(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Christopher Swann
NEW YORK, May 16 (Reuters Breakingviews) - Exxon Mobil (XOM.N) is attacking a straw man in its attempts to defend Chief Executive Rex Tillerson’s bumper $35 million 2011 pay package. Hoping to calm shareholders angry at the bonanza, the oil giant held an investor call on Wednesday afternoon to explain its argument that the company’s long-term goals obviate the need for annual targets when setting executive pay. But that just sounds like an excuse for C-suite largesse.
Exxon has a point that relying on short-term targets has its problems, not least in the oil industry. Decisions to invest in oil wells may often take a decade or more to pay off. And linking pay to annual goals also makes it more likely that executives can be rewarded for matters beyond their control, such as rising oil prices. Exxon also makes a fair point that the cash portion of Tillerson’s pay does vary – it has gone both up and down by some 40 percent in recent years.
But that accounts for barely more than a tenth of his overall compensation. The vast bulk stems from restricted stock grants – some $18 million-worth last year. Turning Exxon’s point back on the company, Tillerson is being compensated in part for the decisions made by his predecessor, Lee Raymond. Just two years after taking over the corner office, the current chief’s stock grants more than doubled and have stayed around the same amount each year.
That hardly seems fair to shareholders to start with. But it’s not the size per se that they are up in arms about – it may be more than twice the size of that given to Royal Dutch Shell’s (RDSa.L) top dog. But it’s in line with U.S. peers. The problem is that Tillerson’s pay is not clearly linked to performance metrics.
Some context for the stock award would be useful – otherwise it looks as if it has been plucked from thin air. But there are no targets for him to hit to secure the awards, meaning he can walk away with the stock regardless of how well the company performs - unless he breaches Exxon’s arcane clawback policy. Any number of short- and medium-term goals would be useful, from performance compared with peers to return on equity or on invested capital, for example.
And for all their longer-term plans, oil companies still need running day-to-day. That’s as much a part of a chief executive’s responsibility as devising strategy – and should be measured and compensated for accordingly. If Exxon isn’t willing to surrender unfettered discretion over such titanic executive payouts, shareholders should vote against the pay on May 30.
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- Exxon Mobil held a webcast on May 16 to rebut criticisms of its executive compensation structure ahead of a shareholder annual vote on May 30.
- Proxy advisory firm ISS has urged shareholders to vote against the set up for top pay at the oil firm.
- Glass Lewis, another proxy advisory firm, said that “the compensation committee has left shareholders in the dark, unable to see a direct link between pay and performance.” They recommended shareholders vote with the board on executive pay.
- At the 2011 annual meeting over 30 percent of shareholders voted against the firm’s resolution on executive compensation.
- In the call on May 16, Exxon said that it linked executive pay to the firm’s performance over 10 to 20 years. It rejected the notion that pay should be linked to shareholder returns over one- to three-year periods.
- The firm also said that high pay was justified by the firm’s complexity.
- Rex Tillerson, who took over as chief executive and chairman on January 1, 2006, was paid $35.9 million last year. This included a restricted stock award of $17.9 million and a cash bonus of $4.37 million.
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