2014 compensation breakdown for Southern Company CEO Tom Fanning
Salary: $1,192,067
Stock awards: $3,383,968
Stock option awards: $2,255,999
Non-stock incentive plan compensation (under annual pay for performance plan): $1,713,600
Change in pension value: $2,899,537
Other compensation (perks and company contributions to employee savings plan and supplemental benefit plan): $70,822
Total: $11,515,993
Source: Southern Company filing with U.S. Securities and Exchange Commission
Southern Company’s board of directors
*member of the pay committee
Henry Clark*, senior advisor for Evercore Partners
David Grain*, managing partner of Grain Management
Veronica Hagen*, lead director for Southern, retired ceo of Polymer Group
William Smith*, chairman and CEO, Capital City Bank Group
Steven Specker*, retired CEO of Electric Power Research Institute
Tom Fanning, chairman and CEO of Southern Company
Juanita Powell Baranco, executive vice president and chief operating officer of Baranco Automotive Group
Jon Boscia, president of Boardroom Advisors
Warren Hood, chairman and CEO of Hood Companies
Linda Hudson, chairman and CEOceo of The Cardea Group
Donald James, retired CEO of Vulcan Materials Company
John Johns, chairman and CEO of Protective Life Corporation
Dale Klein, associate vice chancellor of research for the University of Texas System
Larry Thompson, retired general counsel of PepsiCo
Jenner Wood, chairman and CEO of SunTrust Bank Atlanta Division
Southern Company boosted the pay of its top executives and awarded bonuses to thousands of employees last year despite huge losses from a troubled plant construction project in Mississippi that normally would have cut the payouts.
The higher pay costs – which eventually could fuel higher utility bills for customers in Georgia – stem in part from Southern’s leaders changing pay-for-performance calculations to exclude the Mississippi project losses, essentially rewriting history. It was the second year in row that Southern diluted the effect of the project’s troubles in a way that increased pay.
The changes contributed to a 36 percent pay boost for Southern CEO Tom Fanning, to total compensation of $11.5 million for 2014, a year that also saw continued problems at the utility’s expansion at Plant Vogtle near Augusta. The majority of Fanning’s compensation jump, however, came from an increase in the accounting value of his pension rather than the changes in bonus calculations.
Southern investors saw a 25 percent total return last year, including stock gains and dividends. Profit rose almost 19 percent, to $2 billion. But stock gains over the last three years have lagged most utilities’ returns.
The pay disclosures came in a required annual filing to the U.S. Securities and Exchange Commission. In it, the company also disclosed changes for 2015 executive pay packages that will reduce the potential effect of losses or poor stock performance, and allow executives to accrue dividends on stock awards they haven’t yet earned.
Southern declined interview requests to discuss the filing. In an email, a spokesman said the company did not alter performance goals for 2014, though he acknowledged it excluded the Mississippi results in calculating bonus pay.
Growing cost overruns last year plagued the Mississippi coal gasification project, which is billions of dollars over budget. Regulators also issued repeated warnings about delays and higher costs for a nuclear expansion at Plant Vogtle. That project, led by Southern subsidiary Georgia Power, is more than three years behind schedule.
Still, the pay committee of Southern’s board of directors upped Fanning’s salary, stock and stock options awards and other incentives last year. Included in his pay was a $1.7 million bonus.
Pay for Georgia Power chief executive Paul Bowers jumped more than $2 million last year to a total of more than $5 million, including an $892,841 bonus, according to the filing. Bowers, whose rising pension value also accounted for most of the boost, reports to Fanning.
Extra pay for goals
Fanning and Bowers, like most of Southern’s more than 26,000 employees, get extra pay based on meeting or exceeding various company and individual performance goals.
Southern’s filing didn’t disclose exactly how much the changes in pay-for-performance calculations added to the pay for Fanning and Bowers. It noted that “almost all” Southern employees are eligible for the bonus program, and without the changes all employees — and particularly those at Mississippi Power — would have gotten significantly smaller payouts.
“Given … the high levels of achievement of other performance goals in 2014,” Southern said in the filing, “it was not appropriate to reduce payouts earned in 2014 under the broad-based program.”
Top executives’ pay increases could have been higher under the firm’s adjusted calculations. Southern’s board said it chopped Fanning’s bonus by 30 percent, and Bowers’ and other top executives’ by 10 percent or more, from the adjusted results because they were “more accountable” for problems in Mississippi.
An $868 million financial hit from the struggling Mississippi project would have reduced bonus pay for many Southern executives and employees.
For the purposes of calculating pay goal achievement, the compensation committee of Southern’s board excluded the project loss, which changed Mississippi Power’s bottom line from a loss of more than $300 million, after taxes, to a profit of more than $200 million, according to the filing.
“Oftentimes companies will back out one-time charges or unique charges” from executives’ pay formulas to avoid rewarding or dinging managers for things beyond their control, said Aaron Boyd, director of governance research at Equilar, an executive pay data firm.
Whether Southern’s move was appropriate, “that’s for someone else to decide,” he said.
Costs passed on
The action eventually could contribute to higher monthly bills for Georgia Power customers. The state’s largest utility is generally allowed to pass on rising operating expenses — including executive and employee pay costs — as a factor in future rates. Elected members of Georgia’s Public Service Commission vote on what to allow.
After two years of such ad hoc changes, Southern disclosed it is changing this year’s pay formulas, reducing the importance of hitting specific profit targets to get bonuses, especially for Fanning.
Likewise, the pay committee halved the weighting given to a goal to beat other companies’ stock returns over a three-year period in order for Southern’s executives to win bigger stock awards. In another change, the company said executives will get credit for dividends from the pending stock awards during those three years — a potential windfall of more than $100,000 a year for Fanning, based on his recent stock awards and Southern’s dividend rate.
In an email, the Southern spokesman noted that executives don’t collect the dividends until the shares are earned, and that the formulas were changed to “create better alignment between long-term pay and long-term performance.”
Southern executives forfeited 86 percent of shares awarded in 2012 because stock performance goals were missed.
Shareholder returns can be volatile, and companies are reducing the emphasis on them in executive pay formulas this year, said Boyd, by also linking future stock awards to other measures.
Meanwhile, Southern’s directors concluded the company’s actions on its increasingly delayed Vogtle nuclear project far exceeded performance goals last year, helping boost bonuses.
The board didn’t disclose how it came to that conclusion, other than to say it uses a variety of subjective and objective measures to assess “safe, compliant, and high-quality construction and licensing” as well as “prudent decision-making.”
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