Huge Salaries Are Sometimes Just the Tip of the Iceberg
It clearly pays to be a top officer of one of California’s top corporations, but company insiders often get far more than just a salary, perks and lucrative severance arrangements.
In many cases, they are involved in other business arrangements with their firms that can pay off in a big way.
Often, directors also serve as company consultants and attorneys, bringing home rich fees. Other companies might rent all their office space from insiders. And, in some cases, entire families owe at least a portion of their livelihoods to related party transactions.
Consider Los Angeles-based Herbalife. The company paid its 35-year-old founder and chief executive, Mark Hughes, more than $2 million in salary last year. But that was just the beginning.
Hughes is also one-third owner of a company called Raven Industries, which sold nearly $3.9 million in products to Herbalife last year. Hughes’ “dividends” from the sales amounted to $641,000.
Additionally, he owns 20% of Dynamic Products, which sells weight-loss products to Herbalife. Herbalife bought $1.6 million in goods from Dynamic; Hughes took home $185,000 in Dynamic dividends.
But Hughes wasn’t the only one to benefit from a related-party transaction at Herbalife. A director, David B. Katzin, also serves as a company consultant, helping to formulate and test “nutritional products.” In 1990, the consulting deal paid Katzin $232,000.
Herbalife says it believes that these deals are no more favorable than deals with unaffiliated individuals and companies.
And, in fact, such consulting arrangements are not unusual:
* International Totalizer Systems of Carlsbad hired a former director to advise the firm on marketing in Southeast Asia. Under the agreement, Robert F. McPhail, who resigned as a director last February, took home $365,000 in commissions and was reimbursed $50,000 for business expenses.
* John M. Carmack, a director of Amelco Corp. in Gardena, is also an attorney with Gill & Baldwin. Amelco paid Gill & Baldwin $182,000 for legal services in 1990.
* Martin H. Blank Jr., a director of Barry’s Jewelers, is also the company’s legal counsel. Barry’s paid Blank’s firm $73,000 for legal fees and expenses last year.
* San Francisco-based Dreyer’s Grand Ice Cream paid the law firm of Manwell & Milton $615,450 last year. Edmund P. Manwell is a Dreyer’s director.
Even more common is the practice of corporations leasing office space from partnerships owned by officers and directors. Companies generally maintain that prices in these deals are comparable to what is available on the open market, but that doesn’t make them any less gratifying to the insiders involved.
Cases in point:
* Los Angeles-based Diagnostic Products leases its office space from a partnership owned by Sigi and Marilyn Ziering and their children. (Sigi is Diagnostic’s chief executive, and Marilyn is a vice president.) In 1990, the company paid rent of $701,000. Just a few months ago, it renewed its lease for six years.
* Emcon Associates of San Jose leases buildings from two partnerships owned by employees and directors. The company paid the partnerships a total of $715,935.
There are a handful of related-party transactions that seem to backfire on executives.
For example, Erly Industries in March, 1987, loaned $20.5 million to Hansen Foods. Erly’s president, Gerald D. Murphy, personally kicked in $1.2 million of the total.
Hansen stopped making payments on the notes in March, 1988, and filed for bankruptcy. Erly says it will pay Murphy back, but it reduced the interest rate on the loan he extended from prime plus 4.5% to prime plus 2%. It also reserved the option of converting the balance of the loan into shares of common stock for Erly.
Despite the rich payments to Hughes, Herbalife is in default on more than $2.6 million in payments to “retiring partners,” the company said in its proxy statement. Two of the partners are Lawrence and Donald Hughes, “members of Mark Hughes’ immediate family.”
