(The following story by Mark Basch appeared on The Times-Union website on May 2.)
JACKSONVILLE, Fla. — At CSX Corp.’s annual meeting today in Indianapolis, shareholders will be voting on a proposal to limit pay for the company’s top executives to $500,000 a year.
The proposal, made by a CSX shareholder, is unlikely to pass. In fact, Institutional Shareholder Services, a Maryland-based proxy advisory firm that is campaigning for more shareholder “say on pay” has even recommended a “no” vote on the measure. But the proposal does illustrate how stockholders are trying to take a more active role in scrutinizing executive pay at public companies.
In response to that activism, the Securities and Exchange Commission mandated new rules on how public companies should disclose pay packages. The rules are supposed to give investors a clearer picture of the value of a chief executive’s compensation in a summary table, including stock options and other incentive-based pay.
But the new disclosure rules may be making proxy statements even more confusing for shareholders, who likely will have to read through pages and pages of material to get the full story. And some CEOs think they don’t paint an accurate picture of their pay packages anyway.
“You make what you make and you put it in the proxy, and that’s all fine,” said Bill Foley, CEO of Fidelity National Financial Inc. But he wants the data to be accurate.
Foley was the highest-paid executive of a Jacksonville-based company last year, mainly because of a $19 million cash bonus he received in connection with a corporate restructuring. But Foley thinks the total value of his compensation, listed at more than $31 million, is misleading because it includes $5.5 million in stock option awards that he didn’t actually receive. The SEC rules require companies to estimate the value of outstanding stock options that have not been cashed in.
“The option valuations are really hypothetical,” Foley said. “I think it grossly overestimates executive pay.”
That problem is more acute for Foley in the proxy statement of sister company Fidelity National Information Services Inc. Foley is not CEO but is chairman of that company, and the proxy shows him earning $16.1 million in that role last year – including $13 million in option awards.
Fidelity National Information CEO Lee Kennedy had a total package of $12.8 million, largely because of a $6.25 million bonus following the restructuring of the Fidelity companies. But his package also includes $3.5 million in option awards.
The estimated option values can result in some strange data. According to Virginia-based Brookfield Homes Corp.’s proxy statement, CEO Ian Cockwell was paid a negative $3 million last year, because of a drop in the option values.
Along with “option awards,” another pay category on the proxy that may be misleading is “stock awards.” CSX Chief Executive Michael Ward’s total 2006 package ($13.8 million) includes $6.4 million in stock awards that he didn’t receive.
The footnotes to the summary table in CSX’s proxy statement explain that the awards represent stock executives could receive under long-term incentive programs, implemented in 2006, if the company achieves “likely” performance targets in 2007 and 2008.
Additional tables in the executive compensation section of CSX’s proxy (it has a total of eight tables and 28 pages) show that Ward could actually earn millions more, or millions less, under the long-term incentive plan, depending on the company’s performance.
The summary table also shows that Ward’s $13.8 million package included an estimated $529,198 in stock option awards. But one of the other tables shows that during 2006, Ward took in about $19 million from exercising stock options and from the vesting of other stock awards he had received in previous years. Because the options and shares were awarded before 2006, they are not considered part of his compensation for the year and are not disclosed in the summary table.
Robert Haulter, senior vice president for human resources at CSX, said company officials think they’re complying well with the disclosure rules.
“One of the keys to fairness and transparency is consistency over time. It’s important that investors can see apples to apples from year-to-year. Hopefully, investors will become more acclimated to proxies as the new rules are applied over the next several years,” Haulter said via e-mail.
Disclosures can be unwieldy
But as shareholders try to get acclimated, they have to read through a number of pages in the proxy to get all the details.
“Many believe that the disclosures were so lengthy and confusing that shareholders’ objectives have not been achieved,” Mercer Human Resource Consulting said in a press release last month accompanying its annual survey on CEO pay.
“Mercer’s crystal ball anticipates further refinement of the disclosure rules before next year’s proxy season,” it said.
Martin “Hap” Stein, chief executive of Jacksonville-based Regency Centers Corp., said the rules aren’t perfect, but executive pay disclosure is improving.
“It is more transparent than it has been. There is more information out there,” he said. And he supports that. “If you’re not comfortable with what you’re getting paid, you should not be the CEO of a public company.”
Mercer said that the new disclosure rules and pressure from shareholders are making companies re-think their pay packages, with more emphasis on performance-related pay.
Institutional Shareholder Services said that as of last week, there have been 284 proposals on executive pay on corporate proxy statements this year. ISS advocates more shareholder votes on executive pay policies, but it opposed the proposal by CSX shareholder Mary Morse because it is too restrictive.
“By limiting named executive officers’ compensation to only $500,000, the company will not be able to adopt a pay-for-performance philosophy. Further, market forces and an accountable board are the best modulators of executive compensation levels,” ISS said in its report.
Haulter said CSX also opposes arbitrary limits on pay.
“In our case, over 75 percent of executive pay is at risk and linked to specific goals that result in safety and shareholder value, and we’re meeting those goals,” he said.