Bristol-Myers Squibb

Proxy published: 3/25/2015

Annual meeting: 5/5/2015

The board made several changes in its compensation practices in addition to the announced leadership transition. CEO Lamberto Andreotti, in his final year as CEO, received total compensation of $27,062,382.

In May, COO Giovanni Caforio will become the CEO and Andreotti will become the Executive Chairman of the Board, with the same salary and bonus opportunity through August 3, 2015.

Generally shareholders frown of having a paid executive chairman as well as a CEO, as this can result in high level of payments.  We note however that this position is defined and time limited so less problematic.

However, it appears that as part of the transition it appears that incoming-CEO Caforio will receive two major long term incentive awards this spring, one in March for his current role of Chief Operating Officer and one in May for his new position of CEO. Shareholders may have concerns about what appears to be pay for two positions.

The compensation committee took a number of other action this year. In an effort to simplify their performance share unit (PSU) Awards the company moved from having three three-year over-lapping tranches to a single annual performance period. The company states that the 3-year vesting and the introduction of a relative 3-year TSR modifier will serve the goal of “preserving and enhancing the long-term nature of the award.”

The company added a “pipeline metric” to its annual bonus plan.  Of the three metrics for the annual bonus this was the one achieved at the highest level. This metric replaces the prior cash flow metric and, according to the company, “incorporates both quantitative and qualitative elements.” The metric “measures the sustainability and output of our R&D pipeline portfolio.” It is comprised of goals in two categories, Near-Term Value (Regulatory submissions and approvals for new medicines and marketed products in U.S., EU, and Japan) and Long-Term Growth Potential (development candidates, first in human, proof of confidence, registrational study stats).”

This metric appears to be a positive step toward focusing executives on long-term sustainable growth.

Ameriprise Financial

Proxy published: March 20, 2015

Annual meeting: April 29, 2015

The $24,455,192 reported in the summary compensation table as total disclosed compensation for Ameriprise CEO James Cracchiolo represents only a portion of the amount he took home. Much larger figures can be found in the table titled Option Exercises and Stock Vested in 2014, with realized gains of over $80 million. At the same time, Cracchiolo’s total ownership at the end of FY 2014 was less than at the end of 2013.  According to the stock ownership table he owned 150,000 less shares despite the million shares of options exercised.

As we noted in our report on overpaid CEOs in the S&P 500, Ameriprise’s proxy statement published in 2014 states that the compensation “committee does not consider gains or losses from long-term and equity incentive awards made in prior years, such as stock option exercises and restricted stock vesting, in determining new incentive awards. The committee believes that reducing or limiting current stock option grants, restricted stock awards or other forms of compensation because of prior gains realized by an executive officer would unfairly penalize the officer for high past performance and reduce the motivation for continued high achievement.” The identical language appears in the current proxy.

Apparently this fear of motivation loss has been going on for a long time. A look back shows that a version of this phrase has appeared in the proxy for many years, despite changing circumstances.  In 2014 alone, Cracchiolo exercised over a million shares and recognized over $70 million in value.  He apparently did not keep these shares.  The Ameriprise proxy is a great example of the problem with repeating language in the proxy every year. The rote language that the committee uses, appeared in the proxy published in 2009 with an addendum, “It should be noted that the named executive officers have not realized any gains on options awarded since spin off, and that these outstanding options do not currently have any intrinsic value or market gain as of the end of fiscal year 2008.”

That sentence was taken out in 2010 the sentence and replace with,  “In fact, many of these outstanding vested options do not currently have any intrinsic value or market gain as of the end of fiscal year 2009.”

Over the past several years, the intrinsic value increased markedly, and well beyond original estimates. This phenomena is widespread as options given at the bottom of the market now provide great wealth, and was covered in a March 25 Reuter’s analysis.  Options can create windfalls for executives based on market forces they do not control.  Ameriprise option grants from 2008 had strike price of $52.86, the options granted in 2009 had a strike price of $21.34 cents. This obviously reflects the financial crisis. The grant date fair value of the 1,028,000 shares awarded in 2009 was $9.1 million. What were those options ultimately worth? To fully understand how much Cracchiolo has received in from cashing out equity over the years would require a careful analysis of Form 4s, as well as the stock holding table.  What shareholders are able to more easily ascertain is that the equity compensation paid by the company is excessive.

The continuous equity awards do not create alignment, nor are they long term focused (in fact at Ameriprise, they are unusually short term, with three year vesting periods of 33% each year.)  Yet in 2014, Cracchiolo received yet another option grant of shares valued at over $4 million, and awards of another $4 million.  Apparently the board continues to fear a loss of motivation.

Prudential Financial

Proxy Statement Published:  March 24, 2015

Meeting Date: May 12, 2015

The total reported compensation for Prudential CEO John Strangfeld in 2014 was $37,483,092.  Over half of that amount – upwards of $20 million – is reported as change in pension value.  The footnote for that column begins with a sentence of 166 words, the sort that makes the most intrepid and committed reader decide it is time for another cup of coffee. The bottom line, is that for 2014 Prudential, like many companies, face steeply higher numbers in this category.  See this important Wall Street Journal article for more on the topic.

One factor behind such increases, appear to be changes in actuarial tables that estimate how long individuals are likely to live, the mortality rate assumptions “with white collar adjustments.” Under the sort of pension that many Americans used to have, and many executives still do, retirees receive a guaranteed fixed payments each month. The individuals most able to reasonably save for their retirement still receive defined benefit plans. If the latest actuarial data shows that one is likely to live a longer period of time, then additional money must be set aside.

One may wonder, how much longer Strangfeld is expected to live, given that the changed assumption results in a $20 million one year increase. (Remember as well, that the money set aside is expected to earn some rate of return in the years prior to his retirement, and subsequently.)  According to tables later in the proxy statement the present value of Strangfeld’s the current value of the largest of Strangfeld’s three retirement plans is over $75 million.  In addition, Strangfeld has been deferring compensation – a tax-favorable savings mechanism available to executives – and has over $9 million in his deferred compensation account.  One final note on the deferred compensation is that a small portion of the total figure is due to guaranteed above-market interest.  The fact that this component is so small makes it even clearer that it is unnecessary.

The other category of pay that increased under the summary compensation table was Strangfeld’s non-equity incentive pay, which was $9 million in 2014, compared to $3 million in 2013 (though in 2013 he received additional funds under his bonus).  The compensation committee reports that his target award was of $5.6 million, with maximum of $11.2 million.

The compensation committee states that, “Based on the Final Performance Factor and the Committee’s evaluation of his performance, in February 2015, the Committee recommended, and the independent members of our Board approved, an annual incentive award of $7,800,000 for Mr. Strangfeld for 2014, or approximately 1.39 times his target award amount.”

It is exceedingly difficult for a shareholder to evaluate whether such a bonus is in line with results given the proxy disclosure.  One complicating factor: Prudential uses adjusted operating income (AOI) a non-GAAP measure, rather than GAAP Net Income.  GAAP, for those fortunate enough to be unfamiliar with the acronym, stands for Generally Accepted Accounting Principles.  They are generally accepted for a reason, and whenever a company strays from them – putting an extra burden on shareholders to understand the rational – the plan deserves a closer look.

An example of clearer disclosure – though not necessarily a better bonus plan — can be found in our analysis of AFLAC.

Wells Fargo

Proxy statement: 3/17/2015

Meeting date: 4/28/15

Wells Fargo CEO John Stumpf received total compensation of $21.4 million in 2014, which includes $4 million in non-equity incentive pay, as well as $2.1 million in increase in value of deferred compensation and pension.  Stumpf’s salary of $2.8 million was among the highest 15 of companies in the S&P 500.

For the most part companies tend to restrict salary to a small component of total CEO pay, both based on the broadly accepted principle that the primary vehicles for executive compensation should be bonus and equity based, and because of tax laws that prohibit deductibility of the portion of salaries over $1 million.

Wells Fargo’s proxy statement notes that, “In 2014, the Company paid an aggregate of approximately $4.7 million in base salary to its named executives in excess of the combined deduction limit for these executives.”  Why?

The compensation committee says that it “determined that the benefits to the Company and stockholders of achieving the appropriate compensation balance outweighed the non-deductibility of salaries and RSR awards granted in July 2014 in excess of IRC Section 162(m) limits.”  Further, the proxy suggests that the balance is necessary to “reduce undue focus on short-term financial performance at the risk of the Company’s long-term interests.”  One hopes that recent history, common sense, or the equity held by executives might also encourage them to consider the company’s long-term interests.

The compensation committee acknowledges that between the higher-than-deductible salaries and certain incentive grants that do not qualify for deductions, the company forewent approximately $3.1 million in tax benefits “related to the loss of deduction.”  The company then creates a contrived statistic, calculating that figure as a percentage of company income before taxes, as if to dismiss it as a rounding error.

The concern isn’t simply the cost to shareholders at this one company, however, but the problematic practice itself and the influence it has elsewhere.  A critical component of massive increases in executive compensation overall has been the reliance of inappropriate peer comparisons, and fixed components of pay – such as salary – are often used to perpetuate the “all the other kids are doing it” excuse.

In any case, if the company intends to suggest that its tax loss is a pittance, it might also wish to provide perspective as to how little this non-deductible component of salary truly means for the CEO.  In addition to the many millions reported in the summary compensation table, between 2014 and 2013 Stumpf realized over $126 million from exercising stock options and vesting of previously awarded shares.  Given this, shareholders may rightly wonder if Stumpf truly needs a salary higher than that of his peers.


Proxy published 3/19/2015

Annual meeting: 5/4/2015

Daniel Amos, who has been CEO of AFLAC for nearly 25 years, received total compensation of $15,477,348, including over $6.8 million in change in pension value.  The company’s proxy states that Amos received “a decrease of 51% in total direct compensation for the CEO” resulting from its performance compared to peers. The decline, however, was based in the reduction of his stock grant.

The feature we are taking a closer look at, however, is annual incentive pay, which increased from $4.7 million to $4.8 million in 2014, despite performance issues. This payment was 335% of Amos’s annual salary, significantly above a target level of 220% of salary.

How did executives achieve an increase in bonus when many performance factors decreased? The answer is available in comparing data from two years of proxy statements. The targets for 2014 (designed, according to the proxy statement, to be achieved 50% to 60% of the time) were below the actual achievements in 2013 in several categories. For example, the rate of operating return on shareholder equity (excluding foreign currency effect) was 25.8% in 2013. The target set for 2014 was 20%, and the actual rate was 22.9%. So even though year over year operating return was down, this metric of the annual incentive plan paid above target.

The board is forthright in its acknowledgement that CEO and President/CFO recommend to the Compensation Committee the specific performance objectives and their ranges. Likewise the proxy statement notes that, that in establishing 2014 MIP objectives, it “considered certain headwinds […] that pressured expected EPS growth, direct premium growth and pretax operating earnings growth in Japan. Therefore, these objectives were lower than the prior year.”

Headwinds can be real and targets should be achievable. There may be situations where in order to retain key executives it is necessary to lower the bar. However, it is both unseemly and unnecessary at a company where the CEO is related to the founder and the family has special voting rights (and where – in another aspect of the proxy worthy of critique – Amos’s cousin, John Shelby Amos, received compensation of over $4 million in his role at a newly created position at the company).

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.


Proxy released 3/13/2015

Of the proxies we’ve looked at so far this year, Pfizer is the company that has made the most positive changes to its compensation plan. It replaced restricted stock awards with additional performance share awards. Beginning in 2015, equity awards to executives will be “fully performance-based and will be delivered as 50% in Performance Share Awards (PSAs) and 50% in 5- and 7-year Total Shareholder Return Units (TSRUs).” This 5-7 year range more closely aligns with the longer term interests of shareholders.

In addition, it made adjustments to its peer groups. Of the companies seven removed, four, including Walt Disney and Time Warner, appeared in our 100 overpaid CEOs list.

The company offers thorough and thoughtful disclosure of its financial metrics, and the enhanced disclosure is one of the improvements it cites. One concern we note was that the targets for 2014 revenue and cash flow from operations were actually set below the 2013 results. Setting new goals lower than what was achieved in the past is generally problematic, but also generally invisible (or difficult to assess) to shareholders. The clear disclosure is to Pfizer’s credit, and we note that that CEO Ian Read’s annual incentive declined year over year. Total disclosed compensation was up from the prior year to $23,283,048, in part due to the over $5 million change in pension value.

Lockheed Martin

Proxy released 3/13/2015

CEO Marillyn Hewson’s total disclosed compensation increased to $33,687,442, an increase largely based on the change in pension value of $15.8 million. Hewson also received over $7 million in non-equity incentive compensation. Of this, the company reports that $4.78 million was her annual incentive, and $2.27 million was paid under a long-term incentive plan.



Proxy released 3/12/2015

Total disclosed compensation for Honeywell CEO David Cote is up by more than $4 million, for a total of $29,142,121. A major component of the increase: compensation offered under the rubric of retention for a CEO approaching retirement. In 2014, the board approved a special retention agreement of performance stock options with a grant date value of $5 million, as well as renewing a letter agreement he had with the company. Why the extra incentive? Cote agrees to remain employed with the company through December 31, 2017. Cote, who is 62 years old, also agrees that he will provide “a defined transition period prior to his retirement.” This could be seen as a lack of proper attention to succession planning. A board should have always have in plan a thorough succession plan, in case the CEO is hit by the proverbial truck or more likely private jet. Certainly, as an executive approaches retirement age there should be a particular focus on looking ahead. Perhaps Cote’s retirement package is so lucrative – with a pension valued at $55 million and deferred compensation balance of $113,231,240 – that the board feared he would retire early? If so, more money does not seem to be the answer.

Cotes was also awarded a $5.5 million bonus under ICP awards rather than the much more common form of bonus most company’s use, the tax advantage non-equity incentive grant.


Proxy released 3/13/2015

Despite the high increase in pension value change we are seeing broadly this year, total disclosed compensation for Goodyear’s CEO Richard Kramer declined slightly since last year to $17,853,097. One notable change: beginning in 2014, slightly over half of Kramer’s long term incentive target will be paid in cash rather than equity.