• Letter to Editor
  • Pin it

Fore!! Callaway Golf — the big maker of golf clubs, balls, and other accoutrements — has hit an errant shot that may plunk its shareholders on the head. The blog Footnoted.org says Callaway is “taking a mulligan,” but that may be a little harsh. In golf, a mulligan is a do-over: if you make a lousy shot off the tee, you hit another one without losing a stroke. It’s against the rules, of course, but if the friends in your foursome don’t object, it’s okay.

What Callaway has done is hardly illegal, but shareholders attending the annual meeting May 18 at the company’s Carlsbad headquarters may ask about it. Like many companies, Callaway claims that it ties executive compensation to performance. But when performance stinks, Callaway finds another pretext to pay executives handsomely.

In its latest proxy statement, dated April 1, Callaway boasts, “Corporate governance is the system by which corporations ensure that they are managed ethically and in the best interests of the company’s shareholders. [Emphasis mine.] The company is committed to maintaining high standards of corporate governance.”

The proxy states, “A significant portion of total compensation should be related to performance,” and that’s particularly true of senior management. But also, “Compensation levels should be sufficiently competitive to attract and retain the executive talent needed.”

You can see the loophole here. The company pledges to pay its executives based on performance. But it also pledges to pay them based on retention incentives. Thus, when the performance is poor, the board can always shift focus and hand out bonuses as incentives to keep top brass on the payroll.

That’s what happened at Callaway last year. Sales plummeted from $1.1 billion in 2008 to $951 million. Earnings per share plunged from $1.04 to a loss of 33 cents. The stock, which had traded in the $30s in the late 1990s, dropped as low as $4.66.

Callaway had given the chief executive, George Fellows, along with four other officers, performance awards going back to 2006. One award was stock options that they could exercise at around $14, but that wasn’t going to happen with the stock so depressed. Last year, “All outstanding stock options were underwater and had no intrinsic value,” laments the proxy statement. Indeed, all options granted since 2006 were worthless.

That’s what performance rewards are all about: you don’t perform, you don’t get your emolument. So the board shifted its emphasis: it began focusing on incentives — paying the executives enough to retain their services.

Says the proxy, “Following a lengthy and diligent process, including numerous meetings and conference calls, the compensation committee [of the board]…ultimately determined to make a special retention incentive grant consisting of phantom stock units.” In Fellows’s case, all the board members except him joined in the decision.

Phantom stock, sometimes called “shadow stock,” really isn’t stock. It consists of cash payments that go up and down with the price of the company’s stock. Fellows was granted 254,130 units of phantom stock. He can cash half of them in after two years and the other half after three. Callaway puts a value of $2 million on that phantom stock given Fellows. The other officers were awarded from 44,473 to 69,886 units of phantom stock.

Let’s start adding this up. On January 29 of 2009, the board agreed to give Fellows 135,881 shares of Callaway stock free. The company valued those shares at $1.07 million. On the same day, Fellows got an option to buy 900,521 shares at $7.85. Those aren’t underwater; Callaway stock has rebounded and late Monday was trading at a shade under $10. The company puts a value on those shares of $2.13 million. Then there are those 254,130 phantom shares that Callaway says are worth $2 million. Fellows has a base salary of $925,000. In addition, he gets $136,105 for life insurance, travel expenses, country club dues, free golf clubs and balls, and other so-called privileges of rank.

So on page 41 of this year’s proxy, Fellows’s total compensation for 2009 — that lousy year — should turn out to be $6.26 million, says Callaway, up from $5.51 million in 2008, a good year, and $4.45 million in 2007, another good year. Of course, we don’t know exactly what that 2009 total compensation will be because we don’t know what future Callaway stock prices will be. But we have to go with the value that Callaway puts on these grants.

Eric Struik, vice president of finance, explains that the so-called incentive grants “are intended to cover what had been lost since 2006. We’re trying to compete effectively; these grants restore the retention incentive.”

Yes, but they also erase losses suffered from poor performance. Fellows’s earlier stock options may be underwater, but the so-called incentive grant should make up the difference, according to Callaway’s own valuation.

So whatever happened to compensation “related to performance,” as the proxy brags?

The Callaway proxy says that the phantom stock awards “further align the interests of the executive officers with the company’s shareholders.” Oh? What about those shareholders who are down more than 60 percent? Eyeing the phantom shares granted to Fellows, Footnoted.org comments, “Can ordinary shareholders get the same deal?” Of course not.

Callaway’s board “seems to have this orgy of self-congratulation, and for what I don’t know,” says former San Diegan Graef Crystal, now of Las Vegas, generally considered one of the world’s ranking experts on executive compensation. He is a contributor and consultant for Bloomberg News. “By any financial measurement, they had a crappy year, so they gave [Fellows] both options and free shares. I don’t know what’s going on with these guys.”

“It looks like a clever way to reprice options,” says San Diegan Bud Leedom, who heads California Equity Research and has always followed golf stocks. Incentive grants are pulled out of a hat when performance sputters, says Leedom. “Over and over, companies try to out-clever one another.”

Callaway has many things going for it: golf’s darling, Phil Mickelson, uses the company’s clubs and balls. The company says its first-quarter earnings will more than double to 25 cents a share this year. “However, a lot of golf courses are underwater. You’ll see golf courses turning fallow, the land converted to homes. People aren’t playing as much golf as they used to,” warns Leedom. Callaway stock has made an excellent run this year “but may be ahead of itself.”

Struik, Leedom, and Crystal agree that other companies use such maneuvers so that executives don’t get punished for poor performance. But that doesn’t make it right. It’s out of bounds.

  • Letter to Editor
  • Pin it


Visduh April 29, 2010 @ 12:10 p.m.

Hmmm. When the execs didn't earn the incentives with a profitable year, the reason to reward them anyway was to prevent their departure to greener pastures. Pray tell, what greener pastures? The other golf outfits are suffering too, some more, some less. Is a rival corporation, with its own entrenched power structure, going to start pirating from Callaway? Maybe, but I doubt it.

Then there's the issue of golf being in a secular decline. As a participant sport it has fewer players each year. Can it get those players back and bring in a new generation? Probably not. As a spectator sport, golf is also suffering. Tiger Woods gaveth, and Tiger will taketh away. Despite all the sportswriter hype, Tiger is damaged goods, and every time most people see him, they're going to be thinking about his misbehavior.

Callaway shareholders don't have a great deal to look forward to, so their interests would be in, among other things, cost cutting and a return to some degree of profitability. Rewarding the execs who rode the company through this debacle with even more free stock isn't going to do anything like that.

Maybe as a result of this story some local Callaway shareholders will attend the meeting and ask pointed questions, and demand some justification.


Don Bauder April 29, 2010 @ 1:58 p.m.

Response to post #1: I have always thought Callaway was a good company, but this episode threw me. Your questions are all right on the money. Why should the company give the boss (and other top executives, too) these fat incentive payments to stay when the golf business generally is doing poorly? What really threw me is that after the terrible year, it appears that Fellows will get more money than he will the prior year, which was a good year. What is the purpose of performance bonuses if the company doesn't perform and the performance bonuses are then replaced with other pretexts to jack up top management pay? And then Callaway still claims that it wants pay tied to performance...except when there is no performance, it will think of some other reason to boost management pay. Best, Don Bauder


Visduh April 29, 2010 @ 3:32 p.m.

Sadly, this manipulation of executive incentive compensation is not unusual. We've seen it in the Fortune 100, Fortune 500, and plenty of other corporations. The stockholders weather ups and downs, but executive compensation just keeps increasing.


Don Bauder April 29, 2010 @ 3:48 p.m.

Response to post #3: You are so right. It goes on all the time. Shareholders don't seem to scream, even though the sleight of hand has to be revealed in proxy statements. The lawyers manage to obfuscate the truth; that's why lawyers are hired -- to create unfathomable prose. Best, Don Bauder


SurfPuppy619 April 30, 2010 @ 2:31 p.m.

When the execs didn't earn the incentives with a profitable year, the reason to reward them anyway was to prevent their departure to greener pastures. Pray tell, what greener pastures? ====

Taking a page out of the old public union play book.


Don Bauder April 30, 2010 @ 9:07 p.m.

Response to post #5: After all the talk we've heard how San Diego firefighters and police would get jobs elsewhere if they couldn't continue to get their inflated pay and pensions, now they are saying privately that there aren't any cop or firefighter jobs anywhere. Best, Don Bauder


uncleleo May 1, 2010 @ 1:17 p.m.

Also, it should be noted that one of Phil Mickelson's biggest sponsors is KPMG (Phil sports the hat).


According to another watchdog, Publicintegrity.org, BearingPoint has an interesting history:

"BearingPoint traces its corporate lineage back over 100 years. In October 2002, KPMG Consulting Inc. changed its name to BearingPoint Inc. KPMG Consulting was formed in 1997 as the consulting division of accounting firm KPMG LLP. An initial public offering on Feb. 8, 2001, marked the official separation of KPMG Consulting from KPMG LLP. BearingPoint was the first of the Big Five consulting firms to separate from its audit and tax parent and become an independent, publicly traded company. The crisis that engulfed the accounting profession in the wake of the Enron/Arthur Andersen scandal later that year hastened the company's decision to change its name in 2002. . . . BearingPoint underwent a dramatic expansion by acquiring most of Arthur Andersen's worldwide consulting operations."

Bingo. The firm responsible for the corrupt accounting that papered over the Enron scandal, the greatest corporate failure in U.S. history, lives on, assimilated by BearingPoint. And it steers U.S. policy on Iraq as the government blindly lurches towards escalation, a policy ostensibly supported by only 11 percent of the U.S. population.



Nice work, Phil. You're donning a hat supporting some of the biggest financial thugs the world has ever known. Why not just wear an Enron hat? I'm not saying you're a sell out. Why would I? Your clothing does it for you. Big money in golf? You better believe it. Ask Tiger about the "whales" in Vegas. And then ask yourself: why did he start losing all of a sudden and then end up beaten up on the side of the road? The big boys don't mess around. Charles Barkley and Michael Jordan got Tiger into the BIG money games.


Don Bauder May 1, 2010 @ 4:26 p.m.

Response to post #7: I don't think you can expect an athlete to check the history of a corporate sponsor. By such logic, anybody who played for the Houston Astros when they performed in a ballpark named for Enron is suspect. What's this about Tiger getting beaten up? That's new to me. Best, Don Bauder


Psycholizard May 2, 2010 @ 1:15 p.m.

Twenty years ago, in Australia, golfers said that if new club designs worked, they'd be cheating, and played with clubs from the bargain bin. They also didn't mulligan and sank every putt, even on the temporary greens. We can learn from them, and if we do, sales of clubs like Callaway's, that take the golf club to the edge of cheating and sometimes beyond, will plummet. Lessons will improve your game more than new clubs, unless your handicap is very low.

As for Tiger, sex will only increase the fascination. I hear that Nike is introducing a new line of condoms that Tiger will use for club head covers. The slogan; "Just do it, but be safe.".


Don Bauder May 2, 2010 @ 7:35 p.m.

Response to post #9: There is still controversy whether the clubs with space age metals from Callaway and other makers actually improve the game that much. Yes, pros can hit the ball farther. But is the ordinary duffer helped that much? Best, Don Bauder


Psycholizard May 3, 2010 @ 2:42 p.m.

Callaway's flagship, the Big Bertha, was designed for the high handicapper when first introduced. The big club head made ball striking seem easier as they addressed the ball. The pros followed the amateurs towards the big club head, so the effect must be more than psychological, many golfers swear by them.

All equipment must perform similarly to pass USGA RSA standards. Lee Trevino will still beat you with a taped up Dr. Pepper bottle if you cover his bet.


Don Bauder May 3, 2010 @ 4:45 p.m.

Response to post #11: Many golfers MUST swear by them. The company has had very good sales through the years. The pros definitely benefit from modern equipment.(There has been controversy over whether certain clubs are permitted in pro matches.) But as I have heard from people who know the golf industry well, the jury is still out on whether these clubs really improve one's game that much. Much of the so-called improvement may be psychological, as you point out. Best, Don bauder


exelyman May 12, 2010 @ 12:40 p.m.

Unfortunately, Callaway has never had any decent leadership since Ely Callaway died in 2001. To George Fellows credit, as any good charlatan would do, he saw the vacuum left by the previous failed CEO's who tried to fill Ely's shoes, and he filled it. The board bought his act hook, line and sinker. They are as much to blame as anyone for this. Had they done their homework, they would have seen that he was a below average CEO at Revlon, as he has been at Callaway. The real shame is that the company still makes some of the best products in the business. If they ever had someone who knew what they were doing, they would dominate the industry. And Don, don't be alarmed if you try and get in touch with George and he doesn't call you back. Rumor is that he is at his Manhattan apartment or his house in the Hamptons most of the time. How else are you going to spend all that money?!


Don Bauder May 12, 2010 @ 2:06 p.m.

Response to post #13: Yes, according to the buzz, Fellows spends much time in his distant homes. I agree with you: Callaway has good products (although I have never tried them, so don't know that personally). What annoys me is that the company claims that compensation is tied to performance, but when there is no performance, compensation is tied to some other factor -- in this case, retention. Shareholders should not put up with this, but as we know, shareholders have very little say in companies, with the large Wall Street institutions (accustomed to gross executive overpayments) overwhelmingly controlling the shares and almost always voting with management. Best, Don Bauder


Sign in to comment