United Technologies

Proxy released 3/13/2015

Louis Chênevert resigned as Chairman and CEO in November 2014, and then-CFO Gregory Hayes became the new CEO. With the promotion he received an increase in salary to $1.3 million, and increased the target for his annual bonus to 165% of salary. The Compensation Committee also increased his 2015 long-term incentive grant (made up of 165,500 SARs and 39,500 PSU) to $8.03 million in order to better align his award with that of peer company CEOs.

In addition to the change in CEO, there were several compensation changes made in 2014. Beginning with Performance Share Units (PSUs) granted in January 2015, the company will cap payouts at 100% of target if UTC generates a negative total shareholder return (TSR) over the applicable three year performance period even if relative TSR exceeds the target. Relative TSR is a useful metric, but can allow high payment for an executive even when the larger market suffers. Shareholders, of course receive no such insulation. Certainly an executive should still get salary for the work they perform, but should performance shares vest at target if the stock price has declined?

In another change, effective beginning with PSUs granted in 2014, TSR threshold payout level for PSUs was increased from 0% to 50%.   This change was made “to better align with market practices.” It should be noted that performance share units vest based 50% on an earnings per share goal, and 50% based on relative TSR targeted at the 50th percentile of the S&P 500. PSUs granted at the start of 2012 vested at 90% of target, based on 0% relative TSR vesting and 180% EPS growth vesting. It is not immediately clear whether the new threshold definition would have resulted in a high PSU payment, but one suspects that it may have.

Finally, regarding the EPS target, it should be noted that large buybacks, such as the one UTC has announced, can effect EPS not by increasing earnings, but by reducing the number of shares in the denominator.