Isenberg’s final payout of $100 million under fire

Nabors Industries is slated to pay Eugene Isenberg $100 million – more than the entire company earned in his final quarter as chief executive – and investors are crying foul.

Isenberg, consistently among Houston’s highest-paid executives, stepped down Friday as head of the oil and natural gas drilling company he’s run since 1987, triggering the potential $100 million termination agreement. He will remain as chairman.

The deal, crafted two years ago, entitles Isenberg to the massive final paycheck – plus outstanding stock options and awards valued at $26 million at the end of last year – in the event of his “constructive termination without cause.”

“It defies logic,” said Brandon Rees, deputy director for the AFL-CIO’s office of investment, which owns Nabors shares. “We’re baffled by what the board of directors was thinking in negotiating such an agreement for a CEO who is of retirement age. Nabors will continue to be a focus of shareholder discontent.”

Isenberg, 81, received $13.5 million in total compensation last year. From 2006 to 2010, he got almost $174 million in other compensation, John Daniel, an analyst with Houston-based investment bank Simmons & Co., estimated. During that time, Nabors’ stock price declined 38 percent.

“This year, that under-performance has continued,” Daniel said in a note to investors Monday. Shares of Nabors, which is based in Bermuda but has its main offices in Houston, declined 72 cents to $18.33 Monday. The stock has fallen more than 20 percent this year.

Isenberg’s payment would exceed Nabors’ third-quarter profit of $74.3 million.

No explanation yet

The controversial payment comes as corporate executive pay is drawing scrutiny.

Nabors’ investors were among the first to take advantage of a new federal rule under the Dodd-Frank Wall Street Reform Act allowing shareholders to oppose executive compensation packages with an advisory vote. Of the shares voted at the annual meeting last summer, 57 percent were cast against the pay deals.

Typically, executives receive termination pay when they are forced to leave, either because the board fires them or the company is acquired, said Chris Crawford, executive director for Longnecker & Associates, a compensation consulting firm. “Constructive termination” occurs when an executive is effectively demoted, pressuring him to resign.

Isenberg hasn’t publicly explained why he stepped down. Nabors board members and executives either did not return calls or refused comment.

“It’s definitely unusual to claim ‘constructive termination’ going from CEO to chairman, but it’s way more unusual to stay on as chairman and receive termination” payment, Crawford said. “That’s not a termination.”

The $100 million payout will be recorded as a “contingent liability” in Nabors’ year-end financial statements, the company said in a filing with the Securities and Exchange Commission. The filing doesn’t detail the conditions for the payment.

$50 million for new CEO

The new chief executive, Anthony Petrello, has a similar termination deal that would award him $50 million. He served as chief operating officer under Isenberg.

While acknowledging the $100 million payment may offend some investors, Daniel said there’s validity to Nabors’ argument: He took the company out of bankruptcy in 1987 and turned it from a small Alaska-based drilling contractor with negative shareholder equity into a multi-national company with more than $5.6 billion in value.

“The stock price was $0.37 per share in 1987 and increased 50-fold over Mr. Isenberg’s tenure,” he said.

Recently, some corporate boards have reined in executive severance packages, often called “golden parachutes,” said Cory Morrow, principal at Hay Group, a consulting firm. Some now include sunset clauses, ending the severance deal after an executive has led the company for several years.

“This is clearly an outlier,” Morrow said of Isenberg’s severance. “You can understand severance going into a bankruptcy situation, but 25 years later, is that appropriate?”

Isenberg’s parting package is actually smaller than in 2007, when he was eligible for $329 million in cash. In the years since, the company cut total annual pay by more than 81 percent, according to SEC filings.

Yet, the termination payout remains well above standard, which is two to three times an executive’s salary and bonus.

“If you go over three times, it starts to move out of the norm. Over five times is way outside of the norm,” Crawford said. “Ten times would be a crazy number.”