Today the Institute for Policy Studies released a critical new report: “Money to Burn: How CEO Pay is Accelerating Climate Change.” This is the 22nd year IPS has issued a report on executive pay, and none has been so important for investors or for society. The report compares the devalued energy company assets that may sit in pension portfolios today to the high-risk mortgage-based securities of the past
Here are some of the ways IPS notes that compensation practices at oil companies “incentivize practices that put our planet at risk.”
- Equity based pay can incentive short term thinking. The authors highlight two particularly amazing examples: at just two coal companies, Peabody and Alpha Natural Resources, executives cashed in $80 million dollars in stock options before the prices plummeted. While many individual executives made fortunes, workers and shareholders suffered.
- Buybacks are over-used and reflect poor asset allocation. A stock buyback, in which a company purchases its own stock, are theoretically to be used when the board and management think the stock is so undervalued that purchasing is the best use of corporate assets. But when companies buy back stock at high prices the absurdity of this claim is highlighted. The report notes that Exxon spent $13.2 million in buybacks in 2014. (Exxon was number 13 in our list of overpaid CEOs.) Clearly this is a case where assets could have been spent more strategically, perhaps on research, but that would not give executives a financial benefit nearly as soon.
- Pay for non-performance. The idea of “pay for performance” is very popular with executives when metrics are easily met. As certain energy company’s read the writing on the wall, the proportion of cash to equity pay changed. One example, “At Arch Coal, cash compensation increased 94 percent, to $2.3 million on average among their top five executives. CEO John Eaves enjoyed a $3.1 million bonus in 2014.
- Bonuses that “incentivize practices that put our planet at risk.” IPS found 13 oil exploration and production companies “to achieving a positive ‘reserves replacement ratio,’ a piece of energy industry jargon that expresses the amount of proven carbon reserves added to a company’s reserve base over a year’s time relative to the amount extracted.” One problem, the issue of stranded assets.
- Finally, the report highlights massive pensions that “cushion executives from risks they impose on billions of others.”