Within the next month, a former division president for Centex Homes, who is currently suing the company over a compensation dispute, says he plans to file a wrongful termination complaint against the industry's third-largest builder.
Douglas Pautsch, Jr., a 10-year Centex veteran, was let go earlier this month when the builder consolidated its Central Valley division in California with divisions in Sacramento and Reno, Nev. Pautsch had been president of the division overseeing the two latter markets as well as one in the San Francisco Bay Area. His dismissal occurred only weeks after Pautsch filed a complaint against the company, in which he alleges that the Dallas-based builder reneged on paying him $355,000 in bonus money he claims to have earned during the company’s latest fiscal year.
“I believe in Centex’s culture, which has always been about doing the right thing,” said Pautsch, in an interview with BUILDER this afternoon. “And I might have been okay with a reduction if everyone else was reduced the same way. But what happened just isn’t right.”
Eric Bruner, a Centex spokesman, told BUILDER that it his company's policy is not to discuss pending litigation.
Pautsch’s seven-page complaint, filed on June 18 in Superior Court in Placer County, Calif., hinges on the details of a bonus plan that Centex presented to its division presidents in the fall of 2006. According to the complaint, that plan moved bonus compensation away from what Pautsch describes as “a one-size fits all“ structure that had been based primarily on a percentage of a division’s earnings, and toward bonuses that incorporate other metrics that are not tied to income and are independent of each other. Centex’s goal, he states, was to minimize wild swings in bonus compensation that normally occur during boom and bust periods. So while a division president might receive a smaller bonus under the new plan when times are good, he could also receive a bonus if his division lost money as long as he hit the other performance goals.
Pautsch tells BUILDER that the company customized each division’s performance measurements, depending on the homes it sells and markets it serve; for Pautsch’s division, the four metrics in play were homebuilding operating margin percentage of revenue, asset turns, customer satisfaction, and “personal development.” He said that last year his division ranked first among all of the company’s divisions in customer satisfaction; that it was the No.1 builder in Sacramento and northern Reno; and that its asset turns were above target. His division’s operating margins weren’t great, as Sacramento in particular was where Centex wielded incentives aggressively to sell houses. “The message I kept getting from corporate was ‘forget about margins, go after cash,’ ” recalls Pautsch. “They knew the division wasn’t going to make money last year, but they still rolled out the [bonus] plan.”
This change in bonus compensation was “a culture shift,” for Centex, says Pautsch. Indeed, in its most recent proxy statement, which it filed in June with the U.S. Securities and Exchange Commission, Centex asked shareholders to approve an amendment to a 2003 incentive plan for its top corporate executives, which went beyond using sales and earnings as sole criteria to include other “business process metrics” such as asset turns and cycle time.
James McGuire, a managing director with the Pittsburgh-based executive search firm Specialty Consultants, observes that as business conditions have deteriorated, builders more commonly are adjusting their compensation packages for all employees. “Companies are fighting for survival right now, and we’re seeing them going back to their people and asking them to accept cuts.” He also notes that, with the exception of Ryland Homes, which bases divisional compensation on a percentage of net income, most builders use a menu of performance goals to calculate what bonuses their division presidents can earn.
Pautsch’s complaint states the new bonus plan established a “target bonus” for each division president, which for Pautsch rose to $500,000 when he assumed management control of Centex’s Reno division last September. Pautsch’s attorney, Gary Basham, a partner in the Sacramento-based firm Basham and Parker LLP, tells BUILDER that Centex presented his client and other division presidents with “bonus sheets” with formulas for calculating their bonuses based on achieving each metric. Applying those calculations, Pautsch claims that for the fiscal year ended March 31, 2008, he was owed $455,000. But earlier this year, Pautsch says that his supervisor, Centex’s executive vice president for its Northern Pacific Region John Ochsner, informed him that the company would scale back the bonuses because it was losing money. (For the year ended March 31, 2008, Centex lost $2.66 billion on revenue of $11.9 billion that was off 6.7 percent to $11.9 billion.)
The complaint asserts that Centex is in breach of contract because it paid Pautsch only $100,000 of his bonus for that year. Pautsch says he emailed Centex’s CEO, Tim Eller, pleading with him to reverse this decision, to no avail. The complaint states that Centex has subsequently claimed that the bonuses were “discretionary”; Basham disagrees.
“Under California law, a ‘discretionary’ bonus would be like a year-end merit bonus, or a Christmas bonus,” says Basham, not a bonus that a company is contractually obligated to meet. McGuire also says that he doubts any builder would devise a bonus plan that left much room for discretion. “These things are spelled out in contracts; it’s not a subjective position.”
Pautsch, who is 45, says he believes he has a good case, supported by documentation, for a wrongful termination case against Centex. He asks why Centex would let him go when during the last two years the builder had expanded its territorial responsibilities to include Reno and the Bay Area. He also says he did everything the company asked him to do in tough times, including sell land and reduce his division’s workforce. “It’s very suspect,” he says.