Copyright 2005 Denver Publishing Company
Rocky Mountain News (Denver, CO)
John Malone, CEO of Liberty Media International, takes no salary from the cable company spun off last year from his Liberty Media Corp.
But that doesn't mean he works for free: The company gave Malone 1.5 million stock options last year worth $27.6 million, according to a Liberty Media International filing with the Securities and Exchange Commission.
The grant is further evidence that Liberty Media International is Malone's chief focus. The company was created last year in an attempt to simplify Liberty Media, where Malone serves as chairman.
Liberty Media owns or has a large stake in TV channels such as Discovery, Starz! and the Game Show Network, as well as companies such as Viacom and Sprint. Until the spinoff of Liberty Media International, it also owned European cable systems through its stake in UnitedGlobalCom and other businesses.
The split simplified Liberty Media's structure and boosted the value of both businesses. Despite the spinoff of billions of dollars of assets, Liberty Media trades at levels similar to its pre-spinoff price. Liberty Media International is up about 25 percent since its June 2004 spinoff.
That means Malone already has millions from the options, given to him in June 2004. The options, good for the company's Class B super-voting stock, have an exercise price of $36.75. With Liberty Media International Class B stock at about $48 per share, Malone's options are already "in the money" by more than $16 million.
The options can be used at any time, the company says in its filing. By having the options "vest" immediately, Liberty Media International seems to be avoiding a new accounting rule that requires companies to record the expense of stock options on their income statements.
If Liberty Media International's stock appreciates 10 percent annually over the 10-year life of the options, they'll be worth $91 million in 2014 under a valuation method approved by the SEC.
Malone ranked No. 142 in the most recent Forbes 400 list of the richest Americans with an estimated net worth of $1.7 billion.
The SEC filing that disclosed the option value stated: "The options granted to Mr. Malone were awarded as the primary form of compensation."
Spokesman Mike Erickson said Malone declined a salary and neither Liberty Media nor Liberty Media International pays bonuses.
"We typically take a look at compensation in total, and that obviously would have been reflected in the options he received."
Malone's pay, then, is directly linked to the stock's performance. That method of pay has won plaudits from executive-compensation specialists in the past.
But the sheer number of options - the award could arguably be defined as a "mega-grant" - could give Malone outsized returns. Also, executive pay during the boom and bust, in which executives cashed in options, then kept the profits as the stock price fell, exposed the problem with using massive option grants to pay CEOs.
Said Erickson: "Clearly, we think it's appropriate, or we wouldn't have done it. With options, if the stockholders benefit, then the option-holder benefits."
In a study released Thursday by compensation consultants Pearl Meyer & Partners, the use of stock options declined sharply in 2004 compared with a year earlier. Options represented 37 percent of total CEO pay at 50 multibillion-dollar U.S. companies, compared with 51 percent the previous year.
"In place of the huge option grants that have propelled pay growth over the past 10 years, there is a renewed focus on alternative long-term incentives payable in cash or stock, based on annual and long-term operational performance hurdles," said Pearl Meyer, chairman of the firm.
Malone's Liberty Media International options also are a means for him to maintain significant voting power as the company acquires the remaining stock of its subsidiary UnitedGlobalCom and renames itself Liberty Global.
Liberty Media International has two classes of stock. The Class A, widely held by the public, has one vote per share. The Class B, 91 percent of which was held by Malone at year's end, has 10 votes per share.
The capital structure means Malone has 33 percent of the voting power despite owning less than 5 percent of the company.
Large option grants and big pay packages are common in the family of companies controlled by Malone. In February 2001, Liberty Media CEO Robert Bennett cashed in 16 million options for pretax profits of $94 million. Then, Liberty Media gave Bennett 16 million more valued at $155 million.
UnitedGlobalCom's Mark Schneider made nearly $21 million in 2001 by cashing in options. In 2004, the company granted more than 1 million options to each of its four highest-paid executives, filings show.