Paul Hodgson: How to cheat in executive pay and get away with it

The market collapse and subsequent damage to company performance caused by the pandemic provided an opportunity for some US executives to demonstrate altruism. Some did. Others just figured out a way to get paid anyway.

Here’s an example. A company’s performance pre-Covid would have resulted in a payout of its long-term incentive (LTI) plan at just over 100% of target. But the last six months of a three-year performance measurement period were so bad that they wiped out any LTI payment altogether.

Solution? Ignore the last six months and pay out at just over 100%.

Result? Payouts ranging from $1m to $5.3m for executives and the CEO.

What? I hear you cry. No one would do that. Who would think they could get away with it?

But that’s not all.

The annual bonus wasn’t going to pay out either, so the remuneration committee decided to use the pre-Covid results for the first six months of fiscal 2020 (the company has a fiscal year which runs 1 September to 31 August, so the first six months of fiscal 2020 were 1 September 2019 to 28 February 2020) and then used the results of a ‘balanced scorecard’ for the rest of fiscal 2020.

‘It would have been unfair and unwise to penalise the leadership team and other recipients of performance shares as a result of events relating to the Covid-19 pandemic that were out of their control’ – Walgreen Boots Alliance

That meant switching from an adjusted operating income measure to “management of overhead costs; continued generation of free cash flow; delivery of operating profits; and success in maintaining or growing sales”.

Hard target to fluffy targets.

Result? Payouts at 84% of target, worth around $550,000 for executives. The CEO doesn’t get a bonus or a salary, so no huge amounts here… but who needs a bonus when you get paid nearly $20m a year anyway?

Oh, come on. Seriously? I hear you cry.

This company, analysed in a report by US consultancy Compensation Advisory Partners (CAP), which looked at early vote recommendations by US proxy service ISS, has already had its 2021 annual meeting, on 28 January.

Its Say on Pay vote result? A fail at 47%, compared to 83% support in January 2020. But the management resolution asking shareholders to approve – or in this case disapprove – of executive pay is an advisory one. So, did the executives give the money back after that vote? Not that I can find, no; and they didn’t respond when I asked them. 

The company? Pharmacy Walgreen Boots Alliance.

There’s no way either ISS or Glass Lewis would have recommended supporting a Say on Pay at the company. So, before the annual meeting, recognising that they were about to get slammed by a negative vote, the company issued one of those special pleading proxy statements asking shareholders to support the resolution.

Clearly it didn’t work.

This is a typical extract from that special proxy: “It would have been unfair and unwise to penalise the leadership team and other recipients of performance shares as a result of events relating to the Covid-19 pandemic that were out of their control at a time when they were on the front lines risking their health and safety and the health and safety of their families.”

I didn’t ask any of the people serving me at our local Walgreens, but my guess is that they are not typically recipients of performance shares.

As Jamie Bonham, Director of Corporate Engagement at Canadian investment firm NEI Investments, said to me in a recent telephone conversation: you never hear of executives talking about how they really shouldn’t be benefiting from that massive bull market and returning some of those windfall share price profits on their stock awards.

Walgreen’s special proxy also notes that in 2020, the company returned nearly $2.6bn to stockholders via dividends and stock repurchase. How was that a good idea when it was hemorrhaging profits?

That policy didn’t last long. According to a Business Insider report from last July, Walgreens halted its share buyback programme and said it planned to cut 4,000 jobs after reporting “worse-than-expected third-quarter figures”.

The special proxy asking shareholders to support executive payouts does not mention the 4,000 fired employees.

Why’s he going on about Walgreen Boots all the time? I hear you cry. It’s just one company!

Well, then there’s Hertz, which I have already written about.

It’s a long, complicated story of reduced salaries, reinstated salaries, CEO resignations and appointments, but the main point of outrage was that, on 19 May last year, the company announced a retention bonus programme that provided approximately $16m to key employees at the director level and above. The purpose of the payments was to reward these employees for the substantial additional work they were doing as a result of a “reduced workforce”. Hertz had already, in March, announced the ‘furlough’ (read ‘no work, no pay’) for thousands of employees. My question at the time was: couldn’t the $16m have been used to reinstate and pay some of those ‘furloughed’ employees, thus reducing the additional workload for the managers who got the retention bonus?

Apparently not. 

I could probably write one of these stories about a different company every day as we move through proxy season (don’t worry, I’m not going to).

I found the Hertz example in a database of salary cuts due to Covid put together by Indian data house ESGAUGE and US non-profit The Conference Board.

The database says that 679 companies in the Russell 3000 have announced salary reductions for the CEO, executive officers and/or independent directors since the onset of the pandemic. Not all of them will have restored those salaries as quickly as Hertz, so there is the altruism that I spoke about in the first paragraph. But the database also notes that 349 companies also announced changes to incentive plans, some of them – perhaps even many of them – of the same kind as Walgreen Boots.

CAP’s survey reports some other examples of incentive shenanigans, including healthcare company Becton Dickinson and consumer services firm Aramark – both of which saw dramatically reduced levels of support for Say on Pay – and software firm PTC, which lost its vote like Walgreens. It also cites other companies that got great shareholder support for Say on Pay despite changes, such as hardware company Digi International and car parts manufacturer Meritor. Clearly the changes passed the bar (although both, on closer examination, awarded special payments to executives to make up for salary sacrifices. Not sure I’d have voted for that.)

It’s not as if companies weren’t warned. Glass Lewis was particularly straight-talking in an early bulletin, writing about “crocodile tears for maintaining or even increasing executive compensation levels”.

But there have been examples of altruism. Here are three.

Regional bank holding company Associated Banc – already reeling from a mere 37% support for its Say on Pay vote in 2020 – made a number of significant improvements to its incentive pay plans and, because of “disappointing performance”, reported in its 2021 proxy that it had “exercised discretion to eliminate” annual bonuses for the CEO and other named executives, and to eliminate the LTI payout for the CEO.

Surgical products company Intuitive Surgical is another example of a company “lying in the bed they’ve made” as ISS so eloquently put it. After missing its adjusted operating income target for the year, no annual bonuses were paid out; although the $77.5m in stock option profits for the named executives, $35.7m for the CEO alone, probably made up for that.

Packaging company WestRock reduced annual bonuses to threshold despite the fact that performance merited a higher level of payout in order to “conserve cash reserves” and received a positive Say on Pay vote as a result.

It’s early days yet, but I have a feeling that we can predict a proxy season composed of companies that either follow the Walgreens example or the WestRock example. Whichever is in the majority, average Say on Pay votes in the 90% plus range will be a thing of the past.