Speedway Motors Inc. CEO Burton Smith has recently received some press coverage by the AP over his questionable bonuses, disclosed in a December 5th 8-K filing with the SEC. According to the filing, Mr. Smith is entitled to receive a $1.45 million bonus in part for his "reduction of debt" to the company. Even more troubling is the fact that this "performance" metric has been used for determining Mr. Smith's bonuses for the past several years!

But just how much debt are we talking? Well according to a recent 10-Q filing with the SEC:

"Notes and other receivables from affiliates at September 30, 2006 and December 31, 2005 include $939,000 and $1,906,000 due from the Company’s Chairman and Chief Executive Officer. The amount due represents premiums paid by the Company under a split-dollar life insurance trust arrangement on behalf of the Chairman, cash advances and expenses paid by the Company on behalf of the Chairman before July 30, 2002 and accrued interest. The Board of Directors, including SMI’s independent directors, have reviewed this compensatory arrangement and determined it an appropriate use of available Company funds based on interest rates at the time of transaction and creditworthiness of the Chairman. As of July 30, 2002, the Company indicated to the Chairman that it would no longer make payments under the split-dollar life insurance trust arrangements or advances for his benefit."

How are companies allowed to do this? Well, the practice is now actually illegal - the relatively new Sarbanes-Oxley law (that took effect in 2002) now prohibits public companies from extending new loans to their executives. Meanwhile, experts agree that this type of behavior goes against the notion of performance-based bonuses. Moreover, the company is essentially rewarding the executive twice - once by lending the money and again by rewarding him for repayment. Meanwhile, the company argued that under increased scrutiny, they simply wanted to encourage the executive to pay off his outstanding debts. In reality, it may have attracted even more scrutiny...