General Dynamics

Annual Meeting: May 4

General Dynamics appeared on our overpaid list last year for many reasons, but one outstanding feature was the large bonus that was apparently not tax-qualified. As you may know, every summary compensation table contains two columns that cover two kinds of bonuses: one that says bonus and the one that says NEIC (Non-Equity Incentive Compensation). The latter is much more common because as long as it meets the threshold of “performance based” under SEC definitions – a low bar – it is deductible under Section 162(m). For the most part boards and CEOs considered the nominal link to performance a small price to pay for tax deductions.

But not at General Dynamics. In 2014, Phebe N. Novakovic’s package of $19,388,084 included $4.25 million in a bonus. In 2015, the total increased to $20,424,104 and there was an increase as well in the presumably non-tax deductible bonus to $4,850,000.

It appears, however, that the board must have heard from shareholders. “In March of 2016, the Committee recommended, and the Board approved, subject to approval by the shareholders at the Annual Meeting, the General Dynamics Corporation Executive Annual Incentive Plan that supports the deductibility of payments made under the bonus component of total cash compensation. This change will affect any potential bonus payment that will be made in 2017 based on 2016 performance.”

I expect shareholders will support the tax-avoidance 162(m) plan, but many will likely vote against the excessive pay package again this year.

American Express

Annual Meeting: May 2, 2016

Kenneth Chenault of American Express has been on our overpaid CEO list for the last two years. The fundamental problems remain this year: Chenault’s pay of $21,988,091 is significantly above peers and includes problematic elements including outsize salary and high retirement pay.

I’ve been surprised, personally, at level of support the advisory vote proposal received in 2015: 96.5 percent of shares were voted in favor. I expect this year will be different, the stock price has fallen significantly.

Total disclosed pay is down slightly, but not significantly. This year Chenault received no cash bonus but his stock awards were valued at $16.3 million compared to $12.4 million last year.

William Ryan, an analyst at Portales Partners LLC noted that pay at American Express is “high relative to the company’s subpar performance in 2015.”

This morning’s vote will provide an interesting look at whether rubber-stamp approval continues in these circumstances.


Annual meeting: May 5

Both ISS and Glass Lewis recommended that shareholders vote against pay on the advisory vote at Allergan, for a number of excellent reasons. One prime example is the fact that, CEO Brenton Sanders received an extraordinary $20 million dollar bonus – but no equity awards – as part of his pay package.

However, I want to write today about a somewhat obscure and offensive elements of pay practices that was one rationale for the recommendation: the tax gross-up. (Skip the next five paragraphs if you know already know all you ever want to know about how tax policies are manipulated in favor of executives.)

The tax gross-up is often referred to in the shorthand of tax code jargon it was a response to, Section 280G, and it is a lesson on the unintended consequences of trying to reform pay legislatively. The creators of the rule had every good intention. They saw excessive severance packages and decided, essentially, “Let’s come up with a really costly punishment for executives and companies who have ridiculous obscenely high golden parachute severance packages for CEOs.” So an excise tax, a big extra tax, was set on any package over three times five-year average pay. Not only would the executive have to pay the tax, the company would lose the tax deduction.

Though three years of pay seems like more than enough to cushion a transition to the next job for most of us, it wasn’t enough for many executives. Severance packages grew, and language that seemed insignificant (let’s say “3 times salary and highest bonus instead of most recent bonus”), had significant consequences. Compensation consultations came up with a solution: the tax gross-up. Employment contracts began to include language that said that in addition to the severance payment itself, the company would pay taxes on the payment — or gross up the package –and taxes on the taxes, until the CEO was “made whole.”

The practice spread like wildfire, and for the most part shareholders were unaware of the cost or the extent of the practice. That changed in 2006 when enhanced disclosure required companies to estimate the costs of such packages. Following the revelations of the astonishing amounts involved, institutional investors pushed back. Some filed shareholder proposals, which gained support every year. When “say on pay” joined the scene, proxy advisory services identified the presence of such a loophole in an employment contract as a problematic practice and began voting against pay at such companies.

And nearly as quickly as it spread, the practice began to disappear. Company after company took such language out of contracts (sometimes giving executives an incentive to sign a new contract). The common formulation of “What we do” and “What we don’t do” proudly trumpeted the removal of the gross-ups.

It seemed as if reform was happening, but in some cases the reform was a mirage. There was nothing enforceable in these policy changes. Occasionally lately, we’ve noticed that when a merger takes place the board reverses its previous policy and adds gross-ups back in.

This brings us back to Allergan, and its own self-justifying support of the practice. As the now-cancelled merger with Pfizer approached, the company added the provisions to contracts. In an SEC filing disparaging the proxy advisors Allergan argues that they don’t normally have such tax reimbursement “arrangements in the ordinary course” but added them just for the upcoming merger. Now recall that such provisions are only triggered in a merger.

In other words, we’ll only put this bad practice on the books when it help our executives get more money.
I expect the vote against pay at Allergan to be high this year.


Annual meeting: April 27, 2016

Ameriprise has been on our overpaid list for the past two years. For the 2014 study it was ranked number 31, with the regression analysis suggesting that CEO James Cracchiolo was overpaid by $7.6 million. For the 2015 study, Ameriprise was ranked number 46, and the excess pay from the regression was an estimated $9 million.
During the most recent fiscal year the stock has fallen more than 20%. Total disclosed compensation for CEO James Cracchiolo for 2015 was $20,671,971, reflecting a decrease in bonus, but an increase in salary.

Given that Ameriprise has consistently paid higher than peers, make this a company where a vote against is not only justified, but likely.
I thought I’d take the opportunity to see how some of the funds that disclose their votes have voted. ( again has the best resource for this).

I was surprised to find that a number of funds who offer disclosure did not yet have votes listed, despite the fact that the vote is tomorrow. As of this afternoon, no votes were listed on Ameriprise at CalPERS, CalSTRS, and COPERA. I know only too well how overwhelming proxy season can be, but to be cutting disclosure this close this early in the season is a problem.

Of those where votes were disclosed the Florida SBA and the Ontario Teachers’ Pension Plan had voted against the pay package. The Teachers Retirement System of Texas was the only fund I found with a vote in favor of pay at Ameriprise.

Lockheed Martin

Annual Meeting: April 28

CEO Marilyn Hewson’s total disclosed compensation for 2015 was $28,566,044. Every element of pay increased: salary, stock awards, and bonus (up by more than $2 million to a total of $9 million). The only element that decreased was the accounting/actuarial assessment of pension value. In 2015, Hewson’s pension increased by $8.4 million rather than the $15 million it increased last year.

Why is pay so extraordinarily high at Lockheed? The company says it seeks to pay market rate. To do so it relies on “Similarity in size (a high correlative factor in determining pay)” based on revenue.

The Compensation Committee is quite explicit in noting that it does not — as many companies do — rely on market capitalization when identifying peers, “because market capitalization can change quickly as industries and companies go in and out of favor as investments and as companies restructure. “ Lockheed Martin’s market capitalization is $69.1 billion, putting it at less than half the market cap of many companies including Coca-Cola, Merck or Home Depot. However, on the basis of revenue it ranks in the top 75 companies. But I’m sure that has nothing to do with why they compare themselves to companies of similar revenue rather than companies of similar market capitalization when setting pay.

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 size. 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 this level, however, all companies are large, complex, and multinational. It is at that point where one can question whether executives are likely to leave Apple to join Exxon Mobil. This is particularly the case with an executive like Hewson, who has spent the greater part of her career at Lockheed Martin.

Lockheed Martin’s slogan is “we’re engineering a better tomorrow.” One has to wonder if, in picking comparator companies, Lockheed is engineering ever-higher CEO pay.

General Electric

Annual meeting: April 27

In 2014, Jeff Immelt’s total disclosed compensation was $37,250,774 and for 2015 the same total is $32,973,947. That number is misleading. A major portion of last year’s total was increase in pension value. In terms of cash Immelt’s pay increased in 2015. To its credit, GE reports an SEC adjusted total that does show the $3 million increase overall. The highest area of increase was Immelt’s Non-Equity Incentive Compensation (NEIC), which went from $2.4 million to $7.6 million. (The NEIC went up in part because of a change in metrics in April 2015.) Immelt also received a non-deductible cash bonus of $5.4 million, the same as the prior year.

The biggest difference between 2014 and 2015 was that that last year the pension value increased by $18.5 million and this year it only increased by $6.3 million. Mind you, this is not a decline in his pension value, it is just that the value of his pension under accounting rules grew a bit less. His combined pension plans are worth more than $78 million by the way. At this point it is obviously an intergenerational wealth transfer vehicle rather than a retirement cushion.

Immelt provides an amazing example of the upward trend in CEO pay. In 2001 when he became CEO he earned $6.2 million in salary and bonus, and received 1.2 million stock options. It is hard to do a direct comparison because disclosure rules have changed somewhat, but we can compare the cash component of pay: from 2001 to 2015 it grew from $6.2 million to $16.8 million.
According to Fortune magazine, “When [Immelt] got the job on Sept. 7, 2001, GE stock was $40 a share. Today, after the company released 1st quarter numbers, it reach a low of $30.31.

Bottom line: cash pay nearly tripled, and stock price is down.

Gilead Sciences

Annual meeting: May 11

Martin Shkreli has gotten all the attention, but there’s another pharmaceutical Martin who had reaped a fortune from high priced drugs: former Gilead CEO John Martin. For years, Wall Street was a fan of Gilead as profits and revenues grew based on two Hepatitis C drugs. However, the stock is now 20% off its peak, which was reached in June 2015.

The publicity around the Shkreli case as well as the awareness of record highs in pharmaceutical costs, has brought new and unwanted attention to the industry. In January, for example, the Massachusetts attorney general wrote to Gilead, noting that the price of the drugs Sovaldi ($84,000 per course) and Harvoni ($94,500 per course of treatment), “effectively allows hepatitis C to continue spreading through vulnerable populations, as opposed to eradicating the disease altogether.”

While John Martin is known as a respected business leader and hasn’t purchased any Wu-Tang Chan albums with his windfall (so far as we know) he has reaped a fortune.
To realize his take you need to look beyond the summary compensation table, with total disclosed compensation of over $18 million. The real money was in his stock sales.

During 2015 alone Martin acquired 1.8 million shares through the exercise of options, realizing a value of $164,515,350. Over the same time period, 597,440 stock awards vested, providing him an additional $61,695,154 in value. So $22 million dollars.

As of February 29, 2016, Martin owned 9.014 million shares including 5 million shares subject to stock option. This was actually very close to the amount he owned in of February 28, 2011: 9.06 million shares. So his stake in the company did not increase overall, he just churned through options. Every year Martin exercised options and realized gains on shares. From 2011 through 2015 he exercised over 11 million options, realizing more than half a billion dollars in value. In other words the different between what he had to pay for the option and the prices at the time totaled $573,836,800. At the same time nearly two million of his performance shares vested for an additional $123 million dollars.

Those stock sales – which came in addition to salary, cash bonus, etc. – would be enough to buy a course of Sovaldi treatment for 84,000 people suffering from Heptatis C. Even more, if the drug price were lowered.


Annual meeting: April 26, 2016

Rarely is a CEO pay plan so poorly received that after the proxy statement comes out the compensation committee agrees to change the package. That’s what happened with Citigroup this month, however, when the response to its proxy was a collective: WHAT?!?!

In the proxy released on March 16 the company disclosed that performance shares could pay out at 150% of target EVEN if the stock price fell. This on top of a discretionary bonus of $6 million for CEO Michael Corbat, who received total compensation of $14.6 million in a year when stock price has fallen.

Someone must have gotten some phone calls: Citi says it “heard some concerns” and made revisions to the plan and released a revised plan on April 6.

One change: “The modified PSU design limits the value of the award if Citi’s absolute total shareholder return is negative over the three-year performance period.”

Well that sounds better, they limited how much these performance shares would award executives if the stock goes down. Good call. But wait, to what extent was it limited? Read the next sentence:

“In these circumstances, executives may earn no more than 100% of the target PSUs regardless of the extent to which Citi outperforms peer firms.”


So even if the stock price is down three years from now the executives can get 100% of target assuming peers also struggled. The target we are talking about here is several million dollars.

And if returns are positive, even just by a tiny bit, then Citi executives’ performance shares will pay off at more than 100% of value (as long as others in industry are performing worse).

Last week, after both Glass Lewis and ISS recommended votes against pay, despite the changes, the Citigroup Personnel and Compensation Committee wrote a letter to investors making their case.
Among other things they noted “the difficult socio-economic environment that has existed for the past eight year,” and that Citi faced “uncertainties related to still evolving regulatory regimes.” To translate that: people seem to be mad at banks, and we don’t know what rules may ultimately be adopted.

Yes, Citi, people are angry about overpaid bankers. And with pay packages like this, don’t expect the anger to fade anytime soon.

Advance Auto Parts

Meeting Date: May 18, 2016

The packages for incoming Advance Auto Parts CEO Tom Greco and departed CEO Darren Jackson both show – in different ways – the way the promise of long-term incentive compensation becomes hollow with job changes. Greco will receive from AAP as make-up payment equal to the target value of forfeited equity awards at Pepsi regardless of how those awards would have been paid out; and Jackson will receive accelerated vesting on his long term incentive awards as if he had retired instead of having been forced out.

Following pressure from activist investor Starwood Value, CEO former Jackson was asked by the company’s board of directors to retire effective January 1. Jackson’s total 2015 compensation of $7.9 million includes $4.8 million that is the result of accelerated vesting on long-term incentive awards. Specifically, “Jackson’s LTI awards that were unvested as of the date of his retirement from the Company at the end of Fiscal 2015 to vest, based on the Company’s performance during the relevant performance periods, as applicable, as if Mr. Jackson had satisfied the definition of Retirement contained in his respective LTI award agreements.” It also includes a severance of $1.3 million, and reimbursement for Jackson’s legal fees for working out this agreement. Also included in the package: “reimbursement of $65,532 for temporary living expenses.”

A few days after filing its preliminary proxy Advance Auto Parts filed an employment agreement for its new CEO Tom Greco who will take the position on April 11. The agreement for Greco includes a number of goodies: a base salary of $1.1 million, a guarantee of $5 million a year in equity compensation for the next three years. Fifty percent of this is time-based restricted stock, guaranteed to have some value even if the stock price falls dramatically. He also received a $2 million sign on bonus to “replace the unvested cash-based long term incentive awards that he forfeited when he left his prior employment.”

Greco will receive a grant of “RSUs to replace unvested performance shares and pension benefits from his prior employment (“Make-Whole RSUs”). The aggregate grant-date fair value of the Make-Whole RSUs will be equal to the target value of the forfeited equity awards plus the value of the forfeited pension benefits on the date of Mr. Greco’s separation from his previous employer (the “Forfeited Amount”).”

The details of this new compensation package do not show up on the current proxy statement. Next year, when the figures appear the company will describe it as old news. On the whole, the disclosure seems optimally timed to go beneath the radar.

Greco comes from a 30 year career at Pepsi, where his most recent position was CEO of Frito-Lay North America. Unless the company plans to start selling spark plugs in vending machines it is hard to see how clearly this experience translates. In any case, it represents a pay increase for Greco whose total compensation at Pepsi in 2015 was $6.2 million. He also exercised options on 45,000 shares of Pepsi stock last year, realizing $1.7 million in value.


Annual Meeting: April 25, 2016

Total disclosed compensation for CEO David Cotes was $34,527,344. This total package includes $14.3 million in incentive-based pay, some of which was earned the prior year, and which was performance driven.

Many of the features that earned Honeywell a place on our list of companies with overpaid CEOs remain this year. Some have increased. The quantum of pay at Honeywell is too high, and many of its pay practices are problematic.

These practices are symptomatic, indicative of an attitude of entitlement, of a CEO who may fail to distinguish the company from himself. One example at Honeywell is perquisites. Cote’s “all other compensation” of $927,851 includes more than half a million dollars for personal use of company aircraft. This likely that will place him among the 10 highest recipients of a slowly vanishing perquisite. (Assuming figures at other companies are consistent with those published in this analysis of 2014 ) The vast majority of S&P 500 companies disclose no such benefit, suggesting either that executives provide reimbursement for such use or do not use it at all.

Of the few CEOs that still receive these benefits at a level similar to Cotes, most serve at founder or controlled companies.
This $581,753 figures under-estimates the true cost, since ownership and maintenance of corporate jets, or those trips that combine business and pleasure. And of course it does not consider the environmental cost. One report estimated that an hour flight on a corporate jet emits more carbon dioxide than most Africans do in an entire year.

Shareholder have every reason to be concerned. Stern School of Business professor David Yermack found
using “a decade’s data on 237 large companies and found those that disclosed corporate aircraft benefits underperformed market benchmarks by more than 4 per cent a year on average.
But the personal flights are not the only unusual perquisite. Under an employment agreement signed in 2002 the company is obligated to pay for $10 million in life insurance. Likewise he is guaranteed an “above market interest rate” that added $654,595 to Coe’s already generous pension in 2015. I suppose there’s an algebraic equation using the current total amount of pension (over $55 million) that could pin down the interest rate differential that would result in such a sum, but it would depress me.

The point isn’t that we should all get guaranteed above market interest rates, or even that the sum is truly significant for the balance sheet of Honeywell, or for that matter, of Cotes. The point is what such benefits say about the CEO and the board and the power differential between them.

One notable example last year involved then Dow Chemical CEO Andrew Liveris who faced internal audits and SEC scrutiny based on his use of company assets. example:

The idea seems to be, “The company is so large. I have been here so long. I can do whatever I wish.”

There’s a word for that attitude: entitlement.