Multiple Companies of Concern
Our primary focus with the blog this year is looking at the 100 companies that appeared on our overpaid list in our report, but the overpaid companies from last year are not necessarily the ones from this year. We have become aware of another S&P 500 companies with excessive or problematic pay packages this year, and wanted to quickly point them out.
CtW Investment Group called on shareholders to vote against advisory votes at Dominos Pizza and at Service Corporation International. Vote no campaigns that include public appeals to shareholders are filed as PX14A6G. The letter on SCI critiques a detailed analysis of the company’s bloated pay structure, weak pay oversight, and flawed implementation of performance metrics.
Companies occasionally file defensive, and generally unconvincing, counter-arguments when they receive a recommendation against from one of the proxy voters. While ISS and Glass-Lewis analyses are available only through subscription, these documents are publicly available at the SEC as “Additional Definitive Proxy Soliciting Materials, or DEFA 14A.
For example, on April 14th, Yum Brands filed a letter to shareholders seeking support on its advisory compensation proposal and opposition to a shareholder proposal calling an end to accelerated vesting upon a change in control. One issue that ISS apparently raised concerns about was the fact that some performance awards would be paid out even if the company failed to achieve median TSR. According to the proxy statement, for the 2014-2016 performance shares, the executives will receive have their target awards even if the company is out-performed by 59% of peers. The company counters that, “However, 74% of relative TSR plans result in the target being earned at the 50th percentile or lower performance.” If that is true, particularly regarding lower performance, shareholders need to carefully be reviewing these plans and voting against a higher portion of them. In any case, at Yum this tranche of awards are granted from a baseline at a time when the company under-performed peers.
The Chubb Group, where CEO John Finnegan had total disclosed compensation of $17,841,294 in 2014 also filed a DEFA14A in which it notes that company TSR exceeded that of peers on 7, 10 and 12 year annualized TSR, and that pay has not risen as much as TSR. Non-equity compensation alone was $5.5 million for 2014, however, and that did not cover the same time range. Finnegan owns 784,962 shares of stock, most of which were provided as part of equity compensation so he is adequately rewarded for long-term TSR through that format.
BB&T (meeting date April 28) also filed a DEFA14A in defense of its compensation, though it made no particular reference to ISS or Glass Lewis. The letter, written by Compensation Committee Chairman Joseph Howe, III, explicitly acknowledges that “TSR results on a relative basis slightly lagged our Peer Group in the one- and three-year comparisons,” but suggests that compensation decreased in 2014. However, in that assessment it excludes the significant increases in pension and deferred compensation value. For CEO Kelly King, this represented $6.8 million out of a total package of $14.1 million. King’s current pension value is approximately $26 million, a significant one, particularly given the industry.
Companies often search for and disclose the financial metric that puts them in the best possible light in comparison to peers, and I would speculate that the company considered a number of measures before including in the chart “Tangible book value per share” which, according to the company, “generally represents the amount of money an investor would theoretically receive for each share if a company were liquidated at the values stated on the company’s balance sheet, excluding goodwill and other intangibles.”
The company rebuts concerns about the fact that it targets total compensation between the median and 75th percentile of its peer group contending that it difficult to finding appropriate peers for comparison.
Teradata’s (meeting date April 28) defense of its compensation, filed on April 7, makes much of the effect poor company performance has had on compensation. No performance-based restricted shares were earned in the past two year, annual incentives paid below target, and the no payout is expected Long-Term Special 2016 Performance-Based Restricted Share Units. The company also points out that many of the options granted executives are underwater, meaning the strike price is below the current price. From 2012 to 2014 the realizable pay of the CEO was only 32% of the targeted pay. Shareholders have also suffered, of course, and may not be sympathetic to the CEO given the fact that his cash salary has increased by $100,000 over that same time frame. In addition, the company continues to give large option grants. If the executives can simply return stock to the price it was two years ago, the options granted in 2014 will be worth nearly $2 million dollars.
On April 8, Praxair also filed a DEFA14A in which it urges shareholders to vote in support of the advisory vote and states that, “The ISS voting recommendations seem to be based primarily upon Praxair’s short-term Total Shareholder Return (“TSR”).” However, ISS analysis always considers more than TSR. In fact, last year, ISS recommended in favor of around 8 out of 10 of the companies with the lowest TSR because they felt that pay and performance were appropriately linked. All of these companies had a greater decline than the 5.9% TSR decline of Praxair. However, all of these companies reported total compensation below Stephen Angel’s $19,687,401.
The company also includes in its DEFA14A a chart that shows the heavy stock buybacks the company has participated in over the past decade, noting that it has “reduced share count by 10% and returned cumulative $10 B cash to shareholders through dividends and share repurchases since 2005.” There has been increasing concern from a number of fronts, most recently including an April 23, 2015 letter from Senator Tammie Baldwin to SEC Chairman White calling on a re-evaluation regarding buyback rules. A more lengthy discussion on buybacks and the role they play in the economy can be found in the Roosevelt Institute’s Taking Stock by William Lazonick.
In any case, total disclosed compensation for Angel increased by over $6 million from 2013 to 2014. The company notes in the DEFA14A that “more than 20% of the increase is related to external factors that impact the value of employers’ pension obligations, including changes to the mortality tables issued by the Society of Actuaries in 2014 and a marked decrease in the discount rate used to value pension obligations during 2014.” In addition, “nearly 60% of the change in pension is related to a legacy arrangement established fourteen years ago in connection with Mr. Angel’s recruitment to the Company in 2001, and the final portion of this legacy arrangement vests on January 1, 2016.” In the proxy statement itself, it is noted that to persuade Angel to depart from General Electric, Praxair agreed that he would receive an additional credit under the SRIP [Supplemental Retirement Income Plans] on January 1, 2011 for 10 years of service that he had with his prior employer. Expect to see high figures in this column next year as well: on January 1, 2016 he also will receive credit under the SRIP for an additional 11.64 years of General Electric service if he remains continuously employed with the Company until that date. The present value of his pension benefits is over $35 million dollars.
In addition to seeking out DEFA14As, I took a quick look at some of the companies with highest total disclosed compensation thus far in proxy season and took a very quick look at their proxy statements.
Compensation for CEO John Koraleski at Union Pacific reached $28,144,047, an increase of almost $11 million dollars. The bump was in part due to a change in pension value of over $13 million (it was $6 million last year). In February 2015, Koraleski became executive Chairman of the Board, and Lance Fritz became President and CEO.
Also of note, the estate of former Chairman and CEO James Young, who resigned in January 2014 and passed away in February 2014, received compensation of over $50 million. The company notes that Young’s “performance stock unit, retention stock unit and stock option awards were modified on January 31, 2014, to waive the continuous employment and service provisions and provide for vesting upon his retirement.” While reasonable consideration and compassion is appropriate for any ill employee, the goals of compensation elements such as performance share should also be considered. Young’s pension (over $16 million) and lifetime of savings would likely be sufficient to care for his heirs.
Finally, a look at Union Pacific’s proxy shows that the company has included in its peer group companies including unlikely peers include eight companies from our “Overpaid 100” list, including some that seem unlikely peers such as Altria and Time Warner Cable, as well as others that seem a more appropriate fit. Even with that peer group, the company notes that the $4 million bonus was above the 75% percentile of its peers.