CEOs earn big bonuses for bad year

As millions of Americans cope with job losses and struggle to make ends meet, there's been only a little belt tightening in the corner offices.

Despite terrible performances that cost lots of jobs and produced huge shareholder losses, hundreds of CEOs pocketed millions in bonus pay last year -- thanks to good friends on company boards.

Consider the Ryland Group (RYL, news, msgs) CEO whose bonus went up in 2008 compared with 2007, though more than a third of the homebuilder's employees got the boot. Or the Honeywell International (HON, news, msgs) chief who missed the benchmarks for his annual bonus -- and got $3.5 million anyway.

All told:

• Among all the Fortune 1,000 companies, nearly 400 CEOs got bonuses last year, taking home $402 million in annual bonus pay, according to Equilar, an executive compensation research firm. But that's only part of the picture; more bonus pay figures will roll in as additional companies file reports on 2008.

• These privileged CEOs got an additional $66 million in "discretionary" bonus pay. Annual bonuses are linked to some performance target, while boards can hand out discretionary bonuses for whatever reason they choose.

• These bonuses topped off already-large pay packages. CEOs at larger companies earned about $10 million on average last year, according to Equilar.

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How does a CEO earn a big bonus when his company is staggering?

Experts chalk it up to a broken pay system. The compensation committees that determine CEO paydays set up vague and flexible criteria that keep bonuses rolling no matter how badly a company performs.

"Compensation committees are on automatic pilot," says Timothy Smith of Walden Asset Management, a social and environmental investment shop that monitors compensation. "They continue to reward top management while shareholders and employees suffer."

I hunted through Equilar's list of more than 100 Fortune 1,000 companies that gave CEOs bonuses of more than $1 million each last year to find some of the most striking examples. Here are five that really stand out -- and that illustrate the common tricks.

Ryland, Qwest move the goal posts

Ryland offers a great example. Last year was a horrible year for homebuilders, and the California company performed particularly badly. Ryland lost $9.33 a share, compared to a loss of $7.92 the year before. Gross profit margins slipped to 11.6% from 17%. Ryland's stock fell 34%. The company shed 723 employees, 36% of its work force.

Ryland chief R. Chad Dreier, though, didn't take a loss. His annual bonus leapt from zero in 2007 to $2.5 million in 2008 as part of a $10.9 million pay package. He gained $6 million more from stock options.

How did Dreier earn this largesse? Simple: The board moved the goal posts. In 2007, bonuses were linked to pretax income. No bonuses were earned on that basis.

So in 2008, the board tied bonus pay to changes in net cash flow from Ryland's operating business. Voilà! Ryland met the target, in part because so many jobs were cut.

The switcheroo came just in time for Dreier to cash in. He is leaving the CEO job in May.

The board at Denver phone and Internet service provider Qwest Communications (Q, news, msgs) made a similar move last year, to the benefit of chairman and chief Edward Mueller.

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Qwest had a bad 2008. Revenue declined by just 2%, but earnings per share and net income dropped by 74% and 77%, respectively. Qwest stock fell 43%. Thousands of employees lost their jobs.

But Mueller got an annual bonus of $2.25 million, up from zero in 2007. That was on top of $8.2 million in salary and other compensation.

How did this happen? In part, because in late 2007 the Qwest board switched one of the metrics used to award bonuses. In place of net income, it used a measure of cash flow that gauges earnings before interest, taxes and the accounting charges depreciation and amortization, known as "EBITDA."

In a way, the switch makes sense. Execs wouldn't be penalized for a decline in 2008 earnings compared to an artificial jump in 2007 earnings caused by a one-time tax benefit.

But did EBITDA really rise enough to justify a big annual bonus? It increased by just 3%, and much of that gain came as the company bolstered cash flow by shedding 3,906 jobs, 11% of Qwest's work force. In effect, Mueller got a boost to his annual bonus for cutting jobs.

Company filings say Mueller also got the bonus for the company's sales and cash-flow performance, as well as for forging a partnership with Verizon Wireless and new collective bargaining agreements with unions.

(If this still seems unfair and you're on Twitter, you can tweet your thoughts to Qwest.)

Continued: Covering all the bases

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