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October 28, 2013 at 09:38 AM
If one judges CEO pay solely on the basis of total compensation reported in SEC-filed proxy statements, then the pay package of Prudential Financial Chief Executive Officer John Strangfeld, the top earner in NU’s inaugural November 2013 feature on CEO compensation, clearly is a cut above the rest.
In 2012, Prudential recorded summary compensation table pay of $30.7 million for Strangfeld. Accounting for changes in the value of the equity portion of the package, actual or “realizable” pay was $29.9 million, a 46.2 percent increase over the $20.5 recorded in 2011.
The 2012 amounts are well above what CEOs of other U.S. publicly held life insurers enjoyed that year. A review of NU’s Top 25 list shows the summary compensation table pay of the next three highest paid CEOs within Prudential’s 21-company peer group — those of Ameriprise Financial, Allstate Corp. and AFLAC — at $17.8 million, $17.1 million and $13.8 million, respectively. Realizable pay of Ameriprise’s Cracchiolo, the highest earner of the three, stood at $19.2 million last year.
Is Strangfeld worth what Prudential is awarding him? Opinions differ. Institutional Shareholder Services Inc., a proxy advisory firm, believes the executive’s pay is high relative to company performance, though in fact ISS expressed “cautionary support” for the CEO’s pay package in its proxy analysis for shareholders.
Others believe that ISS’s pay-for-performance assessment warranted disapproval.
“Strangfeld’s pay last year was 2.45 times the median compensation of his peers,” says Compensation Resources Managing Director Paul Dorf, citing the ISS report. “Considering that the company had lackluster performance, as ISS asserts, I would certainly question why Prudential paid him so much.”
Compensation consultant Steve Hall, a managing director of Steve Hall & Partners, disagrees.
“The Compensation Discussion & Analysis in Prudential’s 2013 Proxy Statement is much more valuable than an ISS report for assessing pay because you gain a better understanding there as to what the company was doing and why,” he says. “And a review of the CD&A doesn’t suggest to me there was a big performance drop-off last year.”
What the CD&A says
Indeed, Prudential’s CD&A points to a number of accomplishments that factored into Strangfeld’s compensation. Among them: gains in operating return on average equity (up two percent); after-tax adjusted operating income (up four percent); annual dividends per share of common stock (up 10 percent); book value per share (up 15 percent); and assets under management (up 18 percent).
In assessing Strangfeld’s performance, Prudential also factored in the attainment of certain objectives aimed at strengthening the company’s competitive position. Last year, for example, the insurer inked pension risk transfer transactions with General Motors and Verizon Communications, resulting in the acquisition of $33 billion of annuity account values.
The company also purchased Hartford Financial’s Individual Life Insurance business, which boosted Prudential’s Individual Life Insurance business by 700,000 policies with in-force face amounts of $135 billion. The company also cites in Strangfeld’s performance evaluation a 26 percent rise in retirement account values to a record high of $289.8 billion; a 28 percent gain in international insurance annualized new business premiums; plus Strangfeld’s participation in the “successful” leadership transition for Prudential’s Individual Life, Group Insurance and Annuities businesses.
“Prudential’s CD&A seems to indicate that 2012 was a strong year in terms of company performance and that Mr. Strangfeld did a great job,” says Hall. “Everything looks rosy in terms of the comparative charts.
“The question is, why are Prudential’s earnings off so badly?” he adds. “That’s a key issue, in part because net income is a variable the CEO may not have real control over.
“Without knowing the reasons for the decline, I beg to differ with any compensation consultant who says Strangfeld shouldn’t have received the pay package he did,” Hall adds.
An analysis of the income statement in Prudential’s 2013 annual report (10K) pegs the company’s net income in 2012 at $469 million or $0.94 diluted earnings per share of common stock attributable to Prudential’s financial services businesses. This is down 87 percent from the $3.6 billion or $6.99 per diluted share recorded for the year earlier period.
Prudential’s 10K attributes the decline in earnings to a host of factors. Among them: Lower pre-tax earnings of $2.4 billion resulting from foreign currency exchange rate movements; “unfavorable variance[s]” of $666 million and $639 million, respectively, caused by (1) changes to the value of embedded derivatives and related hedge positions associated with certain variable annuities; and (2) adjustments to deferred policy acquisition and other costs, plus the reserves for Prudential’s long-term care products.
Additionally, Prudential was unable to secure last year the same large pre-tax gains and benefits the company enjoyed in 2011. For example, a $237 million pre-tax benefit in 2011 dipped to $60 million in 2012, reflecting partial sales of the company’s indirect interest in China Pacific Insurance Group.
In written responses to questions posed by NU, Prudential did not specifically address decisions Strangfeld made that may account for the reduced year-over-year earnings. But the company made clear that the less favorable 2012 financial results are indeed reflected in his direct compensation: Total compensation less his pension and deferred compensation.
Last year, Strangfeld received an annual incentive award (bonus) of $5.6 million, about 1.005 times his target award amount. The payout compares to a bonus of $6.3 million for 2011, representing an 11 percent decrease. Of the $5.6 million, $1.7 million (30 percent of the award) was mandatorily deferred into Prudential’s Book Value Performance Program; the balance was paid in cash.
“The 30 percent mandatory deferral is a very good thing,” says Dorf. “If Prudential found that something about Strangfeld’s compensation wasn’t kosher, they potentially could recover the money through a provision of the 2010 Dodd-Frank Act known as clawback.
“However, considering that the 30 percent supplements a $3.9 million cash bonus, I believe the annual incentive awards are exorbitant given the company’s performance,” Dorf noted.
Delving into the metrics
Ascertaining whether pay is indeed in alignment (or not) with performance requires an understanding of the performance metrics the company employs to fix compensation. Prudential uses earnings per share (on an adjusted operating earnings basis) to determine pay awarded through the insurer’s short-term incentive plan. Prudential also considers performance in terms of absolute return on equity (ROE), growth in book value per share, plus EPS relative to the North American life insurer subset of its compensation peer group.
Prudential’s long-term incentive program likewise ties executive pay to the achievement and maintenance of key performance metrics. Thus, performance shares are awarded for sustaining a 13 to 14 percent ROE and increases in the value of Prudential’s stock. Book value units reward increases in book value per share. And stock options reward increases in the market value of company stock.
Prudential, however, qualifies another performance metric that factored into ISS’ analysis of Strangfeld’s compensation: Relative total shareholder return or TSR, which the company describes as a volatile point-in-time snapshot.
“Our relative TSR in 2012 was low in part due to the life insurance sector losing favor with investors in a sustained environment of low interest rates,” Prudential states. “In addition, several peer companies that historically were poor performers experienced partial recoveries from low bases in 2012.
