State inquiry finds no wrongdoing in MPR's business

Originally published in Current, Feb. 2, 1998

By Steve Behrens

After an inquiry of almost two years, the Minnesota attorney general's office has issued a largely approving report on Minnesota Public Radio's complex and generous system for compensating its top executives.

The 21-page letter released Jan. 29 [1998] was so uncritical, compared with the front-page dust-up that launched it in 1995-96, that an Associated Press dispatch said it "cleared" MPR.

The state's letter "completely indicates what we did earlier is absolutely correct," says Steve Rothschild, chairman of MPR.

Charles Wikelius, deputy counsel for the state attorney general, said he expects the MPR matter to be resolved fairly soon, but the state's letter to MPR does require that the network provide some additional data and justifications.

It also reminds outsiders how well the hybrid MPR is doing at earning its own subsidies through its sister for-profit companies — an average of $4 million a year for the past decade, or one-sixth of its annual revenues. The for-profit companies are expected to have gross revenues of $200 million this year.

And it reveals how well MPR compensates three top executives who helped make the network so financially strong — William H. Kling, founder and president of both MPR and its for-profit affiliate Greenspring Co.; Thomas J. Kigin, v.p. of MPR and executive v.p. of Greenspring; and Donna Avery, president of Greenspring's mail-order subsidiary, Rivertown Trading.

Kling was paid $526,945 in fiscal 1997 — a big step up from the $358,000 sum originally cited for fiscal 1995 that made headlines two years ago. Kigin earned $270,279, and Avery, who is Kigin's spouse, took home $529,983. The figures include pension contributions, incentives and fringe benefits.

Most of Kling's and Kigin's pay (and all of Avery's) came from Greenspring. Kling's salary for running MPR itself, for instance, was just $75,137, but his Greenspring paycheck was $451,808.

The Greenspring part has been giving the raises. Kling's pay from Greenspring grew 55 percent (from $290,199 to $451,808) between fiscal 1994 and 1997.

Greenspring is far larger than MPR now, with fiscal 1996 revenues of $161 million — seven times its revenues eight years earlier.

In addition, Kling, Kigin and Avery stand to split $4.36 million as rewards and retention incentives based on the related companies' growth in 1992-96. They and other top staffers will share in rewards for further growth.

A recent study for MPR, requested by the state, indicates that Kling's pay is reasonable and "in the median range" of top executive pay at stockholder-owned mail-order companies of similar size and complexity, according to MPR spokeswoman Ann Barkelew. The study was done by the Chicago firm of Frederic W. Cook & Co., she said.

The attorney general's office accepted comparisons between executive pay in for-profit companies with the pay for a nonprofit/for-profit combo like MPR. State lawyers took their guidance from the federal Taxpayer Bill of Rights enacted in June 1996, according to Wikelius.

Paying such good salaries has caused intermittent public-relations pains, board chairman Rothschild said in an interview, but he believes it's in MPR's long-term interest.

"We have the benefit of a couple executives who are just outstanding in building what we think is the best public radio system and at the same time developing for-profit companies that support that growth," Rothschild said. "This is an unusual but beneficial situation. ... We have the benefit of having the founder of both [MPR and its for-profit sisters] still with us."

State seeks additional info

The most unusual part of MPR's executive compensation plan, and the part where the state still has questions, is its "value participation unit" (VPU) schemes approved by the Joint Compensation Committee for MPR and its affiliates.

This is on top of base salaries, bonuses based on one-year gains and bonuses based on three-year gains.

The VPU plans, designed to motivate and retain top executives, were modeled after stock-option plans in major corporations: they paid rewards for growth in the market value of the companies. Since Wall Street wasn't involved, the boards had to make their own estimates of market value.

The state lawyers focused on whether proper processes were followed in setting compensation. They asked MPR to provide adequate market data to support the finding that Greenspring had grown so much in value. And they said the boards had not clearly documented their evaluation of the executives' performance, or the basis for determining pay rates. MPR said it had already received a consultant's report on those issues.

The first VPU plan, adopted in 1992, rewards the top three execs for Greenspring's growth. They were to share an incentive pool equal to 10-12 percent of increase in the market value of the for-profit companies since fiscal 1992.

In April 1995, the boards decided to change the VPU plan--it wasn't paying out anything, for one thing, and at the same time the pledged percentages were too large, according to the state letter. The Joint Compensation Committee voted to buy out the executives' VPU rights for $4.36 million, representing what the committee believed was a fair share — 10 percent — of the $43.6 million gain in Rivertown's value by fiscal 1995. Kling and Avery would each receive $1.65 million and Kigin, $1 million.

Two months later, in June, the committee chose not to make the buy-outs in cash. In May, the state senate had revived a bill requiring public disclosure of executive pay at nonprofits, points out state Rep. Matt Entenza, sponsor of the bill. Entenza believes that MPR changed its plans to avoid disclosure of the big buyouts.

"It was in no way affected by his legislation," responded Tom McBurney, board chairman of MPR's parent nonprofit, Minnesota Communications Group, in the St. Paul Pioneer-Press last week. "I don't even recall his legislation."

Instead of paying cash buyouts, the companies made them a "contingent liability." They can be paid whenever appropriate for MPR, according to Rothschild. The first installments, totalling $206,000, were paid last year. But the deal pledged that the full buyouts would be paid if Rivertown were sold. In the meantime, the amounts would grow at the prime interest rate to as much as $7.9 million by the year 2006.

One problem with the deal was that it gave executives an incentive to sell Rivertown, the state said. But Rothschild said the executives could not independently move to sell Rivertown.

The second VPU plan, devised in 1996, is now expected to benefit 21 staffers based on the gain in Rivertown's value between 1996 and 2000. The amount of the rewards can't be known yet, of course, but Wikelius believes the plan is less generous than the first VPU plan.

The state's letter gives a hypothetical illustration: "If, at the end of the five-year period (in the year 2000), Rivertown is worth $25 million more than the base amount, Mr. Kling's Phase II ... payment for that year would be 0.4 percent ... times $25 million, or $100,000."

Once upon a yuletide rush

The state completely cleared MPR of questions surrounding a 1995 incident that Entenza raised two years ago. The attorney general's office said it was not improper — and "minimal" in impact, anyway — for Kling to have invited staffers of both MPR and its for-profit affiliates to pitch in when Rivertown was having operational problems in its new mail-order fulfillment center during the pre-Christmas rush.

Eleven employees ended up pitching in for a few hours apiece, the state found. For their labors, their favorite charities received a total of $343 for their labors. (Some named MPR itself to receive the pay.)

But the state said it was concerned that lines between MPR and the for-profit companies "may be blurred" by such incidents. If the network doesn't maintain proper separation, "MPR risks having the acts of its for-profit affiliates attributed to MPR and facing the unavoidable tax consequences that could ensue," the state's letter said.

The state also found no problems with the complex governance system surrounding MPR. The radio network as well as the for-profit companies are subsidiaries of a nonprofit Minnesota Communications Group. MCG is governed by six trustees usually elected from the larger MPR Board. MCG's board elects the board of Greenspring, which oversees Rivertown, Minnesota Monthly magazine and the Minnesota News Network, a news service for commercial radio stations in the state.

Pay for top executives is set by a Joint Compensation Committee of five chairmen and other prominent members of the MCG, MPR and Greenspring boards.

The decision-making bodies were adequately independent from executive control and they relied on appropriate comparative pay figures, the state said. Not counting the VPU plans, Kling was paid less than the comparable $535,000 market salary for presidents of for-profit companies of similar size, the letter said.

In addition to the governance structure, MPR is tied to the for-profit companies by royalty deals. MPR receives its mail-order proceeds through royalties on Rivertown's revenues. The royalty originally paid 10 to 20 percent of gross sales, but the rate was reduced successively in 1988, 1991 and 1993. Now, MPR receives 7 percent on a base portion of sales and 2.5 percent on "new growth." Royalties for the past two years were deferred entirely because of operational problems in 1996.



To Current's home page

Earlier news: Word leaks out that state attorney general's office is investigating MPR, 1996.; MPR sells Rivertown Trading Co., boosting its endowment, 1998.

Later feature: Interview with Bill Kling, 1999.


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