Proxy published: 3/10/15

Annual meeting: 4/24/15

Both short term and long term incentives at AT&T, where CEO Randall Stephenson had reported annual pay of $23,984,315, raise concerns.

To qualify for a payout under the short-term incentive plan at least one of three predetermined performance thresholds must be met. This year the company failed to achieve target in either consolidated revenues or free cash flow, it did achieve the lower threshold level in those categories. In earnings per share AT&T achieved its target. Yet when these benchmarks are achieved the board maintains considerable discretion regarding actual payouts. The board will “consider performance against these and other Company and business unit metrics as well as individual performance.” Upon such consideration, despite the failure to reach target in revenue and cash flow, the AT&T board awarded Stephenson a bonus of $4.35 million, 92% of his target bonus of $5.3 million.  There is a significant gap between his target bonus and that of the other NEOs.

Performance share payouts were based on ROIC (Return on invested capital) to determined 75% of award, and TSR compared to S&P 100 for the remaining 25%.  The company failed to achieve its TSR goal, but the ROIC goal (which was not disclosed) was paid out at 113%. TSR goal allows payment at full target even if it underperforms median of other companies.  The threshold payment level is the 26th percentile, so some awards are paid out if AT&T just barely outperforms the bottom quarter of the comparator companies.

A study sponsored by the IRRC Institute published in November 2014 notes that a significant variation in pay is linked not to performance but to company market capitalization. The study found that: “Economic performance explains only 12% of variance in CEO pay. More than 60% is explained by company size, industry, and existing company pay policy. None of those are performance driven.”

To some extent a link between company size and pay makes intuitive sense: certainly someone running a start-up would expect to be paid less, and differently, than the CEO of a large, complex, multinational company. At a certain point in the S&P 500, however, almost all the companies are large, complex, and multinational. It is at that point where one can question whether executives are likely to leave Apple, Exxon Mobil, or Pfizer to join AT&T, and whether pay should so closely track market capitalization.