KB Home Stock Scandal: Case Study on Why CEO Pay Reform Is Overdue

[Omaha Steve]

http://blog.aflcio.org/2007/04/06/kb-home-stock-scandal-case-study-on-why-ceo-pay-reform-is-overdue/

KB Home Stock Scandal: Case Study on Why CEO Pay Reform Is Overdue

by James Parks, Apr 6, 2007

Bruce Karatz, former CEO of KB Home, once was one of the highest-paid chief executives in the United States. He received the second-largest pay increase among 83 CEOs of large companies who held their jobs between 1995 and 2005. Since 2001, he made nearly $166 million from exercising stock options.

But Karatz resigned in November 2006 after an internal investigation found he had backdated his own stock option grants to boost his compensation. Karatz’s story is one of the six case studies on the AFL-CIO’s 2007 Executive PayWatch website, which was released yesterday. Some 257 companies have announced internal reviews, Securities and Exchange Commission (SEC) reviews or Justice Department subpoenas related to stock option grants. This year, the PayWatch website features CEOs who backdated stock options to take what they want from their companies and their shareholders with impunity.

The internal investigation into the backdating of stock options at KB Home blamed Karatz and Gary A. Ray, the head of human resources, for altering the dates of grants between 1998 and 2005. The company also is under criminal investigation by federal prosecutors, in addition to a formal SEC investigation.

KB Home has frozen Karatz’s severance pay—estimated at as much as $175 million—until an agreement is reached regarding how much he actually will receive. However, because Karatz’s exit package is part of a legally binding employment agreement, it might be difficult for the company to defend its position if it decided not to pay Karatz.

As a result of the stock option backdating scandal, KB Home seems to have taken some positive steps in corporate governance, such as adopting a new policy requiring all stock option grants and their terms to be approved by the board compensation committee and not granting any stock options to any executives in 2006.

FULL article at link.