Pollution Payday: Analysis of executive compensation and incentives of the largest U.S. investor-owned utilities
FirstEnergy
FirstEnergy Corporation’s regulated electric distribution companies serve customers in Maryland, Ohio, New Jersey, Pennsylvania, and West Virginia. The compensation mix for FirstEnergy’s CEO in 2019 was 87% performance-based, and 13% base salary. Long-term incentives were 72% of total compensation and short-term incentives were 15%.
For other named executive officers (NEOs), the compensation mix was 74% performance-based and 26% base salary. Long-term incentives were 54% of total compensation, and short-term incentives were 20%.
FirstEnergy’s executive incentive compensation plans prioritize earnings over ESG goals
FirstEnergy’s long-term incentive program for 2019 to 2021 is based on two equally weighted metrics: operating earnings per share (EPS) growth and average capital effectiveness.
The utility’s short-term incentive program (STIP) “provides annual cash awards to executives whose contributions support the achievement of the Company’s identified financial and operational KPI [Key Performance Indicators] goals, which are linked to the Company’s business strategy and corporate objectives, including ESG-related [environmental, social, and governance] goals.”
Performance metrics for the STIP are weighted as follows: operating earnings comprise 70% for the CEO and 60% for most other NEOs, operational 10% (except CEO), safety 15%, and diversity 15%.
FirstEnergy has a goal of reducing carbon dioxide emissions by 90% from 2005 levels by 2045, and said in its 2020 proxy statement that it “achieved an 80% reduction of carbon dioxide (CO2) emissions as a result of its transformation to a high-performance, pure-play regulated utility.”
FirstEnergy’s carbon reduction goal does not cover the power it purchases, which accounted for 30% of its carbon emissions in 2017. The utility’s carbon reduction claims also take credit for the loss of much of its fossil fuel generation during the bankruptcy of its former subsidiary FirstEnergy Solutions, CO2-emitting generation that is now largely owned by a new company called Energy Harbor that emerged from the bankruptcy.
“To reinforce and align our executives with these objectives, a portion of our annual incentive cash program is tied to ESG related goals, including Diversity & Inclusion, environmental and safety,” FirstEnergy said in its 2020 proxy statement.
No portion of FirstEnergy’s incentives is tied specifically to decarbonization. Performance metrics for FirstEnergy’s STIP include an operational component weighted at 10%, which is based on six equally weighted metrics, of which environmental measures account for only 1.67%.
Environmental performance metrics are limited to “environmental excursions and Notices of Violations (NOVs)”, which measure “issues related to air emissions, water discharges or other unauthorized releases from facilities, that exceed the allowable limitations, conditions or deadlines established in the facilities’ environmental permits and applicable NOVs issued by a Federal, State or Local Regulatory Agency for the violation of an environmental law or regulation.”
In other words, FirstEnergy sets a low bar for executives on environmental performance, simply requiring compliance with the law, rather than meeting corporate targets for reducing emissions.
Metrics that could be used for performance-based awards under FirstEnergy’s 2020 executive compensation plan include, “Shaping legislative and regulatory initiatives and outcomes.”
FirstEnergy recently publicized how it won an award from the Edison Electric Institute for its role in passing a 2019 bill in its home state of Ohio that included subsidies for coal plants, and that rolled back the state’s renewable energy and energy efficiency standards for electric utilities. It has also supported the Trump administration’s rollback of the Environmental Protection Agency’s limits on CO2 emissions from power plants.
Executives benefit from FirstEnergy’s exclusion of negative outcomes from performance measures
FirstEnergy pay-for-performance programs employ non-GAAP performance metrics, which tend to result in higher performance numbers than Generally Accepted Accounting Principles (GAAP) metrics.
Financial results for FirstEnergy based on GAAP show earnings per share of $1.70 for 2019 and $1.99 for 2018, compared to non-GAAP operating EPS of $2.58 for 2019 and $2.59 for 2018.
“Special Items” excluded from non-GAAP performance metrics account for the significant difference in earnings measurements. These special items include FirstEnergy’s “exit of competitive generation” through the bankruptcy of its subsidiary FirstEnergy Solutions, which emerged from bankruptcy in 2020 as a separate company called Energy Harbor.
FirstEnergy’s 2020 proxy statement describes many additional items excluded from calculations of non-GAAP performance metrics used in calculations of executive pay-for-performance programs, including operating earnings, capital effectiveness index, funds from operations (FFO) to adjusted debt index, and operating EPS.
Among the exclusions is “the impact of the Ohio Distribution Modernization Rider,” a charge that cost customers in Ohio over $150 million per year, and which was struck down by the Ohio Supreme Court in 2019. The Environmental Defense Fund described the charge as “an illegal bailout of FirstEnergy’s uneconomic coal and nuclear plants.” Other exclusions include the impact of tax reform-related refunds to customers that “exceeded budgeted amounts,” as well as the impacts of legal reserves or related expenses. Transmission outage frequency, another performance measure, excludes, “Scheduled outages, emergency forced outages, and operational outages.”
“In establishing performance measures, the [Compensation] Committee may provide that any financial factor that in whole or in part comprises any performance measure will be determined in accordance with U.S. generally accepted accounting principles (later referred to as GAAP) or that any such financial factor may be non-GAAP (i.e., that such financial factor may be adjusted to exclude from its calculation one or more GAAP or non-GAAP items),” according to FirstEnergy’s 2020 proxy statement.
FirstEnergy’s proxy statement provided details about its 2020 incentive compensation plan, including a “non-exhaustive list of performance measures that could be used for performance based awards” under the plan.
FirstEnergy justifies its executive compensation by comparing to that of much larger companies
One of the common measures utilities employ to determine executive compensation is comparison to peer companies. FirstEnergy’s Compensation Committee packed its 2019 peer group with larger enterprises, most from outside the utility industry. The Compensation Committee then approved certain NEOs an increase in compensation “to continue to align with the Blended Median, in the aggregate (within the 85% to 120% competitive range)”.
FirstEnergy’s net income was $908 million in 2019. Yet companies in its “general industry” peer group serving to benchmark its executives’ compensation include the following – all of which earned much more income, and whose CEOs made millions more than FirstEnergy’s CEO:
Table: Several companies that are part of FirstEnergy’s “general industry” peer group skews its executive compensation
| Company | Net income, 2019 | Total CEO compensation, 2019 |
|---|---|---|
| FirstEnergy | $908 million | $14.7 million |
| Honeywell International | $6.1 billion | $18.9 million |
| Raytheon Technologies | $5.9 billion | $21.5 million |
| Eli Lilly & Co. | $4.6 billion | $21.2 million |
| Qualcomm | $4.3 billion | $23 million |
| CSX | $3.3 billion | $15.5 million |
| Norfolk Southern | $2.7 billion | $16.6 million |
| Illinois Tool Works | $2.5 billion | $15.4 million |
| Northrop Grumman | $2.2 billion | $20.3 million |
| Ecolab | $1.5 billion | $19.8 million |
None of these companies include FirstEnergy in their own peer groups to determine compensation.
FirstEnergy’s decreased its CEO-to-employee pay ratio by eliminating employees of its bankrupt competitive subsidiaries from the analysis
Investor-owned utilities report annually on their CEO pay ratio, which illustrates the gap between the annual total compensation for a utility’s CEO and average compensation for other employees of the company. Large swings in the annual CEO pay ratio reported by utilities may be due to changes in CEO compensation, but also to other factors like corporate restructurings.
FirstEnergy reported its highest CEO pay ratio of 115:1 in 2018, a year in which CEO Charles E. Jones received his lowest annual compensation for the three-year period between 2017 and 2019. In 2018, FirstEnergy reported CEO compensation of $11.1 million and median employee compensation of $96,805.
The previous year, in 2017, FirstEnergy reported its highest annual CEO compensation of almost $15.3 million for Jones, but a lower CEO pay ratio of 90:1. The median employee compensation FirstEnergy reported for that year was nearly double, at $170,299.
In 2018, FirstEnergy excluded all employees in its Competitive Energy Services businesses from its median employee compensation analysis due to the “deconsolidation” (i.e. bankruptcy) of its subsidiaries, FirstEnergy Solutions and the FirstEnergy Nuclear Operating Company. Those subsidiaries later emerged as a new company called Energy Harbor, and the median compensation of the employees left at FirstEnergy fell.
Perquisites include personal use of corporate aircraft
“The Company does not provide excessive perquisites to our NEOs,” FirstEnergy says in its 2020 proxy statement.
However, perquisites offered by FirstEnergy include personal use of corporate aircraft for NEOs and Board members:
“In 2019, our NEOs could use the corporate aircraft for limited personal use. Mr. Jones is authorized to use either a commercial carrier or our corporate aircraft for any business or personal travel at his discretion. With CEO approval, other executives, including the NEOs, may from time to time use our corporate aircraft for personal travel, which may include family travel. We have a written policy that sets forth guidelines regarding the personal use of the corporate aircraft by executive officers and other employees in accordance with the IRS regulations and customary compensation practices.”
Personal aircraft usage in 2019 was valued at $59,308 for Jones, and $14,795 for Senior Vice President and CFO Steven E. Strah.
In 2017, Ohio state representative Larry Householder flew to Donald Trump’s presidential inauguration on board FirstEnergy’s corporate plane.
“The trip marked a new period of cooperation between Householder and FirstEnergy Corp. as they worked to save the company’s struggling coal and nuclear plants in Ohio and Pennsylvania,” E&E News later reported.
Three years later, Householder would be removed as speaker of the Ohio House of Representatives and indicted on federal racketeering charges. Federal investigators allege Householder and several other defendants secretly used $60 million from FirstEnergy to elect Householder as speaker, and then enact a $1 billion bailout that allowed a bankrupt subsidiary of the utility to cancel plans to deactivate two nuclear plants and a coal plant. FirstEnergy also benefits from a decoupling mechanism enacted along with the bailout, which has helped shield the company from the economic impacts of the COVID-19 epidemic, even as it prepares to resume disconnections for customers struggling to make ends meet.
Other compensation for 2019 also included charitable matching contributions made by the FirstEnergy Foundation that ranged from $2,500 to $2,600 for Jones and several other NEOs. A total of $5,000 in charitable matching contributions was reported for Leila Vespoli, who retired in 2019 and was previously Chief Legal Officer and Executive Vice President of Corporate Strategy and Regulatory Affairs.
FirstEnergy also made matching charitable contributions that ranged from $3,000 to $5,000 on behalf of several members of its Board of Directors in 2019.
| CEO compensation ranking among utilities studied, 2019 | 98:1 |
| Compensation ratio: CEO to median employee, 2019 | -3.9% ($597,226) |
| Percent change in CEO compensation, 2017-2019 | -3.9% ($597,226) |
| Maximum payout of performance-based shares as a percentage of target, 2019 | No. FirstEnergy says that its annual incentive program is tied to environmental goals, but executive compensation policies do not consider greenhouse gas emissions reductions; instead the environmental metrics are focused on rewarding executives for abiding by legal air and water pollution laws and permits. |
| Is FirstEnergy’s executive compensation structure aligned with decarbonization? | No. FirstEnergy says that its annual incentive program is tied to environmental goals, but its executive compensation policies do not consider greenhouse gas emissions reductions; instead the environmental metrics are focused on rewarding executives for abiding by legal air and water pollution laws and permits. |
| Is there evidence from SEC filings that FirstEnergy is using misleading financial metrics to determine executive compensation? | Yes. FirstEnergy excluded several “special items” from performance metrics like non-GAAP operating earnings and EPS, including its “exit of competitive generation” through the bankruptcy of FirstEnergy Solutions, which emerged in 2020 as a separate new company called Energy Harbor. These exclusions yielded a non-GAAP EPS in 2019 that was significantly higher than the standard GAAP calculation. Non-GAAP operating EPS accounted for half of the performance measures used to calculate FirstEnergy’s long-term incentives, and also constituted 70% of short-term incentive measures for the CEO and 50 to 60% for other NEOs. |
| What key perquisites or benefits do FirstEnergy executives receive? | Executives are allowed “limited” personal use of corporate aircraft, and are eligible for charitable gift matching. |