(The following story by Stacie Hamel appeared on the Omaha World-Herald website on February 11.)
OMAHA — A Union Pacific Corp. executive incentive plan criticized for including one-time gains from the sale of its trucking unit has paid $62.3 million to more than 400 senior managers.
The incentive plan used a formula based on earnings per share over three years. The company reached about half the plan’s goals, and the payoff was 48 percent of its potential.
Created by U.P.’s board in January 2001, the plan covered 406 employees — including senior executives — who received payments last week in stock and cash.
The company declined to release how much the plan paid to its top executives. That information will be included in its proxy statement a year from now, a U.P. spokesman said.
U.P. sold trucking subsidiary Overnite Corp. through an initial public offering in October. The proceeds automatically were applied toward the incentive plan’s targets, as the plan’s rules specified, company officials said.
The Overnite sale helped Union Pacific report $1.6 billion in net earnings last year, or $6.04 per share, on $11.6 billion in revenue. Without the one-time gain from the sale, Union Pacific’s per-share earnings would have been $5.09, including $1.08 from an accounting change.
The incentive plan was created to encourage managers to focus on per-share earnings, which ultimately benefits shareholders, said spokesman Robert Turner, a senior vice president.
Since the plan began, the value of all the company’s shares has grown $5.4 billion and preferred stock has been redeemed, Turner said.
“That’s $1.5 billion in debt that’s been reduced. And our dividend has been increased twice in the last year, a 50 percent increase. All of those are things that benefit shareholders.”
Tony Maramarco, a portfolio manager who oversees $2 billion at David L. Babson & Co. in Cambridge, Mass., said one-time gains from a sale shouldn’t be part of an incentive plan. That is especially true when the company is selling an asset worth less than when it was purchased, Maramarco said.
“They bought Overnite a number of years ago and wrote it down. So they took it public from a lower base than they bought it. There’s nothing heroic in doing that,” said Maramarco, whose funds own almost 1 million shares of U.P. stock. “As an investor, I’m not pleased with that.”
U.P. paid $1.6 billion for the trucking company in 1986 and received $610 million from its sale.
Nevertheless, Maramarco said U.P. is a well-run company.
“I think they do a great job of running the railroad. This plan and using the IPO to get them over the top was too much,” he said.
The fund manager stopped short of suggesting the Overnite sale was timed to benefit the incentive plan.
“Timing is everything, and their timing on this one was perfect,” he said.
The timing was also right to sell Overnite, he said. “No question about it.”
Maramarco said future incentive plans should be tied to return on assets or return on investment capital, not earnings per share.
“You can make earnings per share do anything you want them to,” he said. “This is an asset-intensive business. … You manage your assets so they become as profitable as they possibly can for you.”
U.P.’s Turner said the company hasn’t yet developed another long-term incentive plan.
“The issue is to try to find the right measures to be sure that the interests of management and shareholders are as closely aligned as they can be,” he said.
Despite his criticism of the incentive plan, Maramarco said he remains confident in the company.
“I own one railroad stock,” he said. “I own it for a reason. I think they’re the best railroad around.”