Prudential Financial

Proxy Statement Published:  March 24, 2015 Meeting Date: May 12, 2015

The total reported compensation for Prudential CEO John Strangfeld in 2014 was $37,483,092.  Over half of that amount – upwards of $20 million – is reported as change in pension value.  The footnote for that column begins with a sentence of 166 words, the sort that makes the most intrepid and committed reader decide it is time for another cup of coffee. The bottom line, is that for 2014 Prudential, like many companies, face steeply higher numbers in this category.  See this important Wall Street Journal article for more on the topic.

One factor behind such increases, appear to be changes in actuarial tables that estimate how long individuals are likely to live, the mortality rate assumptions “with white collar adjustments.” Under the sort of pension that many Americans used to have, and many executives still do, retirees receive a guaranteed fixed payments each month. The individuals most able to reasonably save for their retirement still receive defined benefit plans. If the latest actuarial data shows that one is likely to live a longer period of time, then additional money must be set aside.

One may wonder, how much longer Strangfeld is expected to live, given that the changed assumption results in a $20 million one year increase. (Remember as well, that the money set aside is expected to earn some rate of return in the years prior to his retirement, and subsequently.)  According to tables later in the proxy statement the present value of Strangfeld’s the current value of the largest of Strangfeld’s three retirement plans is over $75 million.  In addition, Strangfeld has been deferring compensation – a tax-favorable savings mechanism available to executives – and has over $9 million in his deferred compensation account.  One final note on the deferred compensation is that a small portion of the total figure is due to guaranteed above-market interest.  The fact that this component is so small makes it even clearer that it is unnecessary.

The other category of pay that increased under the summary compensation table was Strangfeld’s non-equity incentive pay, which was $9 million in 2014, compared to $3 million in 2013 (though in 2013 he received additional funds under his bonus).  The compensation committee reports that his target award was of $5.6 million, with maximum of $11.2 million.

The compensation committee states that, “Based on the Final Performance Factor and the Committee’s evaluation of his performance, in February 2015, the Committee recommended, and the independent members of our Board approved, an annual incentive award of $7,800,000 for Mr. Strangfeld for 2014, or approximately 1.39 times his target award amount.”

It is exceedingly difficult for a shareholder to evaluate whether such a bonus is in line with results given the proxy disclosure.  One complicating factor: Prudential uses adjusted operating income (AOI) a non-GAAP measure, rather than GAAP Net Income.  GAAP, for those fortunate enough to be unfamiliar with the acronym, stands for Generally Accepted Accounting Principles.  They are generally accepted for a reason, and whenever a company strays from them – putting an extra burden on shareholders to understand the rational – the plan deserves a closer look.

An example of clearer disclosure – though not necessarily a better bonus plan -- can be found in our analysis of AFLAC.