Taking Stock / Rewarding Failure

Of all the lies in the business world, the biggest is that management wages are linked to performance.

The only comfort to be taken by Tel Aviv Stock Exchange investors is that the above isn't unique to the Israeli capital market. That is the gist of an analysis published last week in The New York Times.

Not even two years have passed since Koor Industries' (NYSE: KOR) managers were forced to kill a plan to reduce the price of their options. Yet last week, the conglomerate announced its intention to resubmit a similar plan.

The principle of this second try is exactly the same. The collapse of Koor's share price over the last five years has thrown the options far, far outside the money. They are, in a word, valueless. Accordingly, Koor seeks to reduce the cost of exercising the options.

At the end of 2001, the Koor management sought to lower the exercise price from $118 per share to $24, in keeping with the performance of the company's stock.

Cowed by the harsh criticism on the capital market and the opposition of Bank Hapoalim (TASE: POLI), Koor's chief executive, Jonathan Kolber, was forced to shelve the proposal. Given the poor performance of the management, which had destroyed about a billion dollars in value for shareholders, Kolber understood that the timing of the request to compensate the managers for the share's implosion was not fortuitous.

Yet his appetite for options had not been appeased, and at the end of last week, the conglomerate announced that it will be presenting a new options plan to the general assembly of shareholders. The new plan includes a substantial drop in the exercise price, this time to $20 per share - even less than was proposed the last time around.

What has changed? Why does Kolber think that what investors saw as brazen chutzpah two years ago, will now be judged legitimate? Although Koor stock has risen handsomely in recent months, it's still 80 percent below the share price when he took the helm, and is- 20 percent below its level at year-end 2001, when his last options program was shot down.

It would seem that Kolber has good reason to believe his plan will pass this time.

The entire affair exemplifies the dynamic of the dissociation between managerial results and rewards. The name of the game is timing, the tactic is to survive, and the strategy doesn't matter: Management that manages to keep its job can usually grab pay and bonuses irrespective of the financial results it generates.

Bank Hapoalim isn't there any more

The last time around, in November 2001, Kolber had two problems. The first was his "loser" image, after he had destroyed a billion dollars of the conglomerate's market value. the second was his partner, Bank Hapoalim (TASE: POLI), with its 20 percent stake, which was furious at the share price's crash, and was looking for any way possible to take revenge against Kolber, or at least force him to act decisively to restore the company's value.

Note the changes a year and a half later. Koor stock continued to crumble, and the company lost another NIS 788 million. But Bank Hapoalim isn't there any more. The tremendous loss induced the bank to get rid of the shares by spinning them off - namely, by distributing them as dividends in kind to its own shareholders. Now no single entity holds a substantial portion of Koor's shares, which suffered a drop in its share price from $120 in 1999 to $20 today.

As for Kolber himself, the more time passes, the blurrier become his supervisory failures that reduced the concern to losses in the billions, not to mention the 80 percent drop in its share price.

Memories are very short in the business sector. Within a few months, or at most in a few quarters, the chances are that everybody will be talking about Koor's comeback and how Kolber managed to stabilize the conglomerate.

Which leads us to the truly great thing about executive remuneration: Managers get bonuses for success, but aren't fined when they blow it. If you stay on the job long enough, a high point will inevitably come, for which you can demand a reward.

It is perfectly symbolic that Koor has recruited a new major institutional investor, a British investment fund called Hermes that bought a 9 percent stake. Hermes is famous for its active and aggressive involvement in its investment choices. It vigorously attacks companies in which executive rewards are generous despite weak performance, and demands a high level of disclosure.

Yesterday it transpired that Hermes has already notified the Koor management that it will support the new options plan, although Koor has excelled at remarkable opacity, and in practice, the plan is a bonus for the management that let down investors, causing them tremendous damage.

It is no surprise, though. Hermes is a new investor in Koor. It has no history or gripes. It doesn't care that Koor's value used to be $1.7 billion, and that today it's only $300 million.

Hermes bought into Koor at a company value of around $250 million. It sees great advantage to the management receiving options that would motivate them to raise the company's share price.

And that is, on one leg, the method by which managers and interested parties manage to rake in profits on the capital market. You can fool all the investors all the time. Just make sure to change their identities from time to time.