Pay depends on performance

Publisher of yellow pages gives executives shares and stock appreciation rights

A new incentive plan at yellow pages publisher R.H. Donnelley will reward CEO David Swanson and other top executives if the company's shares recover from their dramatic free fall.

Earlier this month, when shares were down 90 percent compared to their 2007 peak, Swanson was awarded 90,000 shares of stock plus 800,000 stock appreciation rights, or SARs, according to documents filed with the Securities and Exchange Commission.

The value of the SARs is tied to the stock's appreciation; if the stock doesn't rise, the SARs are worthless. The stock awards, which are spread out over three years, appreciate in value as the stock rises but ultimately are worth whatever the shares fetch when they are sold.

Altogether, nine Donnelley executives were awarded 195,000 shares of stock and 1.8 million SARs.

The stock-based bonuses come as Donnelley is slashing costs, including making an undisclosed number of job cuts, to offset slowing sales of print advertising. The Cary-based company has more than 4,000 workers, including 600 locally.

Company officials released a prepared statement that the executive pay "is part of our long-term strategy to build shareholder value by closely aligning executive total compensation with company performance -- so ultimately, the 'true' value of these awards depends on how the company performs over time."

The company grants long-term incentives on an annual basis. Donnelley also said top executives aren't getting increases in base salaries this year. Swanson's salary was $850,000 in 2006; the company hasn't yet disclosed last year's executive pay data.

Donnelley shares nosedived 48 percent in a single day last month after the company scrapped plans to pay shareholders a dividend and cut its earnings forecast.

Shares rose 37 cents to close at $4.88 on Thursday, down from $64 in October.

Compensation experts say giving executives incentive to right the ship has merit -- even though the rewards would go to the same executives who were at the helm when the stock tanked.

"If the company's fortunes are going the wrong direction," said James Cox, a professor of securities law at Duke University, "then you want to make sure you keep ... talented and able personnel on board and focused to stop the ship from listing."

What would be outrageous is if the executives received large cash bonuses while the company is struggling, said E. James Brennan, senior associate at the ERI Economic Research Institute, a compensation research company in Redmond, Wash.

"What they are saying is, we believe in the enterprise," Brennan said. "If it thrives, we thrive. If it fails, we fail."

There is another side of the coin, however.

"You would hope that somebody is paying attention to evaluating whether this is the right management," Cox said.

Analyst Mark Bacurin of Robert W. Baird & Co. blamed the company's problems on the economy, which is hurting ad sales, and investor nervousness over the company's $10.1 billion in debt amid an intense credit squeeze.

With the benefit of hindsight, Donnelley management could be faulted for loading up on debt, but "I don't think anyone would have dreamed of the credit crunch scenario we are in today," Bacurin said.

Moreover, he added, not long ago, investors were clamoring for Donnelley to pay a dividend, which would have reduced the company's ability to pay down its debt.

"I like what Dave Swanson and his team are doing," Bacurin said. "I think they are embracing the Internet and looking for ways to take advantage of it. ... I still believe the yellow pagers are best positioned at helping small businesses figure out advertising online."

Donnelley also awarded stock appreciation rights to top executives last year. But so far those SARs are "out of the money" because the conversion price was $74.31, meaning that shares must be worth more than that to be worth anything at all.

The conversion price for the latest SARs is $7.11, so they would be out of the money as well if they had vested. The latest SARs vest over the next three years and don't expire until 2015.