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

Download full report

Arizona Public Service (Pinnacle West)

Arizona Public Service Company (APS) is an Arizona-based electric utility. It is a wholly-owned subsidiary of Pinnacle West, and provides “essentially all” of Pinnacle West’s revenues and earnings. APS’ executive compensation includes base salary, annual incentives, and long-term incentives.

For current CEO Jeff Guldner, 23.4% of total compensation was base salary, 21.9% was annual incentives, and 54.7% was long-term incentives in 2019. For former CEO Donald E. Brandt, 17.3% of total compensation was base salary, 21.6% was annual incentives, and 61.1% was long-term incentives. For all other named executive officers, 33.8% of total compensation was base salary, 24.5% was annual incentives, and 41.7% was long-term incentives.

APS says that it determines base salaries from experience, performance, and responsibilities as benchmarked to a peer group of other electric utilities.

Annual incentives for all current executives, including current CEO Jeff Guldner, are 50% based on earnings, and 50% based on business unit performance, which includes safety, customer satisfaction and operational quality, and efficiency metrics. However, a higher share (62.5%) of annual incentives for former CEO Don Brandt was based on earnings, with the remaining 37.5% based on business unit performance metrics.

Long-term incentives are 30% based on stock price, 35% based on relative total shareholder return (TSR), and 35% based on operational performance, which includes customer reliability, customer-to-employee improvement ratio*, OHSA injury rates, nuclear capacity factors, and coal capacity factors.

APS has faced questions from state regulators about its executive compensation. Arizona Corporation Commission Chairman Bob Burns filed a letter in APS’ rate case in September 2020 seeking answers to 26 questions about the company’s compensation of senior executives.

APS executives also faced questions from commissioners about why it did not use J.D. Power customer satisfaction rankings, and in a September 2019 hearing, former CEO Don Brandt said the company used its own customer satisfaction system. But Brandt did not mention in his testimony that his compensation used to be based in part on J.D. Power rankings – until APS’ rankings fell to a point that meant executives’ pay would have been reduced. Instead of taking the pay cut and seeking to improve its customer satisfaction ranking the next year, APS simply stopped using the metric.

In earlier proxy filings, such as the 2016 filing, APS included J.D. Power rankings among the criteria the company used to determine executive compensation. APS ranked relatively well in that year’s J.D. Power rankings, published in July 2016, placing fifth among large electric utilities in the West. APS also ranked fifth the year before, and APS’ then-CEO Don Brandt told investors in a July 15, 2015 earnings call: “In the recent JD Power residential survey, APS improved its score in all six of the study’s categories, and ranked in the top quartile among 54 large investor-owned utilities.” Brandt also noted the company’s J.D. Power rankings in earlier years’ earnings calls, including in 2014, several times in 2013, and in 2012.

APS’ proxy filings did not explain the details of how its executives’ compensation would be affected by the J.D. Power rankings. The lack of detail in APS’ executive compensation policies for that metric and others prompted an inquiry from the Securities and Exchange Commission (SEC), which wrote to APS: “We continue to believe that the amount you pay to your named executive officers under this form of compensation and the related metrics are material information to investors. Please disclose targets and actual results for each metric.”

APS’ response to the SEC contained more details about its executive compensation policies, including that executives would receive full credit if the company ranked in the top quartile of J.D. Power’s rankings, and would receive no credit for that metric if the company did not meet that target.

After several years of ranking relatively well, APS dropped to second-to-last among large electric utilities in the West in the J.D. Power rankings published in July 2017. In its next proxy filing, published in March 2018, APS said it would not use J.D. Power customer satisfaction rankings as a metric for its 2017 executive compensation, and claimed that the change was due to an upgrade to its customer service platform at that time.

Although APS’ characterization of that decision suggested it would be temporary, “during this enterprise-wide project,” APS has not returned to using J.D. Power customer satisfaction rankings as a factor in determining its executives’ compensation. APS continues to rank poorly in J.D. Power’s customer satisfaction surveys; among major electric utilities in the West, it ranked second to last in 2018, and tied for last in 2019.

CEO compensation ranking among utilities studied, 201915/19
Compensation ratio: CEO to median employee, 201990:1
Percent change in CEO compensation, 2017-2019+16.3% ($1,717,175)
Maximum payout of performance-based shares as a percentage of target, 2019200%
Is APS’ executive compensation structure aligned with decarbonization?No. APS announced in January 2020 a goal of achieving 100% clean energy by 2050, but has not updated its policies to align executive compensation with its decarbonization goals. Moreover, APS executives’ long-term incentives are based in part on coal capacity factors, which could discourage executives from making decisions that reduce how often the company operates its coal plants.
Is there evidence from SEC filings that APS is using misleading financial metrics to determine executive compensation?Yes. In determining its “peer group” of utilities, APS inflates its revenues by 50% by including all of the revenue from two coal plants and a nuclear plant that it operates, but co-owns with other utilities. APS’ “peer group” includes some utilities that are far larger than APS, such as Southern Company, and thus increase its executives’ compensation.

APS also inflated its earnings figures in 2019 (and thus its executives’ compensation) by excluding from earnings calculations that the Arizona Corporation Commission has not allowed APS to recover costs for adding scrubbers to the Four Corners coal plant.
What key perquisites or benefits do APS executives receive?In 2019, APS paid outgoing CEO Don Brandt a $4 million “performance award” that in 2017 had been “designed to incent Mr. Brandt, a retirement-eligible CEO, to remain in his current role.” APS also awarded Brandt a “Consulting Services Agreement” worth up to an additional $1.75 million. APS also offers executives a non-qualified supplemental retirement plan.

*According to the company’s proxy statement, this metric is defined as “The Company’s ranking for a customer-to-employee improvement ratio, based on data provided by S&P Global Market Intelligence (“Market Intelligence”), an independent third-party data system, relative to other companies reported in the Market Intelligence data.”