Pollution Payday: analysis of executive compensation and incentives of the largest U.S. investor-owned utilities

While the coronavirus pandemic has devastated the U.S. economy, leaving millions of Americans struggling to afford their utility bills, the top executives for those utilities continue breaking their own records for executive compensation every year.

The Energy and Policy Institute analyzed the executive compensation policies and practices of 19 of the largest investor-owned electric utilities throughout the United States. In addition to identifying trends across utilities, this report provides company-level profiles on the executive compensation policies of each of the utilities included in our research.

We found that CEO compensation at these 19 companies totaled over $764 million between 2017 and 2019, with the highest-paid CEO in the group, Southern Company’s Thomas A. Fanning, receiving nearly $28 million in 2019. The ratio of Duke Energy CEO Lynn J. Good’s pay to that of an average employee of her company reached 175:1 in 2017 – the highest of any utility for a single year in the same three-year period.

Investor-owned utilities have argued publicly and to policymakers that they must continue disconnecting customers who have been unable to pay their electric or gas bills. If they don’t have the threat of disconnections, the companies say, they will have to raise rates on other customers to cover the arrearages of those who can’t pay.

But the data in this report show that investor-owned utilities have large pots of executive compensation from which they can draw before turning to rate increases. If Southern Company’s Fanning took just a 32% compensation cut from his 2019 amount – still leaving him with a compensation of $19 million – Southern could use the savings to immediately wipe out the debt of every single Georgia Power customer that was over 90 days in arrears on their bills as of the end of July 2020. Instead, Georgia Power disconnected 13,000 customers in July, starting when regulators allowed a state moratorium on disconnections to expire on July 14. (Of course, Southern could also choose to avoid both disconnecting customers and rate increase requests by tapping into a small percentage of the billions of dollars in corporate profits that it netted in 2019.)

Out-of-control executive pay is not unique to the utility sector. Theories of corporate compensation as “rent extraction” – enriching executives, rather than producing shareholder value – have gained traction, advanced by scholars like Lucian Arye Bebchuk and Jesse M. Fried, as income inequality has skyrocketed in America. But executive compensation at investor-owned utilities deserves extra attention for several reasons.

First, governments have granted monopoly status to investor-owned electric and gas utilities, which means that families and businesses often have no choice but to fund the exorbitant salaries and perks of their utilities’ executives. In some cases documented in this report, utilities have tried to recover the costs of their executive compensation directly from ratepayers’ bills, rather than from shareholder profits. We found that utility executives took home bloated incentive awards, routinely receiving stock shares for performance that doubled company targets. These excesses have prompted utility consumer advocates and some state regulators to oppose saddling ratepayers with the steep costs of executive pay.

Second, the choices made by investor-owned utilities’ executives will be pivotal in whether the United States rapidly decarbonizes its economy. With just a single notable exception of Xcel Energy, the executive compensation policies of the utilities we studied in this report do not incentivize decarbonization. In some cases, we found that executive incentives are directly at odds with reducing emissions by transitioning away from fossil fuels. Some utilities include environmental, social, or governance (“ESG”) goals in their executive incentives that do nothing to promote decarbonization, despite the fact that climate change is a key area of focus for ESG-oriented investors.

A growing number of investors expect companies to link executive compensation to decarbonization goals. In September 2020, major investors with over $47 trillion in assets informed CEOs and directors of several utilities that “companies will be assessed on progress made in becoming net-zero businesses,” including “Whether the company has effective board oversight of, and remuneration linked to, delivery of GHG [greenhouse gas] targets and goals.”

Several of the utilities we studied also use misleading financial metrics as a basis for determining executive compensation, inflating resultant payouts to corporate officers. These tactics include employing non-standard accounting measures and manipulating inappropriate company peer groups for comparison.

Finally, we examined some of the lavish perquisites (or “perks”) doled out to utility executives, such as unlimited personal travel on corporate aircraft, expensive legal and financial services, and a host of “personal benefits” – quickly amounting to further exorbitant tallies.

The primary source of data for this report is utilities’ own annual financial disclosures, namely their 2018 through 2020 “proxy filings”, also known as Securities and Exchange Commission (SEC) Form DEF 14A.

Read the full report online here.

Download the entire report (.pdf) here.

Cover image source: “Monopoly Thimble” by Rich Brooks. Available in the public domain at Flickr.