Proxy published: 4/14/2015 Annual meeting: 5/27/2015
Oil price and stock price are down, and the company recently reported its worst quarterly cash flow since 2009, but pay for Exxon CEO Rex Tillerson is up: increasing from $28.1 million in 2013 to $33.1 million for 2014. As in years past, the major component of the package is stock awards, $21.4 million this year, nearly identical to the value of last year’s grant. The major increase in this year’s pay was $4 million in the change of his pension value.
A major focus of the proxy, supported by multiple tables and graphics is a distinction between realized compensation and the numbers reported in the summary compensation table.
Realized compensation is, to oversimplify a bit, the hard cold cash received. Equity valuation is always a complicated estimate, and when stock price goes down the value of equity incentives may not equal the original estimates. The converse is true as well – equity awards are often subsequently proven to be worth more than estimated -- but that is rarely pointed out in proxies.
One of the chart’s included in the proxy statement shows realized pay as a percentage of reported pay, showing the ratio of the distinction since 2006. According to the chart actual realized pay has not exceeded 71% of disclosed pay over those years, and the average percentage was 46%. For 2014, the company reports realized pay as 55% of the disclosed amount: $18.25 million.
One reason that executives at Exxon have not realized as much value (i.e. converted equity to cash) as at other companies is the company’s admirable stock retention policy. As noted, “a substantial portion of an NEO’s annual compensation in the form of performance-based restricted stock or stock units and restrict[s] the sale of these equity awards for periods of time far longer than the restrictions required by most companies across all industries.” In fact, half of the equity award may not be sold for 10 years from date of grant or until retirement, whichever is later, and the other half is restricted from sale for five years. This policy is one we applaud and wish were more widely adopted.
While the equity must be retained for a time period, to fail to consider its value – as an over-emphasis on realized pay does – is misleading. The equity still has great value. As of February 15, 2015, Tillerson held 1,855,784 shares of company stock (as well as additional unvested stock units). As the stock price has gone down the value of Tillerson’s fortune has declined, but he still has a fortune. If the stock price lost half its value Tillerson’s current holdings would still be worth over $75 million. Even if the stock price plummeted to $15 per share (a level it has not traded at in the past 20 years), Tillerson’s holdings – now worth over $150 million -- would be worth approximately $28 million.
The board notes, “The executives’ inability to monetize equity compensation early is especially relevant in today’s price environment as executives, much like long-term shareholders, experience the impact of commodity price cycles.” The company’s reference to “commodity price cycles” is, obviously, a reference to the declining price of oil. (There’s a great deal of debate, of course, as to whether falling oil price is a cycle or whether the energy industry is in the midst of fundamental changes.) Yet there does not appear to be a similar emphasis in the years when the rising price of a barrel of oil indirectly increased the value of compensation packages.
For the first time this year, the proxy statement discussed “unrealized pay” as well, which it says “includes the value based on each compensation benchmark company’s closing stock price at fiscal year-end 2013 of unvested restricted stock awards; unvested long-term share and cash performance awards, valued at target levels; and the “in the money” value of unexercised stock options (both vested and unvested).” This seems similar to what some others call “realizable pay,” basically the value of compensation if it could be converted to cash. Realized and realizable are not universally disclosed so comparisons are difficult. The terms tend to obfuscate rather than enlighten, and the optional disclosure typically appears – as it does in this case – when it counters an otherwise high figure.
Consistent CEO salary increases
As the performance based pay becomes less valuable, it is of particular interest to see how energy companies handle fixed compensation, and at Exxon the salary is of particular notes. The proxy statement notes that as of January 1, 2015 Tillerson’s salary increased $180,000 per year to $3,047,000. This increase comes on the heels of an increase last year of $150,000 increase the prior year.
Salary, designed as the company notes, “to provide a base level of income,” has risen every year for Tillerson. When he became CEO in 2006 hid salary was $1,500,000 (considerably below that of his notoriously highly-paid predecessor Lee Raymond) so it has more than doubled.
Such high salaries are not a tax efficient. As noted in the proxy statement, “Salary (together with other compensation related to fringe benefits or perquisites) is not deductible by the Corporation to the extent that it exceeds $1 million for any Named Executive Officer (other than the PFO).”
Salary increases also inflate other forms of compensation downstream. Final average salary is used in pension determinations (The current accumulated benefit of Tillman’s pension at the end of the fiscal year was over $25 million. He had an additional $40 million in the Exxon Additional Payments plan). Likewise life insurance policies provided by the company are also based on salary (4 times base salary for the CEO). When Tillerson leaves Exxon, he will, like all U.S. salaried employees, be entitled to payment of salary for any accumulated but unused vacation days.
In every proxy statement since 2006 the compensation committee has noted a flexible approach to peer comparisons, including a version of this sentence that claims its policy “minimize[s] the potential for automatic ratcheting-up of salaries that could occur with an inflexible and narrow competitive target among benchmarked companies.” Yet ratchet the company has: each year since Tillerson became CEO his salary has increased by at over 5%. The annual increases have ranged from 5.5% to 16.7%.
The increase is particularly striking this year in the context of falling oil prices. Bloomberg Intelligence analyst Gregory Elders was recently quoted in a blog as saying, “The only people not hit by the drop in oil prices are the CEOs running the companies.” While this may be something of an overstatement, Exxon’s recent disclosure does little to dispel that impression.