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.

Pfizer

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.

 

Honeywell

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.

Goodyear

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.

Boeing

Proxy released 3/13/2015

Total reported compensation for CEO James McNerney was $28,861,921, an increase over the prior year. A major change, which became effective in 2014, was replacing time-based stock options with performance-based restricted stock units that pay out based on Boeing’s three-year total shareholder return as compared to a group of peer companies. The equity grant value is close to the combine option and restricted stock value of the prior year. Non-equity incentive compensation is $14.4 million, ($4.4 million based on annual, $10.0 based on long-term); and the change in pension value was over $5 million.

Abbott Laboratories

Proxy released 3/13/2015

The total disclosed compensation for Abbott’s CEO Miles White is down from the prior year. The value of stock awards and option awards are both significantly lower, while salary has remained the same and non-executive incentive pay was reduced, and total disclosed pay was reported as of $17,732, 241.

The Abbot proxy, however, is an example of why the summary compensation is not the only table worthy of focus. In the 2014 Options Exercised and Stock Vested column, one can see that t White realized nearly $9 million on the exercise of Abbot stock, and $15 million in the exercise of AbbVie stock. In addition, he realized $7.78 million through shares acquired on the vesting of Abbott RSUs, and $6.4 million of shares acquired on the vesting of AbbVie stock. These figures total over $36 million dollars, more than twice the pay reported in the summary compensation table.

It has become the fashion at some companies to disclose “realized pay” when stock price declines or other performance issues result in lower than expected payments in equity. One rarely sees the reverse: while it is much more common for executives to reap windfalls, these tend not to be highlighted by the company.

Another proxy table shows that White holds several million additional options. These include 438,000 options each for both Abbott and Abbvie that expire in February 2016 and have a strike price of $21.21, less than half of Abbott’s current stock price. Shareholders should continue to monitor these when evaluating pay at Abbott.

Coca-Cola

Proxy released 3/12/2015

Near the very beginning of the proxy statement, in a purported “question and answer” with CEO Muhtar Kent, the company announces Kent’s decision to forgo his annual incentive. Kent says that based on the “difficult but necessary decisions as we implement our strategic actions to accelerate growth” and in view of the work that still needs to be done, he “respectfully requested” forgoing the bonus. (Elsewhere in the proxy the board estimates his bonus would have been $2.5 million.)

Despite this choice, Kent’s Total Disclosed Compensation for Coca-Cola CEO Muhtar Kent was up year-over-year to $25,224,422. The increase was largely on the strength of the changes to pension value: that figure alone was more than $7 million. The other component of pay that increased was Kent’s option grant: 2.38 million shares with an estimated grant date value of $9.3 million.

Prologis

Proxy released 3/11/2015

If early proxies are an indication, CEO salary increases are a theme this year. On July 1, 2014, CEO Moghadam received a $100,000 salary increase. His bonus was also up, but the company provides a clear table that includes key performance measures, target, actually enabling shareholders to get a clearer understanding of compensation. The CEO exchanged 100% of his bonus for shares, as he has done for the last three years. Some shareholders may have concern that the incentive to do so – the value of equity awards is equal to 125% of the exchanged bonus – may be overgenerous.

General Electric (GE)

Proxy released 3/10/2015

Pay is up for Jeffrey Immelt at GE. Immelt’s base salary increased from $3.46 to $3.76 million, and his cash bonus and cash bonus each increased, his salary from $3.46 to $3.75 million, and his cash bonus 8% to $5.4 million. The bonus is based on compensation committee judgement rather than a formula. The value of stock awards is down though, and overall total disclosed pay would have been down slightly over-all – at $18,855,141 — were it not for the $18 million increase reported under “change in pension value and deferred compensation earnings.” The company is quick to point out that this figure is based on actuarial assumptions including new longer life expectancies. It is very true that this isn’t money he takes home this year, but Immelt’s total retirement package is very real. His pension is valued at over $72 million, with deferred compensation at over $10 million. So with total disclosed compensation of $37,250,774 Immelt takes an early lead for the highest paid CEO on our list.

Changes in performance shares: General Electric’s proxy statement illustrates an all too common problem with the pay for performance mantra: too often when performance targets aren’t met, performance metrics are changed. Because of failure to meet metrics prior awards were cancelled. Specifically, “In February 2015, all of the [Performance Share Units]PSUs granted to Mr. Immelt in 2009 (with a $2.3 million grant date fair value) and all of the stock options granted to Mr. Immelt in 2010 (with a $7.4 million grant date fair value) were cancelled under the terms of the grants because GE did not achieve the specified TSR and Industrial CFOA performance conditions.”

Given those failures the board made changes going forward. For example, the prior four grants of PSUs each included a measure to “meet or exceed S&P TSR” as one of the metrics. In awards for 2014 that metric is gone. The compensation committee says there is a relative TSR modifier, but in this grant the only metrics are tare total cash and operating margin. Also changed, the board has added a threshold performance level as well as a target, so there’s more gradation rather than an all or nothing payment (note the nothing payment of this year). Immelt will also receive new kinds of equity pay – in the past his equity was made up entirely of PSUs but now it includes stock options (500,000 shares this year). Finally, the performance share period was decreased from four years to three years. Shareholders who hope for a true long term focus may find this to be another reason to be concerned with the pay package at GE.