K2 is paying a pretty penny for company performance that even mindless indexes can trounce. Come the annual meeting on May 11, investors may want to question what it is they're getting for their dime.
Fool contributor Rich Duprey owns shares of K2, but no shares of any other company mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
