Annual meeting: May 3
Compensation for Duke Energy’s CEO Lynn Good was $21,415,936 for 2017; a 55% increase from the prior year TDC of $13,793,594. Pay ratio was 175:1. Last year, only 83% of shareholders supported the proposal.
There are several areas of concern that would merit a vote against pay.
The company offered a one-time, discretionary retention grant valued at $7,000,000 to the CEO this year. Retention grants are rarely justified. The Compensation Committee stated that it “believes alignment with shareholders is best achieved and retention risk mitigated when our senior executives hold unvested equity grants with a value of approximately 2x or more of their total direct compensation” and noted that Good fell well below that despite her four-year tenure as CEO.
These retention awards are subject to a return on equity ("ROE") goal, a performance metric that appears to be appropriate for the industry. We have, however, seen examples of companies where boards changed performance metrics after-the-fact.
Performance shares vest in part on relative Total Shareholder Return (TSR)
Relative shareholder return is fairly broadly used in then energy sector. As noted in a report by the Ontario Teachers’ Pension Plan, “Is Management Compensation Rewarding the Right Behavior? Managing Disruption and the Transition to a Lower Carbon Economy,” absolute TSR would be a better choice in this sector. Specifically, “With this framework management is rewarded not for enriching shareholders, but for out-performing its peers. In past years the company allowed vesting for below median performance. This incentive structure can lead to large management rewards even when shareholders don’t earn a positive return.”
This year the company changed its requirement for achieving a target payout on the relative TSR component of its long-term incentive (LTI) performance shares from the 50th to the 55th percentile of the UTY. The company notes that “payout is limited to target level” if TSR is negative, in other words even if shareholders lose money, the executives could receive awards at target if other companies performed worse. If the company underperforms its peers in a bull market, executives are guaranteed a payout of 30% if the TSR is 15%.
Time-based Restricted Stock Units
An additional $3 million is made up of restricted stock units which vest in equal portions on each of the first three anniversaries of the grant date, solely on the basis of continued employment.
Notably, “If dividends are paid during the vesting period, then the participants will receive a current cash payment equal to the amount of cash dividends paid on one share of Duke Energy common stock during the vesting period multiplied by the number of unvested RSUs.” This practice is generally frowned on by shareholders.
Increased pay and pay opportunities
Nearly every element of pay was increased for CEO Good. Her salary was increased by 3.5%. Pay opportunities were also increased: her target short-term incentive ("STI") opportunity grew from 150% to 155% and increased her LTI opportunity from 700% to 750% of her salary.