Pollution Payday: Analysis of executive compensation and incentives of the largest U.S. investor-owned utilities
Dominion Energy is a utility company that provides electric and gas service in primarily the eastern and Rocky Mountain regions, including Virginia, North Carolina, and South Carolina. Dominion provides its named executive officers (NEOs) with compensation consisting of a base salary, annual incentive, and long-term incentive, plus additional perquisites and benefits.
Approximately 90% of CEO Thomas F. Farrell, II’s target direct compensation was performance- and/or stock-based in 2019, including 15% from short-term incentives and 75% from long-term incentives, with 10% of direct compensation comprised of base salary. (On July 31, 2020, Dominion announced changes to its leadership team. Effective October 1, 2020, Farrell will become Executive Chair, and Robert M. Blue, Executive Vice President and and co-Chief Operating Officer, will succeed him as CEO.) For all other NEOs, 76% of target direct compensation was performance- and/or stock-based, including 22% from short-term incentives and 54% from long-term incentives, with 24% of direct compensation comprised of base salary.
Base salaries were benchmarked to the median pay for executives at the 17 energy companies comprising Dominion’s Compensation Peer Group, and subject to additional factors like job performance and scope, background and tenure, retention and “market competitive concerns”, and the executive’s role in succession planning, according to the utility’s 2020 proxy filing.
Dominion’s 2019 annual incentive plan (AIP) was based on a formula factoring in executives’ base salaries, target award percentage (150% for CEO Farrell and 90% for all other NEOs), funding level, and payout goal score. Funding level was determined by executives’ achievement of consolidated operating earnings per share (EPS) goals in 2019, with a target of $4.05 per share. Executives could earn a 50% funding level for the AIP at operating earnings of $3.80, and up to a maximum funding level of 200% for exceeding their target. Dominion’s consolidated operating earnings for 2019 amounted to $4.24 per share, in excess of the target, for which all NEOs were awarded 110% AIP funding, at the discretion of the company’s Compensation, Governance, and Nominating (CGN) Committee.
The payout goal score component of the AIP was based on NEOs’ business segment financial performance, and progress toward operating and stewardship goals. All NEOs except Executive Vice President and co-Chief Operating Officer Diane Leopold were assigned a 100% payout score by the CGN Committee. Despite her oversight for most of 2019 of Dominion’s Gas Infrastructure Group, which missed a business segment financial goal, the Committee only reduced Leopold’s payout score to 99.1%. (Leopold served as Executive Vice President and President and CEO of the Gas Infrastructure Group until December 2, 2019. Effective October 1, 2020, she will become sole Chief Operating Officer, when Blue succeeds Farrell as CEO.) Dominion considered all NEOs to have met their company-wide safety, diversity and inclusion, and environmental goals, though it did not describe these in greater detail.
Lastly, Dominion’s long-term incentive program in 2019 consisted of 50% restricted stock with time-based vesting, and 50% performance-based cash awards. Long-term incentives were based on similar factors to those underpinning base salary, with the largest increases for NEOs who had been promoted. Restricted stock awards made in 2019 will vest in 2022, with NEOs also receiving dividends during that period.
The 2019 long-term cash performance grants will be based on the three-year period through 2021, with a potential payout ranging from zero to 200% for each NEO on a denominated target dollar value. The performance grant payouts are determined equally by 1) Dominion’s total shareholder return (TSR) – which is the difference between a share of its common stock’s value at the start and end of the three-year period, plus dividends paid as if they were reinvested – relative to companies in its 2019 Compensation Peer Group, and 2) the company’s return on investment capital (ROIC), which is Dominion’s total return divided by the average capital invested during the performance period. In determining the 2019 performance grants, this first criterion may be supplemented by the achievement of a strong absolute TSR and/or price-to-earnings (P/E) ratio, which is the ratio of the company’s stock price to its EPS.
As the previous three-year performance period ran from 2017 to 2019, Dominion NEOs received their 2017 performance grants in January 2020, earning 91.4% of the target amount. These grants were also based on relative TSR – as modified by absolute TSR and P/E ratio – and ROIC. Because of James R. Chapman’s elevation to Executive Vice President, Chief Financial Officer, and Treasurer part way through the performance period, he received his 2017 performance grant in the form of common stock rather than cash, but in accordance with all of the same performance goals and terms. (Dominion Executive Vice Presidents are required to own either 35,000 shares of stock, or shares with an equivalent value to five times their salaries, whichever is the lesser. NEOs must have attained 50% of their share ownership guidance by the time of the award in order to receive a cash-based performance grant.)
|CEO compensation ranking among utilities studied, 2019||4/19|
|Compensation ratio: CEO to median employee, 2019||119:1|
|Percent change in CEO compensation, 2017-2019||+11.4% ($1,761,273)|
|Maximum payout of performance-based shares as a percentage of target, 2019||200%|
|Is Dominion’s executive compensation structure aligned with decarbonization?||No. Dominion’s executive compensation policy refers to a vague “company-wide environmental goal” as well as “business segment environmental goals,” but does not further explain these. There are no explicitly stated executive incentives related to reducing carbon emissions, despite Dominion’s stated goal of net-zero carbon and methane emissions by 2050, with additional interim goals for cutting its methane emissions.|
|Is there evidence from SEC filings that Dominion is using misleading financial metrics to determine executive compensation?||No.|
|What key perquisites or benefits do Dominion executives receive?||Dominion offers NEOs business and limited personal travel on corporate aircraft; company vehicles; a $9,500 annual allowance for health club memberships, wellness programs, physical exams, and financial and estate planning; and retirement, health, and death benefits. The CEO is entitled to conduct all of his personal travel – amounting to $134,660 in 2019 – and unlimited guest travel aboard company aircraft. Board members receive paid expenses for spouses to accompany them to two meetings a year; can, along with their spouses, accompany NEOs on the corporate aircraft for both business and personal travel; and are eligible for a matching charitable donations program.|