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

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Duke Energy

Duke Energy is a utility company that serves electric customers across North Carolina, South Carolina, Florida, Ohio, Indiana, and Kentucky. Its gas subsidiary, Piedmont, provides gas distribution to customers in North Carolina, South Carolina, and Tennessee. Duke provides its named executive officers (NEOs) with compensation consisting of a base salary, annual incentive, and long-term equity incentive, plus additional perquisites and benefits. 

Duke had the second-highest average CEO-to-employee pay ratio between 2017 and 2019 among the utilities examined in this report, at 139:1. CEO Lynn J. Good also had the highest CEO pay ratio for any single year, at 175:1 for 2017. She was the highest-paid CEO that year among the utility executives we studied, receiving over $21.4 million in total direct compensation, including a one-time $7 million “retention grant”.

Ninety percent of Duke’s target CEO compensation in 2019 was performance- and/or stock-based, with the remaining 10% coming from base salary. Seventy-eight percent of all other named executive officers’ (NEOs’) target pay was performance- and/or stock-based that year, with the remaining 22% coming from base salary.

Base pay for Duke Energy executives is based on, “among other factors, job responsibilities, level of experience, individual performance, comparisons to the salaries of executives in similar positions obtained from market surveys, and internal comparisons”, and is reviewed annually by the company’s Compensation Committee. 

Duke’s long-term incentive (LTI) is the largest component of its executive compensation, consisting 70% of performance shares and 30% of restricted stock units (RSUs) in 2019. Performance shares made up 52%, and RSUs 22%, of the CEO’s target total direct compensation that year. For all other NEOs, performance shares were 41% of their target total direct compensation, and RSUs 17%.

The CEO was eligible to earn up to a 750% LTI as a percentage of her base salary in 2019; this figure ranged from 250% to 300% of base salary for all other NEOs. The Compensation Committee sets these LTI target opportunities annually, and in 2019, it increased them by 25 percentage points for five of Duke’s seven NEOs “to further close the gap between his or her TDC [total direct compensation] opportunity and market median.”

Performance shares are stock awards that vest at the end of a three-year period. For the 2019 to 2021 performance period, executives will receive these based on three criteria: 1) cumulative adjusted earnings per share (EPS), weighted at 50%; 2) relative total shareholder return (TSR) as compared to companies in the Philadelphia Stock Exchange Utility Sector Index, weighted at 25%; and 3) a safety measure that compares Duke to companies in the Edison Electric Institute Group 1 Large Company Index that also have gas or nuclear operations, weighted at 25%. For the 2017 to 2019 period, during which Duke utilized the same metrics to determine performance share awards, executives earned an aggregate 129.17% payout of their target amount of shares, in addition to dividend equivalents for that period.

RSUs are service-based awards that vest on the first three anniversaries of the grant date in equal parts if the executive remains employed at Duke.

Duke’s short-term performance awards fail to substantially incentivize ESG progress

Duke’s short-term incentive (STI) is an annual cash sum based on the achievement of yearly performance objectives, as established by the Compensation Committee. Short-term incentives made up 16% of the CEO’s target total direct compensation in 2019, and 20% of that for all other NEOs. Executives were eligible to earn up to a maximum 183.75% of their 2019 STI target opportunity, and all Duke NEOs ultimately took home at least 130%.

The single largest determinant of STI compensation was adjusted EPS, weighted at 50%. Executives were required to achieve a minimum $4.35 adjusted EPS to earn any STI payout. They exceeded that target, attaining a $5.10 result in 2019. Duke NEOs also exceeded the maximum customer satisfaction score – a metric accounting for 10% of short-term incentives – which the utility said was based on a mix of internal and external (i.e. J.D. Power) survey results. By keeping operations and maintenance (O&M) expenses – likewise responsible for 10% of STI – under the target threshold, executives achieved a full payout on this factor.

An additional 20% of STI was tied to individual objectives for each NEO in 2019. Duke does not provide further details about these objectives, other than to say they are divided across three equally-weighted categories: 1) growth and financial results; 2) “focus on operational excellence, optimize performance, and lead organization, with an emphasis on safety, reliability, and sustainable efficiency to achieve event-free operations”; and 3) “leverage Duke Energy’s leadership initiativies [sic] to foster a culture of innovation and execution, and to attract diverse and highly-engaged employees.” Of a possible 150% maximum payout for these objectives, CEO Good received 123.3%, and all other NEOs received 130%.

The remaining 10% of STI was determined by “operational excellence”, a composite of reliability, safety, and environmental metrics. Duke executives surpassed their overall “operational excellence” target for 2019, earning over a 120% payout. However, their achievement across goals within this category varied significantly – particularly with respect to the performance of Duke’s renewable energy versus fossil fuel operations. For instance, NEOs met only the bare minimum threshold for the company’s “renewables availability metric”, which measured the yield of actual versus expected generation for Duke’s wind and solar projects.

By contrast, Duke executives attained the maximum performance indicator for their “natural gas business outage factor”, which measured the number of gas outages affecting at least 100 customers. Duke NEOs also satisfied close to their target for “fossil/hydro optimized reliability” performance, “a measure of the linkage between financial investment and reliability of the fossil/hydro fleet”. They earned only a 50% payout of possible STI for the renewables availability metric, compared to 150% for the natural gas outage factor and 91% for fossil/hydro reliability.

The “operational excellence” category of Duke’s STI is substantially where the company has concentrated those executive incentives that relate to environmental, social, and governance (ESG) issues. Duke claims throughout its 2020 proxy statement that its executive compensation is aligned with ESG priorities – a growing concern for its investors in recent years. But none of Duke’s “operational excellence” metrics – such as nuclear reliability, renewables availability, or reportable environmental events – encourage executives to move the utility toward a cleaner power supply or to reduce emissions. This is the case despite Duke’s stated goal of net-zero carbon emissions by 2050, with an interim goal of a 50% reduction by 2030.

In addition to Duke NEOs’ uneven performance across the annual ESG-related metrics, these criteria determine very little of executives’ overall compensation. For instance, renewables availability determines less than 1% of short-term incentives – which themselves make up no more than 20% of Duke executives’ target total direct compensation. Instead, Duke’s executive incentives are heavily skewed toward metrics that produce corporate and shareholder profits, like EPS and TSR.

Duke Energy executive compensation does not encourage emission reduction.
Duke claims its performance metrics are aligned to its ESG strategy – but they do not encourage executives to move the utility toward a cleaner power supply or to reduce emissions. Source: Duke Energy 2020 proxy statement

Notably, Duke executives failed to satisfy the final component of the company’s STI plan in 2019: a “safety modifier”. Because of a “work-related employee fatality,” the utility cut all NEOs’ aggregate STI payouts by 5% (or about 1% of total direct compensation for NEOs). The safety modifier can be either positive or negative; if executives had affirmatively achieved several safety criteria, they would have been awarded an additional 5% in STI.

Duke’s executive compensation challenged by regulators, yet continues unabated amid COVID-19 crisis

In its most recent South Carolina rate case, which concluded in 2019, Duke sought to raise rates on its average residential customer by $14 a month, including a steep increase in fixed fees that the company charges. The state Public Service Commission’s (PSC’s) decision effectively halved Duke’s request, though the utility has since appealed that decrease to the South Carolina Supreme Court.

South Carolina regulators’ objection to the full rate hike included Duke’s proposed recovery of executive compensation costs from ratepayers. In a unanimously-approved PSC directive, Commissioner Thomas Ervin wrote:

the CEO and executive team demonstrated they were ‘tone deaf’ as to how a 238% increase in the Basic Facilities Charge [fixed fee] would have negatively and adversely impacted the elderly, the disabled, the low income and low use customers. It is one of the reasons I am recommending a 75% disallowance of the CEO’s excessively high executive compensation for South Carolina during test year 2017 and a 50% disallowance for the next three highest Company executives.

While Duke has maintained promised levels of executive compensation throughout the COVID-19 pandemic, it has threatened to disconnect customers who have been unable to pay their bills during the crisis. If Good took a 50% cut from her 2019 compensation – still earning over $7.5 million – the company would be able to wipe out the debt of over 28,163 residential Duke Energy customers in the Carolinas who were considered past due on their bills as of July 31, 2020, according to data Duke submitted to North Carolina regulators.

CEO compensation ranking among utilities studied, 20199/19
Compensation ratio: CEO to median employee, 2019122:1
Percent change in CEO compensation, 2017-2019-29.8% ($6,386,550)
Maximum payout of performance-based shares as a percentage of target, 2019200%
Is Duke’s executive compensation structure aligned with decarbonization?No. Duke’s short-term executive incentive plan includes a relatively small “nuclear reliability objective” and a “renewables availability metric”. These are “efficiency” measures, and in the case of the latter, merely evaluates actual versus expected renewable generation, i.e. “based on the wind speed measured at the turbine and […] solar intensity measures at the panels.” Incentivizing renewables availability does not encourage executives to move the utility toward a cleaner power supply or reduce emissions, despite Duke’s stated goal of net-zero carbon emissions by 2050, with an interim goal of a 50% reduction by 2030.
Is there evidence from SEC filings that Duke is using misleading financial metrics to determine executive compensation?No.
What key perquisites or benefits do Duke executives receive?Duke provides NEOs with use of company aircraft for business purposes; personal, spousal, and guest travel if reimbursed or via imputed income; up to $2,500 for a physical examination; up to $15,000 for tax and financial planning services over three years; preferred airline status; a matching charitable contributions program, totaling $82,000 for NEOs in 2019; tickets to athletic and cultural events for personal use; severance benefits up to twice the executive’s annual compensation and benefits; and pension benefits worth a total present value of $30.5 million as of March 2020.