Applebees, Inc. (NDAQ:APPB) shares moved down $0.08, or 0.32%, to $24.74 today after Breeden Partners criticized the company's performance and governance and made several recommendations to the company's board of directors in a Schedule 13D/A filing with the SEC. The hedge fund began its letter by pointing out APPB's chronic under-performance compared to other company's in its peer group. They noted Applebee’s performance was 113.3% worse than Darden, 51.7% worse than the S&P 500, and 47.4% worse than the 75th percentile of the casual dining peer group. Next, Breeden pointed out the company's deteriorating fundamentals by showing declining same-store sales (5.2% to -1.0%), declining operating margins (16% to 12.4%), and declining return on capital invested (16% to 10%). The hedge fund noted that many of these problems stemmed from:

1. A fundamentally flawed growth strategy
2. Ineffective leadership during several years prior to Dave Goebel becoming CEO
3. Serious ongoing internal weaknesses in marketing and finance
4. Poor capital allocation policies
5. Excessive overhead costs
6. An ineffective board
7. Poor governance practices of various types
   
8. Inability to make timely decisions of consequence

The letter then moved into an area that is generating an increasing amount of press coverage - executive compensation. Breeden noted that even while the company has lost million in value over the past few years, executives were still granted over $30 million in bonuses! They also uncovered some other highly questionable executive perks, including personal use of corporate aircraft and even the use of shareholder funds to pay executives' personal income taxes. Perhaps the hedge fund said it best:

"We do not believe that shareholder interests are served by turning corporate aircraft into flying limousines for senior executives’ personal vacations. Just as importantly, this practice is inconsistent with the wholesome “neighborhood values” that Applebee’s claims to embody as a company. I am quite certain that most Applebee’s customers would be shocked to find out that a portion of the cost of their meal goes to fly the former CEO back and forth to his beach house aboard a corporate plane ... In addition to not requiring executives to pay any of the costs for their personal travel, the Committee has taken the extraordinary step of requiring shareholders to pay the income taxes owed by the CEO and other senior executives for their aerial vacation tours."

Clearly, there is a disconnect here between management and shareholders that the board is failing to correct. To address these issues, Breeden made several recommendations to the company's board of directors:

1. There should be a moratorium on any incentive compensation for any tier one executives so long as TSR remains negative. Similarly, incentive compensation should be zero if the company remains in the fourth quartile of relative performance in generating TSR.
2. A large proportion of incentive compensation (such as 50-75%) should be based on relative measures of performance compared to the company’s publicly traded casual dining competitors shown on page two of this letter.
3. Growth in average per restaurant royalty fees from franchise operations should be included as an incentive target for relevant executives (including the CEO and CFO), since franchisees represent 73% of the company’s system.
4. The level of free cash flow would be a healthy measure for some portion of incentive opportunities, especially for the CEO and CFO.
5. Minimum relative performance in generating TSR or EVA (such as being in the top 20%) should be a significant part of every executive’s target incentive eligibility. All executives should have a vital stake in the company outperforming its peers.
6. Personal use of corporate aircraft should be banned. Tax gross-up payments made during the last three years should be repaid to the company.
   

Combined, hopefully these changes will be implemented by the company's board of directors and management in order to protect the company's integrity and restore shareholder confidence in the company. The changes could also help the Applebees boost their performance and better motivate management to deliver shareholder value. Meanwhile, investors can track management's compensation and perks at ExecutiveDisclosure.com.

Executive compensation is clearly an issue that will dominate the 2007 proxy season for public companies. Today, a group of institutional investors - comprised of public pension funds, labor funds, asset managers, and foundations - announced a campaign to petition U.S. corporations to give corporate shareholders an advisory vote on executive compensation packages. The group, which was organized by American Federation of State, County and Municipal employees' (AFSCME) Employees Pension Plan and Walden Asset Management, said that it has filed shareholder resolutions at 44 public companies in the United States.

The group of investors are seeking an annual, non-binding advisory vote on the summary compensation table that every corporate board presents to investors in its yearly proxy statement. According to the group, these resolution were only submitted at companies where pay has been excessive or where there has been a misalignment between pay and performance over the past three to five years. Their target companies include the likes of Affiliated Computer Services, Citigroup, Coca-Cola, Exxon Mobil, Home Depot, Jones Apparel, Merck, Nabors, Pfizer, Qwest, Time Warner, UnitedHealth, and Wal-Mart.

The idea is good in theory, but will it work? The group is quick to note that similar resolutions were filed with a half-dozen other companies in 2006 and averaged more than 40 percent support in its first year, including 44 percent support at Sun Microsystems and Countrywide Financial, 43 percent support at Sara Lee, 41 percent at US Bancorp, and 40 percent at Home Depot. Moreover, the group points out that the strategy has already been successfully implemented overseas. The United Kingdom passed a law in 2002 requiring publicly traded companies to give shareholders an up-or-down advisory vote on executive pay, and the U.K. system has successfully restrained the growth rate of CEO compensation there ever since.

Whether or not this plan will work remains to be seen - the vast majority of shareholder resolutions will be voted upon this spring during 2007 stockholder meetings. Until then, investors wishing to learn more about executive compensation and how it relates to a company's performance can visit ExecutiveDisclosure.com, which includes free charts comparing compensation vs. performance, compensation vs. industry compensation, and much more!

Apple Computers (NDAQ:AAPL) co-founder and CEO Steve Jobs has found himself in the spotlight again after sources said he was being questioned by the U.S. Department of Justice and the Securities and Exchange Commission last Thursday. While reportedly "flanked by lawyers", very few details of the event have been released to the public. Steve Jobs was most recently put in the spotlight after reports surfaced that he was granted 7.5 million stock options that were backdated by two months. Apple subsequently confirmed that documents were falsified to create the impression that the options were approved at a board meeting that never took place. While no criminal chages have been filed, this ordeal may prove to be a blow for Apple's iconified CEO who has been a media darling for several years. With more than 200 companies already implicated in the growing options backdating scandal, this is definitely a story to watch closely.

Home Depot (NYSE:HD) shareholders suffered another setback today after their request to freeze Robert Nadelli's $210 million severance package was denied by a Georgia state judge. Moreover, since the court case delayed payment of compensation, the court also ordered that the payment process be sped up. The General Employees' Retirement System for Pontiac, Mich. first sought the injunction in early January after widespread anger over the ex-CEOs generous retirement package.

Meanwhile, Home Depot said that it has tightened its regulations by adding provisions enabling the company to recoup compensation paid to executives that commit fraud. The company also said that it has increased the number of directors on the compensation committee in order to increase scrutiny over executive pay. While many shareholders remain disgruntled over the situation, the company argued that it has learned from its mistakes and instituted measures to prevent future abuse. You can check out the compensation amounts of other Home Depot executives by visiting ExecutiveDisclosure.com.

The Senate approved measures last week aimed at making it more difficult for executives to protect their compensation from creditors in the event of a bankruptcy. These measures came in response to Enron, Worldcom, and other scandals in which executives made away with millions while shareholders lost their entire investment. The new regulations put a $1 million limit on what many highly paid executives can place into a tax-free deferred compensation plan. The new provision, which was passed unanimously with a larger bundle of legislation, will also greatly increase taxes for a number of highly paid executives by millions of dollars over the next 10 years. The measure is part of a dozen other provisions aimed at limiting corporate and executive tax loopholes, after widespread abuses in the corporate world.

A new study on Director influences on CEO compensation (full report) shed additional light on an issue that has been receiving a lot of press.

Here are a few exerpts summarizing their findings:

This paper explores how networks of directors affect CEO compensation. We map the entire network of all board members of S&P 1,500 firms between 1996-2004, and generate network measures that capture several dimensions of these connections. We present strong empirical evidence that firms that have more connected board members, and whose board members are connected to better connected firms award a higher compensation to their CEOs. Controlling for firm size, investment opportunities, industry, and performance, a CEO of a firm which is in the top quintile of connected firms receives a 10% higher salary and a 13% higher total compensation than a CEO of a firm which is in the bottom quintile of connected firms. These results are robust to alternative explanations such as interlocked boards, busy boards, and entrenched boards; they are also robust to the independence of the board, geographic location of the firm, different governance measures, and potentially unobserved CEO or firm characteristics. These results highlight the important role that board networks play in the decision to compensate a CEO. Outlandish goodies are showered upon CEOs simply because of a corporate version of the argument we all used when children: "But, Mom, all the other kids have one."

These results highlight the importance of understanding the intricate ways in which a board of directors makes decisions. We present evidence that the decision regarding CEO compensation is highly affected by a unique characteristic of the board - how central it is in the overall director network.

There are several theories as to why this difference exists. Some argue that this study is evidence of corporate back-scratching - or friends-of-friends networks, while others insist that it highlights a greater move towards self-serving practices. However Dale Oesterle, a law professor at Ohio State University, doesn't think it's that complicated. He believes that it is simply the fact that a board member with a reputation for supporting CEOs gets other jobs; an outside directors that is friendly to CEOs on one board gets selected by other CEOs for other board positions. Regardless, the study does further illustrate the many issues that must be addressed to fix the many problems associated with executive compensation in corporate America.

Caremark Rx Inc.'s (NYSE:CMX) deal with CVS Corp. (NYSE:CVS) unfairly favors company insiders, according to a shareholder lawsuit brought to court by shareholders attempting to block the merger. Shareholders were also infuriated earlier this month when the company's board voted unanimously to block a higher, rival offer from pharmacy benefit manager Express Scripts Inc. (NDAQ:ESRX).

What's so unusual about this deal? Well, first of all, the Caremark-CVS deal has a whopping $675 million breakup fee - much larger than that of many large PE buyouts that took place recently. Secondly, Caremark executives and directors would also receive lucrative director positions at the combined company and could use the company's sale to free themselves from possible penalties and fines from an investigation by the Securities and Exchange Commission into potential backdating of stock options. In fact, CEO Edwin 'Mac' Crawford Thirdly stands to gain $48 million in stock, severance payments and consulting fees as part of the CVS deal. Finally, while the CVS offer is for stock in the company, and the Express Scripts offer was for stock plus a cash premium to shareholders. This is not to mention that the entire transaction took place near the stock's 52-week low, which is highly suspect.

Clearly there are plenty of reasons for concern. Lawyer Stuant Grant said it best: "Our main gripe is this was a sweetheart deal that gave the insiders a lot more than the outsiders". Whether or not this can be successfully resolved depends largely on the sentiment of larger institutional shareholders.

The Walt Disney Company's (NYSE:DIS) CEO Bob Iger revealed a $24.9 million pay package in a recent 14A proxy filing with the SEC. The compensation package included $2 million in salary, a $15 million cash bonus, and a $4.3 million payout from the vesting of performance options. Moreover, Iger also received $666,000 expense reimbursements for auto benefits ($14,400), personal air travel ($67,879), and security ($578,656). And this comes in addition to another $2.92 million in Disney stock options granted during the company's fiscal year. While this package pales in comparison to recent $100 million compensation packages, it still represents significant reimbursed expenses at the cost of shareholders. This is also a significant raise over his previous salary as COO, where he received $9.24 million in salary and cash bonus, $500,000 in restricted stock, 274,241 stock options, and other compensation of $1.02 million. But with Disney stock reaching new highs, he could be worth the price...