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

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The executive compensation of PSEG, a utility providing electric and gas service across New Jersey and portions of New York City and Long Island, consists of four main components: 1) fixed base salary, 2) annual cash incentive, 3) equity-based long-term incentive, and 4) perquisites and retirement/post-employment benefits. Both the annual and long-term incentives are performance-based. 

The majority of the compensation mix is performance-based, with 70% of the CEO’s compensation comprised of long-term incentives, 17% of annual cash incentives, and 13% of base salary. The average pay mix for the other named executive officers (NEOs) is 53% long-term incentives, 20% annual cash incentives, and 27% base salary. 

The annual cash incentive is evaluated based on achievement of specific performance goals relating to four factors: corporate earnings per share (EPS), as determined by non-Generally Accepted Accounting Principles (GAAP); business unit earnings; business unit scorecard and strategic goals; and individual performance. Participants also have “People Strong” goals that support strategic initiatives, including environmental, social, and governance-related (ESG) priorities. These focus on the following categories: “People,” “Safe and Reliable,” and “Economic and Greener Energy,” which are benchmarked, when possible, against a group of peer utility industry companies which PSEG chooses and re-evaluates yearly. PSEG sets its targets according to the top quartile of that comparison, or the top decile for safety-related measures.

A larger percentage of the CEO’s compensation is tied to additional strategic objectives focused more broadly on “Operational Excellence,” “Financial Strength,” and “Disciplined Investments.” “Operational Excellence” pertains to 1) achieving top quartile performance in providing safe, reliable, economic and greener energy in comparison to its peer group; 2) continuously improving operations through a culture that recognizes diversity and inclusion; and 3) attracting, developing and retaining a high-performing and diverse workforce.

The long-term incentive plan is based upon performance share units (PSUs) and restricted stock units (RSUs), with a pay mix for NEOs of 70% PSUs and 30% RSUs. PSUs are measured over a three-year period based 50% upon total shareholder return (TSR) versus PSEG’s peers and 50% on return on investment capital (ROIC) versus its peers, with the opportunity to earn between zero and 200% of the target. RSUs “cliff vest” (i.e. the executive earns the right to the full benefit) at the end of three years, unless the executive is retirement-eligible, in which case RSUs vest one-twelfth per month over one year.

CEO compensation ranking among utilities studied, 201914/19
Compensation ratio: CEO to median employee, 201992:1
Percent change in CEO compensation, 2017-2019+23.1% ($2,453,112)
Maximum payout of performance-based shares as a percentage of target, 2019200%
Is PSEG’s executive compensation structure aligned with decarbonization?Not directly. PSEG has a general goal that mentions “greener energy” as part of its annual cash incentive, which itself forms no more than 20% of NEOs’ compensation. The company does not provide any specific detail on how it measures its “greener energy” metric. No incentives directly reward decreased carbon emissions.
Is there evidence from SEC filings that PSEG is using misleading financial metrics to determine executive compensation?Yes. PSEG excluded plant retirements and dispositions as “one-time items” in calculating its executive compensation for 2019. These exclusions were part of the adjusted operating earnings, which helped increase executive payouts.
What key perquisites or benefits do PSEG executives receive?These include an automobile stipend (and for the CEO, a driver), parking, reimbursement of relocation expenses, annual physical examinations, limited personal and spousal travel including use of aircraft (in accordance with company policy and with CEO approval), home security, limited personal technology, charitable contributions on behalf of individual executives, limited club memberships, limited reimbursement of credit card annual fees, limited personal entertainment, and non-qualified supplemental retirement benefits. No NEO received an individual perquisite in 2019 that exceeded the greater of $25,000 or 10% of the NEO’s total perquisite and personal benefit amount.