Paul Hodgson: How to cheat in executive pay and not get away with it

A majority of GE shareholders voted against executive compensation yesterday, despite the CEO giving up his annual bonus and most of his annual salary

I had promised not to write a COVID-incentive-target-adjustment-so-CEOs-make-out-big article every day, but here we are again. It’s not my fault if remuneration committees make pay decisions that bring down the wrath of shareholders on their heads. They really should know better.

Yesterday, just under 60% of shareholders voted against the Say on Pay vote – the advisory shareholder vote on executive pay – at US conglomerate General Electric (GE). It’s not the first Say on Pay defeat this proxy season and it won’t be the last.

It shouldn’t have come as much of a surprise. Both major US proxy advisors, Glass Lewis and ISS, recommended voting against it. There was also an exempt solicitation – a letter filed with the SEC that goes to all shareholders – full of withering criticism of the changes to CEO Lawrence Culp’s pay package from CtW Investment Group – a federation of US trades unions. CtW also recommended voting against all the members of the compensation committee. It wasn't the only one pushing back – there was a whole swath of shareholders saying, ‘nah, I don’t think so’.

ISS’ proxy research report said: “Mid-cycle adjustments to performance equity grants are generally considered to be problematic, particularly when the changes both increase the value of the award and decrease the performance level needed to earn it.” In a similar vein, Glass Lewis’ proxy report said: “The revised award provides Mr Culp with the same amount of compensation in dollars for creating less shareholder value, even as the revised grant allows for greater upside opportunity (and dilution) on account of the higher number of shares covered.”

So what exactly did they do wrong?

Well, first of all, as detailed in GE’s proxy, Culp forfeited most of his $2.5m base salary and all of his annual bonus, receiving just $15m in long-term performance shares. So far, so good – at least by the unusual standards of US executive compensation.

But, of course, that was not all.

Culp’s total pay figure was more than $73m.

Huh? What? Where did that extra come from, I hear you cry?

Well, when Culp joined GE in 2018  (he’s the first company outsider to lead GE) he was given an ‘inducement’ award of five million GE shares worth – potentially – around $37m, intended to retain him until 2022 so long as the share price met certain targets. But with COVID-19, it looked like it might take Culp longer than that to turn GE around, and besides, those share price targets – $18.60 – $31 – were looking pretty unrealistic.

The new inducement award they dreamed up in August last year turned out to equal almost twice the number of shares as the original, and these could be earned by hitting share price targets that were half the level of those in the original

This is because GE’s share price had already fallen to less than $13 before the pandemic. Culp’s strategy may have been causing some short-term losses before moving into long-term gains, but the remuneration committee was more concerned with the continued free fall to around $5.50 in May.

So, they dropped the old inducement award and designed another one, “in the best interests of shareholders”, according to the proxy statement, because – and get this – “the Board heard concerns from shareholders that Mr Culp’s original inducement award did not provide enough retention value to be meaningful”.

Really? $37m not meaningful enough?

Which shareholders had these concerns, exactly? According to a CtW press release issued yesterday, Norges Bank Investment Management (the 12th largest institutional shareholder with about 0.7% ownership), and US pension funds CalPERS, CalSTRS, Florida State Board and the New York City Funds all opposed the Say on Pay votes, among others. They were already unhappy, and warning shots were fired last year, when Culp’s pay package garnered just 73% support from investors – pay support is generally around 98%.

“Today’s vote was a rebuke of the Compensation Committee’s short-term approach," said Dieter Waizenegger, Executive Director of CtW Investment Group, in the release. "We hope GE will either renegotiate the goals associated with the award or rescind it.”

The new inducement award they dreamed up in August turned out to equal almost twice the number of shares as the original, and these could be earned by hitting share price targets that were half the level of those in the original. There’s a logic there, somewhere, if I could only figure out what it was.

The proxy section describing the new award conspicuously avoids putting an actual dollar value on the potential maximum, but, with a calculator, you can figure it out: $232.6m.

Whoa! For returning the GE stock price to a couple of dollars higher than when he became CEO?

And the threshold award, which could earn him 4.6 million shares? That share price target was surpassed before the end of 2020. That threshold award is now worth just under $61m. And now he’s pretty close to getting the target award, which could be worth $124m if he does. This for basically getting the stock price back up to where it was when he became CEO.

A little patience might have been counselled. Was he threatening to leave? There’s no evidence of that. So there doesn’t seem to have been any urgency to come up with some kind of a new plan, and a little ‘let’s wait and see what happens with the stock market’ might have been a good idea.

So what should GE have done?

Nothing, frankly, except give Culp two more years to satisfy the original share price targets and, hey presto, that would give them the extra retention period that the board and those concerned shareholders were worried about in the first place. If he satisfied the targets, that would actually have been the turnaround he was hired to do in the first place.

But the GE board can make good decisions. At the same time as losing the Say on Pay vote, a shareholder resolution from As You Sow asking for a report on how it will meet the criteria of the Net Zero Indicator (net zero GHG emissions by 2050) received 98% support from shareholders. The main reason for this, the highest level of support for a shareholder resolution ever? The board recommended a vote for it.