Sotheby’s Cuts Ruprecht Pay From $10.3 Million as Profit Sinks
By Philip Boroff

March 11 (Bloomberg) -- Sotheby’s cut the pay of Chief Executive William F. Ruprecht for 2008 after he earned $10.3 million the year before as the art market peaked.

The New York-based auction house indicated in a filing last month that Ruprecht’s pay, while reduced, was at least $2.1 million. Sotheby’s declined to disclose the entire package ahead of a filing with the U.S. Securities and Exchange Commission, expected in a few weeks, that reports compensation for its five highest-paid officers.

Sotheby’s earned a record profit of $213 million in 2007. Ruprecht’s pay for that year included a $500,000 cash award, one of several bonuses to top executives that exceeded the auction house’s own prescribed limits.

“Mr. Ruprecht has distinguished himself, not only as a chief executive but also as a developer of client relationships worldwide,” Sotheby’s wrote in an April 2008 SEC filing.

“The committee believes this type of special award is occasionally appropriate in order to reward unusually strong individual performance and recognize his important contribution to overall company performance,” the company wrote.

As the only publicly traded auction house, Sotheby’s said there are no direct comparisons in assessing its compensation relative to other companies. In 2005, consulting firm Frederic W. Cook & Co., working for the board, found that Ruprecht’s pay exceeded the median of chief executives in four of five groups of companies it studied, including retailers, information- technology firms and a mishmash of enterprises of comparable market value. Only apparel paid more.
The board nonetheless called Ruprecht’s pay “appropriate,” according to the April 2008 filing.

Subjective Factors
While compensation must be “market based,” Sotheby’s favors “subjective performance factors” when setting executive pay, according to the filing. It looks at “historical performance by the individual” and “leadership and overall reputation within the company.”
“He’s one of the best executives I’ve ever seen,” said Sotheby’s Chairman Michael Sovern, a former president of Columbia University. “I’m altogether comfortable that he should be paid well.”
Through a spokeswoman, Ruprecht declined a request for an interview.
For 2007, he earned his annual salary of $700,000, $6.3 million in stock awards and $2.6 million in cash “incentive plan compensation.” Ruprecht’s package was three times the size of the second-best paid executive, Chief Financial Officer William Sheridan, who earned $2.9 million.

Free Car and Driver
The chief executive also received free financial planning, legal services, life insurance, car and driver, club memberships and sums to pay the associated taxes. Sotheby’s valued the lot at $691,880, including $281,244 in dividends from stock grants that hadn’t vested, $22,500 for company contributions to his 401(k) retirement savings plan and $154,500 in deferred compensation.

Ruprecht, 53, started at Sotheby’s in his early 20s as a typist in the rug department. He took over marketing in 1992 and North American operations in 1994, becoming CEO in 2000 after Chief Executive Diana Brooks was ensnared in a price-fixing scandal. That year, Sotheby’s reported a $189 million loss. Brooks served six months of house arrest in 2002.

“The company was a mess,” said Tim Fidler, a portfolio manager at Chicago’s Ariel Investments, Sotheby’s largest shareholder. Ruprecht’s team “brought a sense of discipline. They turned around the company from an operating standpoint.”

Market Boom
Between the start of the art market’s last boom at the end of 2003 and late 2007, Sotheby’s stock rose six-fold, peaking on Oct. 10, 2007, at $57.64. Profit nearly tripled in three years.

To win consignments, both Sotheby’s and privately held Christie’s extended minimum-price guarantees to sellers. Sotheby’s guarantees totaled $902 million in 2007, up from $131 million in 2005. With guarantees, the auctioneer in effect buys the art and shares in any resale profit.

Sotheby’s said that until last year, guarantees were profitable, primarily because of the commissions buyers pay. As the global financial crisis pummeled the art market, Sotheby’s lost $60.2 million on guaranteed property in 2008, partially offset by $43.8 million in commissions.

“When we put our estimates on guaranteed property for the autumn season, it was during the summer, when the world was a very different place,” Sovern said. “Consequently we experienced losses in our guarantee portfolio for the first time ever.”

Sotheby’s 2008 profit of $28.3 million was the smallest since a $20.7 million loss in 2003. More than 200 staffers will lose their jobs this year amid $100 million in cost cutting.


Share Price
The shares closed on Monday at $6.35, down 89 percent from their peak and their lowest since Sotheby’s went public in 1988. Yesterday, Sotheby’s rose $1.11 to $7.46 in composite trading on the New York Stock Exchange.

Ruprecht’s package for 2008 included $1.4 million in so- called restricted stock that vests over time -- the minimum permissible award -- and a $700,000 salary, according to a filing last month.

A big package “can make a CEO seem out of touch,” said New York compensation consultant James F. Reda. “It can make him a target of disdain. That’s why a lot of CEOs say they don’t want the money.”

Sovern said Ruprecht declined a $3 million “retention bonus” he was entitled to in December 2003, at a time when Sotheby’s was also cutting jobs. In 2002, Ruprecht did accept “retention bonuses” totaling $4 million.

Sovern said most of Ruprecht’s compensation is “performance-based.” Sotheby’s spokeswoman Diana Phillips said that of 2007’s $10.3 million, $4.1 million was stock grants from prior years.

Piece of Company
As of Feb. 10, Ruprecht owned nearly 557,000 Sotheby’s shares, nearly 1 percent of the company, including 421,483 shares that haven’t vested. Phillips said that “the market value of all of his stock grants is only a small fraction of their original worth.”

“The system is self-adjusting,” Sovern said. “When the shareholders don’t make out, Bill isn’t going to do well either.”

To be sure, Sotheby’s isn’t the only U.S. company to struggle after a record payday for its chief executive.

“The current economic conditions are challenging conventional wisdom on setting bonuses,” said Reda, the compensation consultant.

To contact the writer on this story: Philip Boroff in New York at pboroff@bloomberg.net.
Last Updated: March 11, 2009 00:01 EDT