It looks like Apple (Nasdaq: AAPL) took another bite out of Sprint Nextel (NYSE: S). Apparently, when Sprint was figuring out those executive bonuses for 2011, it left out one core calculation: the extent to which the actual costs of getting the iPhone would drag on the company's bottom line.
In an 8-K report Sprint filed with the Securities and Exchange Commission on Monday, it declared that the company's "… Compensation Committee approved the payouts for all eligible employees … [but that] … [t]he incentive plan targets for 2011, and the 2011 operating budget, did not include the impacts on our financial results of offering the iPhone … "
The iPhone deal reportedly is for $15.5 billion over a four-year period. The costs of subsidizing phones for its postpaid subscribers increased by $540 million to $1.7 billion YOY for the quarter once Sprint started offering the iPhone.
Verizon (NYSE: VZ) and AT&T (NYSE: T) also saw their profit margins shaved by the higher subsidies required by offering the iPhone.
One other item that changed for the compensation committee was Sprint's relationship with LightSquared. As the 8-K reported, the incentive targets "… were established before we reached the final terms with LightSquared, which included a cash payment that benefited free cash flow." That cash payment of $310 million was to be part of a network-hosting deal. However, LightSquared has been embroiled in controversy, putting its continuing involvement with Sprint in doubt.
Ignoring the reality
But the compensation committee has decided to "… exclude the total financial impact related to the launch of the iPhone … including (i) the negative effects the launch had on adjusted OIBDA and free cash flow, and (ii) the positive impact on net service revenue." The committee also decided to "eliminate the benefit from cash received from LightSquared."
What it boils down to is that if the iPhone and LightSquared charges had been taken into account, then CEO Dan Hesse, for example, would receive $1.53 million in short-term incentive payouts instead of the $1.77 million he is scheduled to receive.
Frankly, I'm glad I'm not a Sprint stockholder. If I were, I would be extremely upset about this exercise in tweaking the numbers to justify bonuses higher than the original target rates. The bottom line doesn't work out the way you want it to? No problem, as long as you used a pencil and didn't press down too hard.
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