MGM MIRAGE’s Lanni doesn’t roll the dice on his pay

Graef Crystal

Wednesday, June 9, 2004 | 11:32 a.m.

If Terrence Lanni, the chief executive of Las Vegas-based casino operator MGM MIRAGE, takes over rival Mandalay Resort Group, he'll at least be moving the size of his new combined company into a closer match with his pay package.

Until now, Lanni has specialized in designing the almost perfect low-risk, high-reward pay strategy. Consider what Lanni has pulled off in his quest for pay-package perfection:

--His stock options were repriced two different times, although the smaller, and more recent repricing, backfired. He ended up with fewer shares and a higher strike price.

--A new employment agreement two years ago doubled his base salary to $2 million a year, by far the highest in the casino industry.

--That agreement gave him a lush new retirement plan, the funding costs of which doubled to $717,000 in 2003 from $358,000 in 2001.

--As part of that agreement, he was handed in June 2002 150,000 free shares worth $5.3 million at the time of their grant.

--Last July, he exercised 350,000 option shares out of the 2 million that were repriced in December 1995. His gain on exercise was $7.2 million. He promptly sold the shares.

--Of course, selling shares gives you less reward in the case of a stock surge. But at least some of that lost award potential was restored by the earlier grant of 150,000 free shares.

--Lanni was also helped by the grant of 700,000 new option shares on February 27, 2003, just five months before he exercised and sold those 350,000 option shares.

Let's take a closer look at that new option grant. The strike price of the grant was $25.48 a share, which was the closing price on the grant date. Note that the strike price was some $10 a share lower than the price on the date when the 150,000 free shares was granted. That's a drop of 28 percent.

Indeed, the $25.48 strike price of the option shares was within $1 a share of the low closing price during the entire year prior to the date of the option grant. Nice timing.

Following the grant of the option, the company's stock price took off, reaching a closing price of $44.84 on Monday. Lanni, in less than a year, has already built a paper profit of $13.5 million in his new stock option.

So, in the way of protection, we have the bloated base salary, the nice pension, the repriced options and the 150,000 free shares. And in the way of further reward, we have the deliciously timed option grant, as well as the appreciation in those 150,000 free shares.

The nature of the low-risk-high-reward deal Lanni has obtained for himself shows up in comparisons with other companies. In a study of 494 major companies, Lanni, after adjusting for differences in company size and after assuming that the Mandalay deal goes through, tests out:

--69 percent above the market in base salary

--62 percent above the market in salary and bonus combined

--40 percent above the market in salary, bonus and free shares combined

--But only 13 percent above the market in total pay, which includes the above elements as well as the estimated present value of stock option grants.

The above numbers vividly demonstrate that, in a decline, Lanni has guaranteed himself the softest of landings.

If MGM MIRAGE's stock price continues to accelerate, it looks on the surface as though he might lose out on a big payday -- until one recalls the extremely fortuitous timing of his most recent option grant.

What's sad about all this is that Lanni is a good performer. Between May 31, 1995, the end of the month before he became CEO, and the close last Thursday -- the day before the news of the Mandalay offer began to leak -- total return on MGM MIRAGE, the third-biggest U.S. casino, was 13.5 percent a year.

That compares with a return of 10.3 percent on the Standard & Poor's 500 Index and with returns of 5.9 percent and 6.6 percent, respectively, for Mandalay and Harrah's Entertainment Inc. (Lanni was CEO during the entire period, except between December 1999 and March 2001. During that interval, he was board chairman, as well as chairman of the executive committee.)

Indeed, in narrowing time windows of nine years to one year, with each window ended May 31, 2004, MGM MIRAGE beat the S&P 500 Index nine times out of nine.

Lanni is a lot better CEO than he thinks he is. It's time for him to throw away the crutches in his pay package and to stand tall.

One paradox here is that the chair of MGM Mirage's board compensation committee is James Aljian, an executive of Tracinda Corp., the holding company of Kirk Kerkorian, which owns 57 percent of MGM MIRAGE's stock. The notion that having large shareholders on a board will result in more shareholder-friendly executive pay hasn't been given any boost by what has happened at MGM MIRAGE.

The other members of the MGM MIRAGE board compensation committee are:

-- Ronald Popeil, CEO, Ronco Inventions.

-- Melvin Wolzinger, former general partner of W.W. Investment Co. and principal owner of various privately held restaurants and casino gaming establishments in Las Vegas.

As for Lanni and his riches, he's a low-risk-high-pay player. There's none of that high-roller behavior exhibited by his so-called "whales" -- the big bettors from all the over the world who contribute mightily to his bottom line.