In numerous situations in the last several years the boards of directors of public companies have been criticized for using discretion when dealing with variability and economic uncertainty in executive compensation plans. Justifiably this is interpreted by some, when payouts are adjusted up, as paying for effort rather than results and not subjecting executives to the same downside as shareholders who do not have the same out. Several times in this proxy season which coincides with year two of say on pay examples are popping up of the reverse of this situation with boards exercising their discretion to modify awards downwards.
One example of such a case was outlined in the preliminary proxy statement filed by AT&T. The company, having recently gone through a reorganization following the failed acquisition of competitor T-Mobile, has drastically reduced the compensation of CEO and Chairman Randall Stephenson. The proxy states that 92% of Stephenson's, and on average 82% of other named executive officer, compensation is tied to performance including stock price. It also highlights a decline of reported compensation by 19.4% from 2010 to 2011 and of 6.5% from 2009 to 2010. The more interesting part though is surrounding incentive awards and how costs from the merger impacted payouts. The proxy states
Although the 2011 short-term awards and all outstanding performance share awards provide that merger transaction costs may be excluded in determining the achievement of the awards, the Committee considered the T-Mobile transaction costs in determining compensation payouts for Mr. Stephenson and the other Named Executive Officers. This reduced Mr. Stephenson’s 2011 short-term award payout by approximately $1,260,000, or 25%, and his 2009 performance share award by approximately $820,000, for a total compensation decrease of approximately $2,080,000, a significant reduction in the percentage of his award payouts relative to other managers. These transaction costs will also be considered in determining the payouts of 2010 and 2011 performance-share awards.
Similarly the compensation and benefits committee of the board of directors for Alcoa took some strong steps in response to a second half drop in the company's stock price. The company notes in their preliminary proxy statement that for CEO Kleinfeld, 89% of his compensation is performance based and 73% paid in the form of equity and that accordingly the impact of a drop in share price on compensation is significant. They also specifically detail their strong pay for performance alignment in the below actions.
Despite strong financial and stock price performance in the first half of the year, the economic volatility and sharp drop in the price of aluminum in the London Metal Exchange during the second half of 2011 resulted in a decline in the stock price of Alcoa and its aluminum peers by year end. To demonstrate leadership in adversity, Alcoa took discretionary actions to reduce executive compensation.
The proxy also highlights best practices in place including stock ownership guidelines which require the holding of a significant amount of equity through retirement, a no hedging policy, no repricing, cashing out or exchanging options, double trigger vesting of equity, and clawbacks in place for incentive plans.
Alcoa had a strong say on pay vote in 2011 and clearly is taking steps to try and ensure that this does not change in 2012. There is an interesting table that has been provided in the CD&A which highlights realizable value of compensation vs what has been disclosed as a counterpoint to the data in the summary compensation table. It is not surprising that they have done so since the summary compensation table, even with actions taken by the board would imply increased compensation year over year due in part to first half increases in salaries that had been frozen since 2008. This alternate table shows that total compensation excluding change in the value of pension is actually 59% of what is shown in the summary compensation table.
Both of these companies are very interesting examples of board discretion in practice in ways that are not often highlighted in the media and adds some fuel to the fire in the discussion of whether board discretion is a good or a bad thing. Robin Ferracone of Farient Advisors wrote an interesting article on the topic of bounded discretion for Forbes last year that is worth a read. There is no doubt that in a period of economic volatility, planning goals a year out is a challenge. Seeing the down as well as the up side in practice is a positive thing and it will be interesting to see how these actions impact votes as they come in. I will keep my eyes open for other good examples to post about as the season continues.