Modified Employee Compensation Plan Released

As originally appeared in the Troubled Company Reporter.

PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $662 million in assets and $426 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 11% of PICO. Other activists at (RPN) have taken to the Internet to advance the shareholder cause.

PICO Holdings has released details of its New Compensation Plan. The New Comp Plan employs a Bonus Pool calculation that is roughly similar to the Legacy Comp Plan with three differences:

gross invested capital will now be netted from the sales proceeds,
30% of the Bonus will be awarded in Restricted Stock Units, and
12% of the Bonus Pool will go to PICO manager designates.

Under the Legacy Comp Plan, CEO Max Webb and CFO John Perri were to receive 5% of the Net Gain based on carrying value. Under the New Comp Plan, they will receive 8.75% of the Net Gain, based on gross invested capital.

The bloggers state, “The New Comp Plan’s inclusion of gross invested capital looks better. It might benefit shareholders. Or it might benefit CEO Max Webb, CFO John Perri and their manager designees. PICO owners may have been better off if the Legacy Comp Plan remained intact.

When assets that have been subject to large impairments are sold for significant premiums, Messrs. Webb and Perri get less, because gross invested capital acts as a high water mark. But when unimpaired or slightly impaired assets are sold for large premiums, Messrs. Webb and Perri will receive a windfall under the New Comp Plan.”

The bloggers remind readers that former CEO John “The Juicer” Hart said that under the Legacy Comp Plan, which captured 20% of Net Gain, Executives could receive $20 million in Bonus. Messrs. Webb and Perri would have received $5 million of that amount.

“Under the New Comp Plan, using Juicer’s $20 million estimate, Messrs. Webb, Perri and their manager designates would receive almost $9 million in Bonus — or 80% more than under the Legacy Comp Plan.

Messrs. Webb and Perri each earn about half a million dollars yearly, when benefits are included. If the Net Gain evolves as Juicer speculated:

Mr. Webb could receive $7 million over the next four years, or $1.7 million per year ($6,730 per workday); and
Mr. Perri could receive $5 million over the next four years, or $1.2 million per year ($4,800 per workday).

This brings us to a harsh question: are shareholders better off terminating Messrs. Webb and Perri? It would cost PICO $2 million to terminate both men today, plus another $1 million for replacements. Juicer estimates Messrs. Webb and Perri could receive around $12 million in compensation and bonus over the next 4 years.

Are Messrs. Webb and Perri worth $9 – $10 million to PICO shareholders?”

The New Comp Agreement does not improve base compensation from the perspective of shareholders. That both Messrs. Webb and Perri will maintain their previous compensation gets no golf clap from us — both men were handsomely compensated given PICO’s market cap, the nature of its assets, the performance of its stock and its ever-shrinking and simplifying future.

Over the last six years, while PICO owners have suffered losses of around 70%, Mr. Webb has received $5,815,828 in total compensation — an average of $969,667 annually. Mr. Perri has received $3,680,604 in total compensation — an average of $613,434 annually. While PICO owners have been punched at every turn, these men have been luxuriously compensated.

PICO will shrink and simplify in the future. The New Comp Agreement does not correlate compensation with asset balance or asset mix. As these men steward a smaller, simpler asset base with a contracting market capitalization, they will each be paid, when benefits are included, over a half-million dollars annually.”

The bloggers are most displeased by the lack of chronological incentive in the New Comp Plan. “Under the New Comp Plan, there is no time value to money. There is little in the New Comp Plan that encourages Executives or Directors to expedite asset sales. The RSUs don’t provide shares for 3 years, so Messrs. Webb and Perri are incentivized to start that clock ticking. But this is small beer compared to half a million dollars in annual compensation.

We are surprised at this omission. It violates Finance 101. It goes against demands made in numerous 13-D filings. It ignores wishes expressed on earnings calls and at the 2016 Annual Meeting. It disregards over one year of RPN publications. Why the Board has defied shareholders on this matter is unknown. More on this at the end of today’s post.”

The bloggers rhetorically ask, “Where Are The PICO Shareholders’ Yachts?

On an absolute basis, the New Comp Plan is not ‘good’ for PICO shareholders. If presented in the average American Boardroom, it would be thrown in the trash faster than you can say ‘Harquahala Valley.’ We believe that Messrs. Webb and Perri are over-compensated, both via base comp and the Bonus Plan. We think a million dollars a year for two guys to liquidate a water portfolio is high. In the not-too-distant future, once UCP is sold and a big water property is sold, Messrs. Webb and Perri will run a micro-water enterprise and they will be earning the same collective million dollars a year. To us, this is not economically rational.

We view the lack of a time value of money mechanism to be the New Comp Plan’s biggest weakness. There are certain aspects of the RSUs that encourage expeditious progress, but they are incremental. We hoped for something far stronger.

As one PICO observer stated: “If the Board intended to expeditiously monetize assets and return capital to shareholders, why didn’t it include a time value of money component?”

It is a fair question.

In less than 3 weeks, the window for 2017 Director Nominations opens. We will see how other shareowners feel about the New Comp Plan. There are inarguable improvements, but there remains the potential for less than full maximization of value at PICO. Time will tell.”