Steve Wynn Wins for Losing, Courtesy of Kirk Kerkorian

BLOOMBERG NEWS–Steve Wynn seems to have hit on a unique strategy to increase his compensation: Perform so badly that your company attracts an unwanted suitor.

It’s not as though Mr. Wynn, chief executive of Mirage Resorts Inc., the Las Vegas-based hotel and casino operator, hasn’t been provided sufficient motivation. On Dec. 31, 1999, the last date for which pay information is available, he was sitting on 13.6 million option shares. On top of that, he and his wife (who also is a Mirage director) owned almost 11 million shares outright.

All that motivation notwithstanding, Mr. Wynn’s record as a chief executive has been awful. His performance suggests he somehow came to believe shareholder returns were like golf scores: the lower the better.

During the 10 years ended Feb. 22–the day before his company got an unsolicited takeover offer from MGM Grand Inc.–Mirage’s shares posted an average annual return of 9.1 percent, compared with a 18.1 percent average annual gain for the Standard & Poors 500. For the five-, three- and one-year periods ended Feb. 22, his stock posted a negative return while the index soared.

The stock’s decline during the past two years was not exactly friendly to Mr. Wynn’s millions of option shares. So in December 1998, he took an action that his better-performing peers don’t have to take: He got the company to reprice the options that were under water. He turned in 2 million shares, carrying an original strike price of 16 3/16, and received back 1.83 million shares, carrying a strike price of 14 3/4.

But even a repricing isn’t going to save the day if your company’s stock price keeps declining. Which Mirage’s did. Mirage’s stock, which had traded as high as 30 1/8 on Sept. 30, 1997, fell to a five-year low of 10 7/8 on Feb. 22. A hero was needed to prevent Mr. Wynn’s options from going down for the count.

The hero in this saga, improbably enough, is Kirk Kerkorian, the toughminded investor who controls one of Mr. Wynn’s fiercest competitors, MGM Grand. On Feb. 23, he offered $17 a share for Mirage. Responding to the bid, Mirage’s stock jumped 33 percent the day the announcement was made, closing at 14 1/2.

So by repricing his options and then continuing to lead the company to a poor performance, Mr. Wynn, paradoxically, re-energized his options through the good offices of Mr. Kerkorian. If Mr. Kerkorian pulls off his takeover bid, the 56 percent premium he is offering will at once lift Mr. Wynn’s options above water, make his already above-water options worth a great deal more and, finally, substantially enhance the value of his actual shareholdings and those of his wife.

Mr. Wynn most likely will not see Mr. Kerkorian in quite so benign a light. But given his performance record, it seems time for him to consider folding his hand and leaving the gaming table.

Of course, Mr. Wynn, being the top dog of Mirage, has been given an opportunity denied to his customers, namely, a stacked compensation deck. Besides engaging in an option repricing, Mr. Wynn pays himself a salary of $2.5 million a year, in the same ballpark as Jack Welch of General Electric Company. And he gives himself the same $1.25 million bonus year in and year out.

A bonus that fails to respond to changes in profitability is really additional base salary in drag. Viewed from that perspective, Mr. Wynn’s true base salary is a rounded $3.9 million. Of the 854 chief executives whose pay I studied in 1998, not one of them earned that much in fixed compensation.

On top of that, Mr. Wynn seems to have found a way to get paintings to yield dividends. He did this by leasing some of his art collection to be displayed in his flagship Bellagio hotel in Las Vegas. For that privilege, Mirage’s hapless shareholders are paying rent to Mr. Wynn that runs to around $4 million per year. For a lot less, they can see far better art at the Met.

Chief executives and their compensation-consultant lackeys would have you believe there is a one-to-one relationship between the size of stock option grants and future shareholder returns. But that is utter nonsense. A better theory is that ultra-large stock option grants, like those given to Mr. Wynn, may actually trigger poorer performance because whatever benefits they confer in the way of motivation are overwhelmed by their excessive cost to shareholders.

All gamblers know that in the long run the house doesn’t lose. Sadly for Mirage’s shareholders, Mr. Wynn is the house.