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McClatchy-Tribune  06/13/2014 5:34 PM ET
Pay for North Carolina CEOs rises 14 percent [The Charlotte Observer :: ]

June 13--North Carolina's biggest companies, faced with shareholder demands for more of a say on CEO pay, are doing more to explain their executive pay practices.

But try to decipher some of their explanations, and you might not find much clarity. Executive pay packages are more complicated than ever, tied to an array of performance targets like "return on non-cash average assets" with components such as "performance share rights."

A decade ago, CEOs were commonly paid in stock, salary, bonuses and stock options, as well as perks. Pay packages have grown more complex as companies try to explain their pay packages in light of non-binding "say on pay" votes that give shareholders a voice.

"Often you get a laundry list of metrics, and it's hard for investors to tell," said Amy Borrus, spokeswoman for the Council of Institutional Investors.

The Observer's annual analysis of executive pay showed median compensation rose 14 percent for the CEOs of North Carolina's 50 biggest publicly traded companies last year, to $4.1 million.

In general, executives are getting more of their compensation through salary and stock awards, and less through stock options. Here's how options work: If the stock goes up, the executive's options are worth more, while if the stock goes down, the options are often worthless.

Now boards are reducing options -- in part to respond to critics who think they reward executives arbitrarily for a rising stock price, rather than how well the executive is running the company.

That may be well-intentioned, but it's making pay packages "far more complicated," said Tom Kelly, a Charlotte-based pay consultant with Towers Watson. "Back in the day, generally, when the world was all about stock options, it was easy to understand how it would pay out."

While the Occupy movement that cast a spotlight on inequality and CEO pay has faded, companies are still feeling the impact of shareholder votes on executive pay.

"For corporate governance, it's really been a game-changer. It's clear that CEOs and boards care about the results of these advisory votes," said Borrus. "This is a far cry from a few years ago. A lot of companies are doing outreach."

Such votes, required by the 2010 Dodd-Frank financial reform law, aren't binding. But failing them can embarrass a company, and boards have to explain the following year how they responded to investors' concerns. Though about 98 percent of companies pass their say-on-pay votes, even getting less than 90 percent shareholder support can spur changes.

Treading lightly around say-on-pay

Shareholder votes on CEO pay have not only prompted boards to more fully describe how they pay executives. Some are compensating their executives differently.

--Charlotte-based Piedmont Natural Gas received only 76 percent support in its say-on-pay vote last year. The company said in this spring's annual proxy filing that it reached out to major investors to hear their concerns about executive pay. Investors told the company they felt its retention awards were large, and weren't linked to performance.

Piedmont's board decided not to give a retention award to CEO Tom Skains this year, and his total pay fell 41 percent. This year the company won its say-on-pay vote with 96 percent support.

Spokesman David Trusty attributed the increase in shareholder support to more outreach. "We did communicate more individually with our large institutional investors," he said. "We simply did a better job of getting in front of those stakeholders."

--At Polypore, the Charlotte-based maker of battery components, the influential group Institutional Shareholder Services recommended voting against the company's pay package this year. ISS said CEO Robert Toth's pay wasn't aligned with performance, in part because of his large stock option grants. Toth's 2013 pay rose 428 percent, in large part due to $2.8 million worth of stock and option grants the board awarded him.

 

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