NEW YORK (Reuters) - Even if Countrywide Financial Corp.'s profit falls sharply in 2007, Chairman Angelo Mozilo still could pocket a maximum incentive of $10 million, thanks to a change in his employment contract that does not require earnings growth.
Mozilo, the son of a butcher who built Countrywide into the largest U.S. mortgage lender, is used to receiving handsome compensation. Over the past five years, Mozilo has received $387 million from pay and stock option gains.
After Wednesday's close, shares of Countrywide CFC.N were down 12 percent since the mortgage lender reported on Tuesday morning that second-quarter profit tumbled 33 percent. Mozilo blamed a rising wave of homeowners missing loan payments, forcing the company to slash its 2007 forecast.
Late last year, as Countrywide's subprime lending business soured, the company's board changed Mozilo's employment agreement. The contract eliminated a formula that calculated Mozilo's incentive award by using earnings-per-share growth. For fiscal 2006, his incentive award was $20.5 million after Countrywide's earnings per share rose 4.62 percent.
The new contract also cut Mozilo's base salary to $1.9 million from $2.9 million, and capped his maximum incentive payout at $10 million.
Under the new formula, Mozilo can receive 0.44 percent of Countrywide's net income if the company's return on equity is between 10 percent and 12 percent. His take rises to 1.08 percent of earnings if return on equity tops 12 percent, according to Countrywide filings with the U.S. Securities and Exchange Commission.
Return on equity is calculated by dividing net income by shareholders' equity (total assets minus total liabilities).
Wall Street analysts track return on equity closely because it demonstrates how effectively management reinvests capital. Last year, Countrywide's return on equity was 20 percent.
The company's profit is down 35 percent at midyear, but its return on equity is on track to be about 13 percent for the full year.
Over the last five years, Countrywide's average return on equity was 23 percent. That's better than rivals such as Wells Fargo & Co. (WFC.N), Washington Mutual Inc. (WM.N), Bank of America Corp. (BAC.N) and JPMorgan Chase & Co. (JPM.N), according to Reuters data.
And even though Mozilo's maximum incentive is capped at $10 million, Mozilo still has big payouts ahead of him. That is because the real juice behind his compensation over the years has been stock option awards amid rapid profit growth.
Last year, he realized $72.2 million from gains on stock option exercises, according to Countrywide's proxy statement.
And there's more to come.
At the time of the proxy filing in late April, Mozilo held nearly 6.7 million options with exercise prices between $9.60 and $18.98. Countrywide shares were trading at $29.88, down 2 percent, in late afternoon trade on the New York Stock Exchange.
In July alone, Mozilo has realized about $9.5 million from option exercises, U.S. regulatory filings show. Mozilo option exercises are governed by a so-called 10b5-1 trading plan, which allows company insiders to sell stock at all times under a predetermined formula.