Proxy firm: Protest big exec pay at BGE/Constellation
Proxy Governance Inc., which advises instititional shareholders on how to vote at corporate shareholder meetings, tells owners of BGE parent Constellation Energy to vote against members of the board's compensation committee as a protest against excessive executive pay. The board members, Michael Sullivan, Doug Becker, Freeman Hrabowski, Lynn Martin and Robert Lawless, sit on the committee that sets pay for Constellation CEO Mayo Shattuck and other top bosses. CEG's annual meeting is July 18.
The average three-year compensation paid to the CEO is 156% above the median paid to CEOs at peer companies and the average three-year compensation paid to the other named executives is 190% above the median paid to executives at peer companies. We note that our calculations include compensation paid to former CFO E. Smith, who resigned in May 2007.We have concerns regarding the company's executive compensation, which is high compared to peers and given the company's financial performance relative to peers. The high pay appears to be driven by two factors: first, in 2005, large option grants were made to CEO Shattuck
(valued at $18.4 million), EVP/Subsidiary Chairman T. Brooks ($5.6 million) and EVP/CFO/CAO F. Smith ($4.5 million).A large portion of these grants represented “replacement” options that were granted in connection with the then-proposed merger with FPL, which was subsequently cancelled. These options replaced options that were exercised by the executives at the request of the Compensation Committee in order to minimize the potential amount of excise taxes and tax gross-up that would become payable by the company following the merger.
We believe that the company should not have offered to replace the exercised options
before the merger was certain. By doing so, the company locked in a profit for executives and gave them another chance to have "another bite of the apple" - to profit twice from the same option grant. We also do not support the use of gross-ups to pay for taxes that would have been
owed by the executives.Secondly, we note that although the company generally did not grant equity awards to executives in 2006, they did grant unusually large cash incentive payments. In 2006, Shattuck received $10.8 million and the other named executives received between $4.5 million and $7.8 million in annual and long-term cash incentive awards. As we noted last year, the company abandoned its long-term performance metrics for 2006 on the grounds that uncertainty with regard to the FPL merger made any performance goals unworkable. This decision allowed the long-term award to vest 100% within two years, with no performance vesting requirements. We believe it was inappropriate for the committee to simply drop all performance-based vesting criteria from the long term incentive awards.
While we generally believe that the board is properly discharging its oversight role and adequately policing itself, it appears that the compensation paid to the company's executives is out of line relative to that paid to peer executives. Therefore, we recommend that shareholders withhold their vote from the Compensation Committee members who are subject to election at this meeting (D. Becker, F.Hrabowski III, R. Lawless, L. Martin and M. Sullivan) as a way of signaling concern about the company's compensation practices.
