David DAlessandro, chief executive officer of John Hancock Financial Services, Inc., Boston, has come under fire from two industry analysts for receiving a pay raise in 2002 that they maintain seems out of proportion to recent company performance.
DAlessandros total direct compensation last year was more than $21.7 million, up almost 164% over the year before, according to a recent analysis of executive compensation in the life insurance industry by Citigroup Smith Barney, New York.
Colin Devine, a life insurance industry analyst for Smith Barney, said in the report that Hancock had the highest-paid management team in the industry. All told, its top five executives were paid more than $42 million last year, 77% more than top executives at Prudential Financial Corp., Newark, N.J., which was the second highest-paid executive team. Prudentials top five earned a total of just under $24 million last year, Smith Barney reports.
“Making Hancocks executive compensation plan even more difficult to understand was reconciling its 121% increase with a 15.4% drop in net income as well as a 32.4% decline in JHFs share price,” Devine observed.
He noted that the stock prices of life insurance carriers tracked by Smith Barney declined an average of 22.4% last year.
Prudentials stock price fell only 4.4% last year, its first full year following its initial public offering, Devine points out in his report. Its net income rose more than 140%, while the pay of its top executive, Arthur Ryan, actually fell 3.4% in that time.
Another analyst, Vanessa Wilson, managing director of Deutsche Bank Securities Inc., New York, downgraded Hancock from a buy to a hold because of her unanswered questions about executive pay at the company.
“We cannot recommend investors add new money to this stock until the pay-for-performance issues are clarified,” commented Wilson.
A Hancock spokesman declined to comment on the controversy, while the chairman of the companys executive compensation committee was unavailable. The committee head, Richard Syron, chairman of Thermo Electron Corp., Waltham, Mass., was recovering from an unspecified medical procedure, a Thermo Electron spokesman said.
In an interview last week with the Wall Street Journal, Syron said his committee wanted to reward Hancocks top executives for the big increase in the companys stock price in the first year following its IPO in January 2000. Those executives did not qualify for stock options in that time period, he noted.
Between the IPO and the end of 2002, the companys share price climbed 64%.
In a telephone conference with analysts earlier in May, DAlessandro pointed out that considerations for executive pay increases are broader than year-to-year performance.
He also called it a “fallacy” that he and other company executives couldnt be rewarded for the IPO success and valuation.
“Thats not true. We couldnt be rewarded that year. But going back, the compensation committee felt it was important to look at the IPO success and rewarded the top three executives for that.”
From the time of the IPO to last January, Hancocks stock was still up 58% while the S&P index was down 37% in that same period, DAlessandro pointed out.
Smith Barneys Devine, who participated in that teleconference, retorted that in the three months leading up to that teleconference, Hancocks loss forecast had gone up 60%, due to poor company investment performance.
Devine also questioned the incentive compensation Hancock paid to Michael Bell, senior vice president of its retail unit. Bell wasnt on staff at the time of the IPO yet was the third highest-paid executive at the company. (Bell earned total compensation last year of almost $6.5 million, according to an analysis by Deutsche Banks Wilson.)
At that point in the teleconference, DAlessandro told Devine he wanted “to take it off line,” apparently implying he wanted to discuss Bells pay with the analyst privately.
“Nows not the time,” he said.
The CEO added that the company would soon eliminate its long-term incentive plan and retention bonuses for top executives.
Jason Adkins, a Boston attorney and frequent Hancock gadfly, says he took issue with the companys executive pay packages during the companys annual meeting May 12.
Adkins says he questioned DAlessandro about the apparent “incompatibility” between company performance and executive pay and noted that Prudential and Met Life paid substantially less to their CEOs, even though they are larger.
“I didnt get satisfactory answers,” he says. “It is our view that the compensation is not consistent with the plan of reorganization.”
That plan, a roadmap to the companys demutualization and IPO, barred incentive-based compensation for a year after the IPO, Adkins notes.
“Yet thats what theyve done,” he says. “Theyve given incentive compensation for that year.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, May 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.