Housing Slump Hits
Builder Execs' Pay

As the housing market slowed down last year and the share prices of home-building companies plummeted, so did the compensation of many of their chief executives.

Some analysts applaud the linkage of pay with performance, but other investors and shareholder activists argue the bosses' pay should fall further, based on other measures of performance.

A sampling of executive compensation across many industries, compiled by Mercer Human Resource Consulting for The Wall Street Journal, shows that five out of eight home-builder CEOs in the survey received less direct compensation in 2006 than in the previous year. At one company in the survey, KB Home, the change in CEOs last year made a compensation comparison difficult.

The survey measured total direct compensation, which covers salary, bonuses, other annual incentives and the initial value of restricted shares, stock options and other long-term incentive awards.

The average compensation of 13 major home-builder executives dropped to $13.7 million in 2006 from $24.9 million in the previous year, according to another analysis by UBS AG analyst Margaret Whelan. Her analysis included companies omitted from the Mercer survey, including Centex Corp., Meritage Homes Corp., Pulte Homes Inc., Standard Pacific Corp. and WCI Communities Inc.

Lennar Corp.'s Stuart Miller is one CEO whose pay dropped more percentagewise than the decline in his company's total shareholder return in 2006, which the Mercer survey measured as stock-price appreciation and reinvestment of dividends over one year. Mr. Miller's pay is tied to the company's earnings and return on investment. "My pay package is directly tied to performance of the company," Mr. Miller said in an interview yesterday.

Conversely, Beazer Homes USA Inc. CEO Ian McCarthy's direct compensation jumped 180% to $30 million last year, according to the Mercer analysis. Meantime, Beazer's total 2006 shareholder return dropped 33%.

A Beazer spokeswoman says Mr. McCarthy received a significant amount of restricted stock grants last year that are tied to Beazer's future stock-price performance relative to its peers. He can only receive these shares as they vest over the next several years based on Beazer's relative stock performance. His pay package was determined for the company's 2006 fiscal year, ended Sept. 30.

Ms. Whelan says she is encouraged that many builders are moving away from tying compensation to gross profits or profit growth, and are now measuring pay based on return on investment.

But others believe that the home-builder executives are still getting paid too much at shareholder expense. Laborers International, a construction union, targeted pay practices of several home builders recently and proposed various changes in executive pay. "When they are in the downturn, these compensation practices really stand out," said Jennifer O'Dell, a spokeswoman for Laborers.

In March, the union withheld votes for Carl B. Marbach, chairman of the Toll Brothers Inc. board compensation committee, to protest the pay package for CEO Robert Toll. They urged other shareholders to do the same, but Mr. Marbach was re-elected. Ms. O'Dell believes that because of the protest, the company appears more open to discussing compensation issues.

Mr. Toll's total direct compensation dropped 35% to $23 million in 2006 from the previous year, while the company's total shareholder return fell 22%, according to the Mercer analysis.

Executive pay was also a flash point at KB Home last year. Longtime CEO Bruce Karatz stepped down in November, after the company said an internal investigation found that he backdated his own stock-option grants.

Mr. Karatz received $44.2 million in compensation in 2005, according to UBS. His successor, the company's former chief operating officer, Jeffrey Mezger, received direct compensation of about $6 million last year, according to Mercer. Mr. Mezger's contract includes certain stock grants that are tied to the company's total return, compared with its peers.

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