On Proposal 3, the Company is providing stockholders with the opportunity to approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in the Company’s Proxy Statement.

As an advisory vote, this Proposal is not binding on the Company or the Board.

We believe stockholders should vote to disapprove the compensation of the Company’s executive officers. As noted above, the Company’s CEO has received significant compensation, totaling more than $39 million over his tenure, while stockholders have lost nearly $900 million.

In 2011, the Company, at the urging of its management team, bought Peregrine to diversify the Company into copper and gold and into Argentina. The Company’s stock declined by 47% in the month after the deal was announced and was down 51% for the year. Yet, the compensation committee and Board awarded the Company’s CEO more than $5 million in compensation, far in excess of the pay awarded on average to the Company’s peers. Indeed, while stockholders suffered in 2011, Mr. McAllister made more than he ever has at Stillwater and was paid more than any other public company CEO in Montana.

The pattern continued in 2012.

stillwater_coins_by9In 2012, the compensation committee of the Board used a “scorecard” to evaluate the performance of executives. The Company has provided a copy of this scorecard in the Company’s Proxy Statement. For the reasons noted below, we find the compensation committee’s approach to executive compensation in 2012 to be unacceptable and encourage all stockholders to review the Company’s proxy disclosures in detail. We note the following:

First, although the compensation committee in 2012 used an elaborate list of 17 factors for deciding on bonus payouts and 16 factors for determining the long-term incentive program awards, none of those factors are tightly tied to the creation of shareholder value. Nowhere in the list of 33 items is the word “stock price” or “stockholder return” or “profit” or “cash flow” mentioned. We believe a Chief Executive Officer should be incentivized to do things that create stockholder value. Instead, Mr. McAllister’s fortune is not tied to those of the stockholders.

Second, one of the factors used for both the short-term bonus and the long-term incentive plan is the year-end cash balance. The more cash, according to the compensation committee’s approach, the merrier the bonuses for the executive team. We see no reason to incentivize the Chief Executive Officer to hold onto as much cash as possible and not either return it to stockholders or put it to good work. We believe there are capital projects worthy of spending on in Montana; the current compensation scheme provides a disincentive to pursuing those projects even though they would likely create acceptable (or extraordinary) returns for stockholders.

Third, the compensation committee awarded the management team scores on the various criteria that are far higher than we would have awarded. For example, the compensation committee provided a 100% performance grade for the refinancing of the Company’s convertible bonds, even though the financing was executed so poorly as to deliver a 30% return to the new investors in four months. The compensation committee also provided a “200% performance ranking” to the management team for its handling of the Altar asset, for ending the year with more unused cash on the balance sheet than projected, and for making an “excellent” board presentation on the Company’s safety program. (The safety presentation to the Board resulted in more than $80,000 in bonuses to the executive team, more than making up for the lost bonus the team suffered for failing to deliver an updated feasibility study on Marathon, which is critical to the Company’s future economic opportunities.)

Fourth, in the “discretionary amount” of the short-term bonus calculation, the Board concluded the management team had so outperformed expectations that it deserved a discretionary award 50% higher than the target. It appears this Board found no reason to penalize the management team for producing fewer ounces in 2012 than in 2011, for experiencing cash costs per ounce that were 15% higher than 2011 (in an environment of lower realized prices per ounce), for managing a recycling business whose profit declined by 44% in 2012 or for the discovery of flawed diligence in the acquisition of Marathon. In the end, the Board determined that the executive team was worthy of short-term bonus award equal to 142% of the target amount and a long-term award equal to 120% of target, which we believe is far too high given the performance in 2012.

Fifth, the “target” long-term incentive awards are set in a manner that is characteristic of pay in Lake Wobegon, where everyone is “above average.” The “target” bonuses were intentionally set by the compensation committee to be in the 50th to 75th percentiles of the pay received by executives of the so-called “Comparator Group” companies. In other words, for targeted performance, the Board intended to pay its Chief Executive Officer at an above-average rate.

Sixth, the Comparator Group used to determine the “target” bonus is hardly comparative at all. The group selected by the Board consists of ten public companies, the average enterprise value of which at the end of 2012 was $8 billion, more than five times the enterprise value of Stillwater at that time. The ten “comparative” companies produced EBITDA in 2012 on average of $1.1 billion, more than ten times the EBITDA produced by the Company. Yet, the compensation committee targeted Mr. McAllister to make more than the average of the pay received by the CEOs of these so-called peers.

Seventh, one of the companies in the “Comparator Group” is Cliffs Natural Resources (“Cliffs”), an $11 billion enterprise value (at year-end 2012) company with $1.3 billion in EBITDA. Mr. McAllister, the Stillwater Chief Executive Officer, is the Lead Director of the Cliffs Board of Directors and serves on the Cliffs compensation committee, helping to determine the pay received by the Cliffs CEO. Until late 2011, Mr. McAllister was the Chairman of the Cliffs compensation committee. The pay package Mr. McAllister awards to the Cliffs CEO (which has consistently been one of the highest among the “Comparator Group” companies) in turn affects Mr. McAllister’s own pay at Stillwater under the approach taken by the Board. This is a blatant conflict of interest. Cliffs should not be included in the “Comparator Group”.

Eighth, after painstakingly determining the dollar amount of stock the executive team deserved, based on its complicated scorecard, above-average target award and inapposite peer company list, the Board converted the dollars into restricted stock awards using a below-market stock price. We too would like to buy stock at a discount, but seemingly only the executive team is permitted to do so. In calculating the number of restricted stock units to be granted, the Board used a 90-day trailing average stock price of $12.01. But, on the grant date (February 8, 2013), the stock closed at $14.31. So, after using the complex process described in six pages of the Company’s Proxy Statement to determine that Mr. McAllister was worthy of a $2,581,610 long-term incentive award, the Board then gave him shares that had a then-current value of $3,075,520. Mr. McAllister received a windfall of almost $500,000, rendering the precise and painstaking long-term incentive award evaluation process essentially moot.

The combination of grading management on criteria that is not tied to stockholder returns, inflating the grades, setting the “target” compensation based on an above-the-average compensation package of the peers, selecting peers that are markedly larger (or in one case a peer that Mr. McAllister influences), and then using a fictional stock price that is 19% below the actual stock price, is a bad process that led to a bad outcome in 2012.

For 2013, the compensation committee has decided to add some EBITDA and stockholder return elements to the long-term incentive plan award criteria. While we welcome this development, we are mindful that 2013 will be the first year these important factors are considered and that they will be weighted only 20% in 2013. We believe this is too little, too late and acts as an admission of a deficiency in the prior years’ compensation approach.

We also note that Mr. McAllister receives a tax gross-up that fully offsets the effect of any excise tax imposed under the federal tax laws in the event he is terminated or quits for good reason. The effect of the tax gross-up is that Mr. McAllister is spared having to pay certain otherwise required federal excise taxes and the stockholders pay them (and the tax on those benefits) for him. And while the Board recently decided that it would provide “no future gross-up provisions in any employment agreements,” Mr. McAllister still apparently remains entitled to his tax gross-up. We believe this is not in the best interests of the stockholders and should be removed as a condition of any continued employment. Mr. McAllister should be solely responsible for any federal taxes that may be required upon his retirement. The compensation committee’s failure to adjust Mr. McAllister’s employment contract is another reason vote against this proposal.

For all of these reasons we believe the Company’s executive compensation practices are not well designed and that stockholders should express their disapproval.

Our Views on the Proposals

Anyone who knows us knows we have some strong views. Find out what we think of the proposals at this year's annual meeting.
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Why Change is Needed

We believe the Stillwater Board has made significant errors in guiding the Company since the majority owner sold its stake in 2010.
The Case for Change

The Path Forward

The Company can create more value for its stockholders by taking these steps
Read More

Materials For Stockholders

April 15, 2013
Clinton Group second letter to Stockholders Read More >

April 9, 2013
Presentation to Stockholders Read More >