Pollution Payday: Analysis of executive compensation and incentives of the largest U.S. investor-owned utilities
NextEra Energy is a utility company based in Florida that serves customers in that state via its retail utility, Florida Power and Light (FPL), and which develops renewable energy, natural gas, energy storage and transmission projects around the U.S. NextEra refers to its executive compensation as “pay for performance” with a focus on “shareholder value creation” and “executive retention,” emphasizing performance-based compensation and de-emphasizing fixed compensation. Named executive officer (NEO) direct compensation has three principal elements: base salary, annual incentive awards, and long-term equity compensation, as overseen by the Compensation Committee and reviewed by the Executive Compensation Review Board. NextEra Energy CEO and President James L. Robo and several other NEOs sit on the latter body.
Robo received more than $62 million in total compensation from 2017 to 2019 and is the highest-paid CEO of all the utilities in this report over that period. NextEra Energy likewise reported the highest average CEO pay ratio at 164.3:1 for 2017 to 2019.
Ninety percent of Robo’s compensation is performance-based – that is, tied to financial and operational metrics – with 75% coming in the form of long-term equity and 15% via an annual incentive. The remaining 10% of compensation is his base salary. Of the 15% annual incentive, 50% is tied to financial metrics and 50% is tied to operational metrics, as dictated by the Compensation Committee.
Per NextEra’s 2020 proxy statement, the financial metrics are based on “enduring standards indicative of sustained performance—adjusted EPS [earnings per share] growth and adjusted ROE [return on equity]—as compared to the financial performance over the ten-year period ended on December 31, 2019 of the companies included in the S&P 500 Utilities Index.”
Operational metrics include items such as operations and maintenance (O&M) goals, generation availability, customer satisfaction, and safety standards, each with an individual weight towards the total incentive.
NextEra executives failed to meet some performance goals in 2019. For example, NextEra listed its Nuclear industry composite performance index as an “aggressive” goal and reported it as “missed”. NextEra reported the goal for “performance under FERC [Federal Energy Regulatory Commission] and NERC [Nuclear Energy Regulatory Commission] reliability standards” as having “no significant violations,” while also reporting the outcome as a “partially met goal” – indicating that some significant violations did occur. As these missed goals comprise only one line item within a percentage of a percentage of the total compensation package, even major safety or environmental violations would have minimal impact on NextEra NEOs’ annual incentive awards.
NextEra uses an industry peer group in determining executive compensation that includes 14 energy services companies and 21 other publicly-traded companies, ranging from Kellogg to 3M. NextEra outlines a checklist of broad requirements that industry peers must meet in order to be considered in the peer group. NextEra references industry awards to justify its NEO compensation, despite the fact that these awards are effectively self-selected, chosen by peer executives within the industry.
NextEra’s long-term performance-based equity compensation mix includes performance shares, performance-based restricted stock, performance-based restricted common units (NEP), and stock options. The percentage mix of the long-term equity compensation is fairly consistent for all NEOs’ performance shares and stock options, at 60% to 65% and 20% to 25%, respectively. Performance-based restricted stock ranged from 3% to 20% of NEOs’ long-term compensation, and performance-based restricted NEP common units ranged from none to 7%.
Payouts from the three-year 2017 to 2019 performance period were based on factors determined by the Compensation Committee. Fifty-two percent was based on adjusted EPS growth and adjusted ROE, 35% on total shareholder return (TSR) relative to the companies in the S&P 500 Utilities Index, and 13% on operational measures. The operational measures included metrics such as three-year average employee safety, nuclear industry composite performance index (combined – and missed in 2019 – for FPL and NextEra Energy Resources’ nuclear facilities), three-year average equivalent forced outage rate for fossil and renewable generation, on-time execution of both renewable energy and interstate gas pipeline construction projects, and FPL’s three-year average service reliability. NextEra does not include decarbonization as an incentive criterion nor does it refer to it as a guiding principle for other criteria.
In addition to direct compensation, NextEra provides a number of extra executive perquisites to its NEOs, including access to private corporate aircraft, supplemental retirement plans, professional legal and tax services, hospitality memberships, and home security.
NextEra also has a stock ownership and retention policy which dictates that within three years after appointment to their position, NEOs are expected to own NextEra Energy common stock with a value equal to a multiple of their base salaries: seven times the base for the CEO, three times for senior executives, and equal to the base for all other officers.
While NextEra has maintained promised levels of executive compensation throughout the COVID-19 pandemic, it plans to begin disconnecting customers in October 2020 who have been unable to pay their bills during the crisis. If NextEra’s Robo took a 50% cut from his 2019 compensation – still allowing him to take home over $10 million – the company could use that money to wipe out the debt of 43,581 Florida Power & Light customers who were in arrears as of the end of June 2020, according to data NextEra submitted to Florida regulators.
|CEO compensation ranking among utilities studied, 2019||2/19|
|Compensation ratio: CEO to median employee, 2019||168:1|
|Percent change in CEO compensation, 2017-2019||+16.3% ($3,065,904)|
|Is NextEra’s executive compensation structure aligned with decarbonization?||No.|
|Maximum payout of performance-based shares as a percentage of target, 2019||200%|
|Is there evidence from SEC filings that NextEra is using misleading financial metrics to determine executive compensation?||No.|
|What key perquisites or benefits do NextEra executives receive?||Executives’ “personal benefits” are extensive, ranging from use of company-owned private airplanes and vehicles to home security monitoring systems, financial planning, legal services, hospitality memberships, and supplemental retirement plans. For instance, NextEra spent over $130,000 on NEO vehicle expenses in 2019.|