North Carolina’s biggest companies, faced with shareholder demands for more of a say on CEO pay, are doing more to explain their executive pay practices.
But try to decipher some of their explanations, and you might not find much clarity. Executive pay packages are more complicated than ever, tied to an array of performance targets like “return on non-cash average assets” with components such as “performance share rights.”
A decade ago, CEOs were commonly paid in stock, salary, bonuses and stock options, as well as perks. Pay packages have grown more complex as companies try to explain their pay packages in light of non-binding “say on pay” votes that give shareholders a voice.
“Often you get a laundry list of metrics, and it’s hard for investors to tell,” said Amy Borrus, spokeswoman for the Council of Institutional Investors.
The Observer’s annual analysis of executive pay showed median compensation rose 14 percent for the CEOs of North Carolina’s 50 biggest publicly traded companies last year, to $4.1 million.
In general, executives are getting more of their compensation through salary and stock awards, and less through stock options. Here’s how options work: If the stock goes up, the executive’s options are worth more, while if the stock goes down, the options are often worthless.
Now boards are reducing options – in part to respond to critics who think they reward executives arbitrarily for a rising stock price, rather than how well the executive is running the company.
That may be well-intentioned, but it’s making pay packages “far more complicated,” said Tom Kelly, a Charlotte-based pay consultant with Towers Watson. “Back in the day, generally, when the world was all about stock options, it was easy to understand how it would pay out.”
While the Occupy movement that cast a spotlight on inequality and CEO pay has faded, companies are still feeling the impact of shareholder votes on executive pay.
“For corporate governance, it’s really been a game-changer. It’s clear that CEOs and boards care about the results of these advisory votes,” said Borrus. “This is a far cry from a few years ago. A lot of companies are doing outreach.”
Such votes, required by the 2010 Dodd-Frank financial reform law, aren’t binding. But failing them can embarrass a company, and boards have to explain the following year how they responded to investors’ concerns. Though about 98 percent of companies pass their say-on-pay votes, even getting less than 90 percent shareholder support can spur changes.
Treading lightly around say-on-pay
Shareholder votes on CEO pay have not only prompted boards to more fully describe how they pay executives. Some are compensating their executives differently.
• Charlotte-based Piedmont Natural Gas received only 76 percent support in its say-on-pay vote last year. The company said in this spring’s annualproxy filing
that it reached out to major investors to hear their concerns about executive pay. Investors told the company they felt its retention awards were large, and weren’t linked to performance.
Piedmont’s board decided not to give a retention award to CEO Tom Skains this year, and his total pay fell 41 percent. This year the company won its say-on-pay vote with 96 percent support.
Spokesman David Trusty attributed the increase in shareholder support to more outreach. “We did communicate more individually with our large institutional investors,” he said. “We simply did a better job of getting in front of those stakeholders.”
• At Polypore, the Charlotte-based maker of battery components, the influential group Institutional Shareholder Services recommended voting against the company’s pay package this year. ISS said CEO Robert Toth’s pay wasn’t aligned with performance, in part because of his large stock option grants. Toth’s 2013 pay rose 428 percent, in large part due to $2.8 million worth of stock and option grants the board awarded him.
Although Polypore sent shareholders a seven-point rebuttal of ISS, the company saw shareholder support in its say-on-pay vote drop from 99 percent last year to 72 percent this year.
• Shareholders gave Charlotte-based SPX Corp. only 67 percent support in last year’s say-on-pay vote. The diversified manufacturer said it listened to shareholder feedback and changed its executive pay to eliminate some perks, such as tax gross-ups, automobile and country club allowances. The companysaid it also
changed the peer group it uses to set pay in order to better reflect SPX’s size, added “clawback” provisions to recover pay in the event of executive wrongdoing and toughened its performance metrics for some stock awards.
The board raised CEO Chris Kearney’s pay by 25 percent, to $8.4 million. The company saw shareholder support for its pay practices fall further, to 62 percent.
More complex pay packages
Some experts credit the say-on-pay votes with helping to drive increasing complexity in pay packages. Corporations’ drive to show shareholders that pay is tied to performance has helped produce a proliferation of metrics for measuring that performance.
Different parts of an executive’s pay are now tied to factors such as relative stock performance, pre-tax earnings and revenue. Other components can be time-restricted, tied to how long the executive stays at the company.
Some companies are now paying executives with performance stock options, a combination of stock options tied to performance targets that must be met before they vest.
Kelly, the Charlotte-based pay consultant, said more complex pay packages can help companies fine-tune what they reward executives for, but at the cost of clarity.
“I’ve designed some really, what I would call kind of like ‘high-performance automobiles,’” said Kelly. “Sometimes they work fine, but if people don’t understand it, it’s kind of like what was the point?”
• In 2003, Lowe’s then-CEO received a base salary, a bonus, stock options and perks. The options were time-restricted, meaning they vested at set time intervals, and the bonus was tied to earnings.
In 2013, by comparison, Lowe’s CEO Robert Niblock’s pay package consisted of a salary, bonus, perks, options and stock awards. The option awards were time-restricted, but the criteria to earn the stock were more complex. Two-thirds of the stock awards were tied to “return on non-cash average assets” while the remaining third were tied to improvements in the company’s “brand strength.” His bonus was tied to still more criteria, including pre-tax profits, total sales and the company’s success with strategic initiatives such as “diversity” and “people productivity.”
• In 2003, when Howard Levine was named executive chairman of Family Dollar, he received a salary, bonus and stock options. In 2013,his compensation
was made up of salary, bonus, perks, option awards and “performance share rights.” The PSRs, as they are known, are tied to the company’s earnings growth and return on equity. They are not actual shares of stock, but the right to be issued shares of stock if the company meets predetermined goals.
Spokeswoman Bryn Winburn said in a statement that the company’s board “regularly reviews our compensation programs to ensure that our programs are easy for shareholders (and Team Members) to understand and link to operational plans and objectives.”
• SPX’s Kearney was paid in salary, perks and time-restricted stock in 2004, the year he was named CEO. Last year, he was paid in salary, bonus, stock and perks. Two-thirds of Kearney’s stock was tied to the company’s three-year performance vs. the S&P 1500 Industrials index, and one-third accrues over time and is based on internal company metrics. His bonus was tied to both operating margin and free cash flow, weighted in different proportions.
John Roe, executive director of Institutional Shareholder Services Corporate Services, said some packages are too complex now.
“There is a degree of over-engineering in certain executive packages,” he said. “It does actually create more confusion than benefit for shareholders.”