Caterpillar chairman and CEO, Doug Oberhelman 2014compensation of $17.1 million represented a 14.3% increase at a time when the company’s was an incr. A headline on a story about the low level of support received by Caterpillar on its executive pay packages used the word “rebuke.” That struck me as the perfect verb, even more so when I looked up the definition:  “to express sharp, stern disapproval of.” According to preliminary reports, only approximately 66% of shareholders voted in favor of the plan. When targets are lowered and bonuses increase – as they were at Caterpillar this year -- such a rebuke is definitely in order. A letter to shareholders filed by the CtW Investment Group highlights multiple concerns:

  • Deteriorating peer for performance alignment
  • A dramatic reduction of 2014 OPACC target – used in determining annual bonus – “after a dire performance in 2013.”
  • Compensation committee approval of an overly generous “golden goodbye” package for departing Group President, Stuart L. Levenick
  • A move to EPS rather than TSR as the long term incentive metric, that appears to be inspired by the fact that failure to reach multiple TSR targets meant that had resulted in prior plans earning no payout.
  • Finally, and most importantly, the company’s recent excessive use of buybacks that have resulted in synthetic earnings.

CtW Executive Director Dieter Waizenegger wrote, in particular, “We are worried about the timing of the change in plan design since it coincided with Caterpillar’s marked uptick in stock repurchases within the last year. 2014 saw a decided shift in management’s capital allocation policy with $4.2 billion spent on buybacks, a boost of 110% over 2013, without which EPS would have shown a 2.5% decline. With a -9.06% return on investment on share repurchases since Caterpillar commenced its share buyback program in 2013, it appears these buybacks have not created value for long-term shareholders up to this point.2 It is well known that by shrinking the denominator, share repurchases are among the tools of financial engineering available to executives to meet EPS targets.”

Many investors have spoken out against overuse of buybacks, including Blackrock CEO Larry Fink.  According to the proxy statement, Blackrock holds approximately 5% of Caterpillar shares. However, Blackrock supported the pay at 95% of the 100 most overpaid CEOs, as noted in our February report. Given Fink’s perspective on buybacks we will be very interested in the eventual disclosure of Blackrock’s vote in this case.