Blockbuster bonus battle offers a rare inside glimpse

By Rachel Beck
Published March 8, 2007

No wonder Blockbuster Inc.'s CEO is upset. Instead of rubber stamping a fat incentive-based bonus to him, the movie-rental chain's board decided to trim it big time.

Even though pay for performance is supposed to be just that, few boards across corporate America exercise their power to lower bonus compensation when things aren't going as well as they think they should.

But Blockbuster's directors did - to the tune of more than $5-million - and CEO John Antioco's fight to get that money back has thrust this typically behind-the-scenes boardroom bickering into public view.

What has been going on at Blockbuster may be the first wave of a changing tide regarding executive compensation. CEO paychecks are not heading into a free-fall, but there certainly is an increased awareness that shareholders won't tolerate excessive amounts being given to corporate leaders without reason.

Blockbuster awarded Antioco a $2.28-million bonus, which is in addition to his 2006 salary and deferred compensation of about $2.5-million. The bonus came with a condition - if Antioco protests, he is supposed to get nothing.

That payout came as Blockbuster's profits tumbled by 28 percent in the fourth quarter because of higher costs for the launch of its "Total Access" program to combine its online and in-store rentals.

But Antioco claims he deserves $7.65-million based on performance targets set forth at the beginning of last year, and he is pressing the company to give him that money.

Normally, boards and executives work out such issues behind closed doors. But since Antioco is fighting the directors' decision, the company had to include the information on the "disagreement" in a Feb. 27 securities filing where it said it had set aside $4.5-million for this contingency, based on accounting rules.

Now the spotlight is on Antioco's pay, which might have been some directors' intention - namely billionaire investor Carl Icahn, who sits on the company's board.

Icahn could be using this as a way to speed up the company's restructuring effort, said Wedbush Morgan analyst Michael Pachter.

Blockbuster has been cutting costs and closing many of its stores, but its online business only has about 2-million paying subscribers compared with 6.3-million at Netflix.

"It is our belief that Mr. Icahn is impatient with the pace of Blockbuster's restructuring, and we can only speculate that Mr. Icahn is using the compensation lever to motivate Mr. Antioco to move more quickly to maximize free cash flow and pay down debt," Pachter said in a recent note to clients.

Should that be true, and Icahn ultimately gets what he wants, executives across corporate America should beware.

Their performance pay could be next on the chopping block.