Applied Materials

Proxy published: 2/18/2015 Annual meeting: 4/2/2015

Applied Materials did not appear on our recent report of overpaid CEOs, but with a $6 million increase in total disclosed compensation in 2014, they may make the next edition.  Total disclosed compensation for President and CEO Gary Dickerson was $16,425,005 for 2014, compared to $10,409,369 the prior year. The primary concern, however, is the departure in the manner of pay.  This year, the CEO received no option awards or stock awards, but his annual non-equity incentive increased from $1.5 million to $14.9 million.  This increase was largely due to the decision by the compensation committee to pay “cash-settled performance units” rather than equity awards used in prior years, a move it made in part to alleviate some tax burden for the executives.

In determining the extent of these awards the committee considered the fact that “there was no potential for the NEOs to be rewarded for any increases in stock value that would have been possible if the awards were equity-based.”  Justification for large equity grants as a component of CEO pay routinely notes that such awards are “at risk” if stock price goes down, and such potential is carefully calculated in determining award size. This is a reverse of that more common argument: there’s no upside so the company needs to pay more cash.  The cash-settled performance units will vest over three years, initially conditioned on the fact that Applied achieve “an annual adjusted operating profit margin of at least 10% in any one of fiscal years 2014, 2015 or 2016.” The company achieved that goal in 2014, so these payments are now guaranteed.

Dickerson’s compensation was higher than the compensation committee’s already generous benchmarking guidelines. The company notes that in 2014, compensation for Dickerson was above the 75th percentile of peer companies, but that this was appropriate given the challenges that included “planning for the successful closing of the Business Combination and leading post-close integration, and the continued demands of running our business.”

The compensation committee targets annual compensation at the “50th to the 75th percentile of Applied’s peer group for each of these NEOs’ total direct compensation.”  Such benchmarking contributes to spiraling upward increase of executive pay.  If no company ever pays below average – even the 49th percentile -- in executive compensation, then such compensation can only increase, regardless of performance or external factors.