The price of a barrel of oil is down and the price of stock is down, and yet pay for Exxon CEO Rex Tillerson is up: increasing from $28.1 million in 2013 to $33.1 million for 2014. The diary I did on Comcast CEO’s retirement (http://www.dailykos.com/...) got great response (thanks guys!), so I thought I’d do another one of these.
There are two elements of his pay I want to focus on – salary, which we all understand, and the concept of “realized pay” which is tricky, but important. Basically, Exxon’s board spends a lot of time trying to convince shareholders that because of decline in stock price Tillerson’s pay package isn’t as big as it seems. They have a certain point – more on that later – but the fact that stock price is falling needs to be put in context.
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As of January 1, 2015 Tillerson’s salary increased $180,000 per year to $3,047,000. Not a bad raise, is it? Can you imagine getting an increase in salary greater than salary of a huge percentage of the population? This on the heels of an increase last year of $150,000 increase the prior year. Salary is, as the company notes, designed, “to provide a base level of income,” has risen every year for Tillerson. When he became CEO in 2006 his salary was $1,500,000 (below that of his notoriously highly-paid predecessor Lee Raymond) so by now it has more than doubled. In fact, looking back I calculated that it has increased by more than 5% every year since he became CEO. The annual increases have ranged from 5.5% to 16.7%.
One has to wonder how much the salaries of other employees designed to provide base levels of income have increased each year, and by how much. Certainly on the larger level in society we know that average salaries have not.
There are a number of concerns about having such high CEO salaries. For one thing, anything over $1 million loses a tax deduction. There was a tax code rule passed by Congress under Clinton, Section 162m, as an attempt to reduce CEO pay by creating these tax consequences. As it played out, there was an exception – some call it a loophole – was made for performance-based pay, so in fact it may have inadvertently raised overall pay because of greater emphasis on bonus and options. However, it mostly worked to keep CEO salaries close to $1 million for a long time. But now more boards are slowly raising CEO salaries, incrementally. And when one board raises the salary component and shareholders don’t object there’s a domino effect. So it is part of what I think of as the inflationary spiral of executive pay. Other issues: salary increases mean much higher pensions, and often higher bonuses because the bonus target is often 2 times salary, for example.
Pay at oil companies is especially important for a closer look when we think about how that industry affects climate change.
One reason salary is so interesting to me at Exxon is because of the changes in the industry.Bloomberg Intelligence analyst Gregory Elders was recently quoted in a blog that looks at pay at other oil companies as saying, “The only people not hit by the drop in oil prices are the CEOs running the companies.” (http://fuelfix.com/...) It is unclear exactly how true this will be in the long run, but it is a very important issue. And since salary stays doesn’t reflect the price of oil I wanted to start with that.
I hope to dig into that at greater depth later. The point of incentives is to encourage executives to focus on certain goals. Now that financial goals are becoming more challenging, we may see more focus on operational metrics. If those metrics focus on worker and environmental safety that could be very valuable. So far as I’ve looked at oil companies I’ve seen more metrics that are not as hopeful for the planet, including “increasing petroleum reserves.” There are a lot of implications for that, but, that’s for another diary.
The biggest component of Tillerson’s total pay package were his stock awards, $21.4 million this year, nearly identical to the value of last year’s grant. A major focus of the proxy, supported by multiple tables and graphics, is a distinction the company makes 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 – figuring out exactly how much stock awards are worth -- 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 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 is a really good policy, and shareholders often urge companies to adopt it in shareholder resolutions. It would have been great to see this in place at coal companies and might have made a difference in some decisions executives made.
But to go back to the way Exxon talks about this, while the equity must be retained for a time period, it still is worth a lot of money. To fail to consider its value – as an over-emphasis on realized pay does – is misleading. 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.
There’s a lot of emphasis put into trying to spin CEO pay packages and put them in the best possible light, but it is important to dig in a bit and look at the details. So there you have it. Any questions?