The public's anger over the exorbitant compensation paid to employees by banks that have received millions in federal bailout money hasn't prevented publicly traded home builders from showering their corporate executives with generous bonuses and incentives based on performance measures that aren't always directly related to their companies' recent profitability or stock price.

Hovnanian Enterprises' recent disclosure that its 51-year-old president and CEO, Ara Hovnanian, received a compensation package for 2008 totaling $10,255,501 is hardly unusual for an industry whose executives are perennially among the leaders on corporate compensation rankings. Tim Eller, Centex's CEO, reaped $13.2 million during the fiscal year that ended March 31, 2008; Toll Brothers' chairman Bob Toll received $8.8 million during fiscal 2008, which ended Oct. 31. But the severe downturn in the housing industry and the millions in losses being reported by public builders can seem disconnected from the rewards some of their honchos are still getting.

For example, the Red Bank, N.J.-based Hovnanian Enterprises reported a 29.1% falloff in closings in fiscal 2008, to 10,577 units; a 31.3 percent decline in revenue to $3.31 billion; and a net loss of $1.1 billion, on top of a loss in 2007 of $627 million. The company's stock price lost nearly three quarters of its value last year.

It could be argued, given that roughly $7.4 million of Hovnanian's and Toll's respective compensation packages were in the form of stock options, that the fullest value of their gains last year might not be realized unless their companies' fortunes improve. Paul Hodgson, a compensation analyst with The Corporate Library in Portland, Maine, would like to see more public companies compensate their executives by issuing stock "with long vesting periods" so that they are being rewarded based on the company's stock price performance, which theoretically at least should reflect the company's financial health and market position.

Nearly two-fifths of the $5.4 million in compensation that D.R. Horton awarded its chairman, Don Horton, last year was in stock, as was nearly one-third of what it paid its president and CEO, Don Tomnitz.

But in their current survival mode, many builders, including D.R. Horton, now gauge their health on their ability to service debt and run their operations. As the housing market deteriorated, a builder's cash flow became a more important measurement to investors and lenders. Horton's and Tomnitz's pay packages for fiscal 2008 each includes $1.85 million in "incentive compensation," based on "positive adjusted pretax income, operating cash flow, and SGA [selling and general administrative] containment," according to the company's SEC filing.

Last year, D.R. Horton's closings declined by 36% to 26,396. Its home building revenue fell 41.2% to $6.52 billion, and the company incurred a $2.67 billion net loss, on top of a $1.02 billion loss in 2007. However, the builder ended fiscal 2008 with $1.88 billion in cash flow, up from $480 million in fiscal 2007. D.R. Horton also reduced its SGA costs last year by 31% to $791.8 million. But as a percentage of its home building revenue, SGA rose to 12.1%.

Hodgson says that using cash flow as a bonus criterion isn't unusual in the corporate world. But he has more trouble, in general, with SGA reduction as a performance measure. "I'm not sure about the ethics of receiving a bonus for making cuts that include laying people off to keep costs down."

Hodgson notes that compensation formulas that many big builders use—paying execs relatively low base salaries coupled with higher bonuses and incentives—are a lot like how Wall Street firms compensate their employees. "Not exactly a ringing endorsement," he quips. "The problem is that people come to expect bonuses, even when their companies' poor performance renders them baseless." But as more public companies place greater emphasis on the integrity of their corporate governance, Hodgson expects their boards inevitably will be taking a much closer look at how much their executives are being paid.

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Portland, ME.