Lawndale Mows Down CEO’s Salary

An independent investor has succeeded in getting a company’s compensation committee to chop the CEO’s salary by a third, a move seen as unprecedented.

Recently disclosed action by Lawndale Capital Management of Mill Valley, California led the board to reduce the annual base compensation of Richard A. Horowitz, chairman, CEO and president of P&F Industries — a Melville, New York–based $12 million market cap tool and hardware manufacturer — from $975,000 to $650,000.

“This is the first time I’ve ever seen a shareholder action reduce compensation on an incumbent CEO,” says Paul Hodgson, senior research associate in charge of executive pay research for GMI, a company that issues governance ratings on public companies.

Lawndale first began lobbying for a pay cut for Horowitz last May, when it filed a form 13D with the Securities and Exchange Commission. Its president, Andrew Shapiro, who holds 9.95% of P&F, sent a letter to the P&F board calling for “a reduction or elimination of egregious compensation terms,” in any new contract, in particular Horowitz’s guaranteed base compensation. His existing agreement was set to expire on December 31, 2011.

As a result of the decision by the board’s independent directors and compensation committee, Horowitz could also see his bonus fall. The new agreement, which took effect on January 1, 2012, reduced his ‘target bonus’ to 50 percent from 90 percent of his base salary and set a ceiling of 150 percent, according to an 8-K that P&F filed on December 29, 2011. Prior to this, Horowitz’s bonus had no maximum, said Shapiro.

In addition, the committee next year could further reduce the target bonus percentage and pay it in the form of equity, the filing says.

“P&F has a long history of disenfranchised shareholders,” says Damien J. Park, a managing partner in Philadelphia-based Hedge Fund Solutions, LLC and co-director of the Expert Committee on Shareholder Activism for The Conference Board. Parks, who co-wrote the book, The Shareholder Activism Report, with the Board’s Executive Compensation Survey Chief, Matteo Tonello, says, “It’s becoming more common practice to engage shareholders in the compensation debate, especially since Dodd-Frank requires it. Still, it is unlikely this compensation cut — to a sitting CEO — would have happened without shareholders like Shapiro and others.”

In an email to Institutional Investor, Shapiro noted that “the former compensation terms for Mr. Horowitz were so excessive that putting them and his legacy board members under the public microscope (i.e. transparency) was the best disinfectant.”

Shapiro’s success as an activist isn’t limited to P&F. During 2009–2010, he convinced fellow holders of pulp manufacturer Mercer International debt to hold out for a third and higher offer to convert their existing notes to new ones, even though an industry shakeout was putting downward price pressure on the company’s margins. Shapiro bet that Mercer’s state-of-the-art facilities, the expected closures of less efficient plants and increased demand from China would offset market fears that Mercer wouldn’t pay its debts at maturity. It appears Shapiro was right. The debt holders ended up converting their notes for a better price from Mercer. “At this point,” Shapiro wrote in a shareholder newsletter last March, “our debt instruments trade with unlimited equity upside while we get to collect 8.5 percent interest payments and maintain superior balance sheet status as a creditor.”

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