KB, Toll Brothers Set
CEO Bonuses Amid Gloom

The boards of Toll Brothers Inc. and KB Home are finding ways to grant sizable bonuses to their chief executives, even as the home builders' share prices and profits languish.

The compensation committee at Toll Brothers is proposing to replace a bonus plan that was tied partly to shareholder equity and income. Under that plan, CEO and co-founder Robert Toll didn't receive a bonus last year for the first time since 1991. Under the new bonus plan, Mr. Toll could get an amount based partly on the company's income and also on whether Mr. Toll meets a "varied," but undisclosed, set of criteria determined by a compensation committee.

In 2007, if the proposed plan had been in place, Mr. Toll would have gotten a $1.36 million bonus based on income and could have been eligible for as much as another $5.2 million if he had met the other criteria, according to the company.

Mr. Toll, who is the company's largest shareholder, was paid a $17.5 million bonus in 2006 and a $27.3 million bonus in 2005.

"The real question here is whether the board actually needs to continue to compensate Mr. Toll for his services," says Paul Hodgson, senior research associate at the Corporate Library, a corporate-governance firm based in Portland, Maine. "Has it not paid enough?"

The company says Mr. Toll should be compensated for preparing the builder for a housing-market recovery. Without a bonus for 2007, Mr. Toll received a $1.3 million salary and was granted options valued at $7.1 million.

Meanwhile, KB Home's compensation committee has granted chief executive Jeffrey Mezger a "discretionary" bonus of $6 million for 2007. Otherwise he wouldn't have received KB's standard "annual incentive" for the top job, which is tied to profits under the builder's current plan.

The company said in a filing with the Securities and Exchange Commission that Mr. Mezger met important company goals in 2007, such as shoring up its balance sheet and selling its French operation amid the difficult housing market.

Others question the decision. "This is the kind of stuff that makes us crazy," says Richard Metcalf, director of public affairs at the Laborers International Union of North America, whose pension funds own stakes in both Toll and KB. "What kind of board of directors gives a $6 million bonus when the company's stock falls 60%?"

KB Home shares fell 56% in 2007. Its shares fell $1.01, or 4.4%, to $22.05 yesterday in New York Stock Exchange 4 p.m. composite trading.

Mr. Mezger took over the helm of the Los Angeles builder from Bruce Karatz, who stepped down in late 2006 after an internal investigation revealed that he had backdated his stock-option grants. Mr. Mezger was a paid a total of $16.4 million in stock options, salary and bonus in 2007.

Mr. Metcalf says while he understands that all builders are battling some housing conditions beyond their control, the company's bonus plans should be based more closely on how the companies compare with their competitors, "not some subjective internal criteria."

The flap over the builder bonuses comes as the board of struggling thrift Washington Mutual recently set compensation targets for top executives that will exclude some costs tied to mortgage losses and foreclosures. The move will effectively shield the pay of more than 100 top executives from the fallout of the mortgage meltdown.

Not all builders are collecting big bonuses amid the housing turmoil. Stuart Miller, chief executive at Miami-based Lennar Corp., received no bonus last year after a $4.7 million bonus in 2006 and a $21.5 million bonus in 2005, because of the company's losses. A Lennar spokesman declined comment.

Toll says its proposed bonus plan will likely result in smaller bonuses when its profits take off again. Under the old plan, Mr. Toll received up to 2.9% of the company's income before taxes if its shares hit certain price measures. Under the new plan, that percentage would drop to 2%. While the old plan had no cap, his total new bonus wouldn't be able to exceed $25 million.

"One of the reasons the commitee changed the plan was because of concerns that his past bonuses have been large," says Toll's chief financial officer, Joel Rassman.

Corporate-governance firms, such as ISS Governance Services, a unit of RiskMetrics Group, are urging shareholders to vote against the new CEO bonus plan. Toll's independent board members wrote a letter to shareholders in support of the new plan. Mr. Toll, who owns about 13% of the company's shares and is the company's chairman, also intends to cast his vote in favor of the new bonus plan, according to the proxy.

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