Pollution Payday: Analysis of executive compensation and incentives of the largest U.S. investor-owned utilities
PPL is a utility company that serves electric and gas customers across Pennsylvania and Kentucky. PPL also serves electric customers in the United Kingdom. PPL’s executive compensation consists of three elements: base salary, annual incentive awards, and long-term incentive awards.
Base pay made up 15% of former CEO William H. Spence’s compensation, 28% of the CFO’s compensation, 23% of the COO’s compensation, and 29% of the compensation for all other named executives officers (NEOs) in 2019. (Effective June 1, 2020, former PPL President and Chief Operating Officer Vincent Sorgi succeeded Spence as President and CEO of PPL Corporation. Spence became Non-Executive Chairman of PPL’s Board of Directors.)
Annual incentive awards for all NEOs, except Chairman of the Board, Chief Executive Officer and President of LG&E and KU Energy Paul Thompson, and President of PPL Electric Utilities Corporation Gregory Dudkin, were determined by corporate earnings per share (EPS), weighted at 80%, and corporate operational goals, weighted at 20% in 2019. The operational goals comprise items such as customer satisfaction, system reliability, and forced outage rate. The corporate EPS target for 2019 was $2.40.
Thompson and Dudkin are the executives in charge of PPL’s electric subsidiaries. Their annual incentive awards were determined by corporate EPS, weighted at 40%; corporate operational goals, weighted at 10%; net income for their subsidiary, weighted at 40%; and subsidiary operational goals, weighted at 10% in 2019. The subsidiary operational goals comprised items such as customer satisfaction and system reliability. The 2019 net income goal was $441 million at Thompson’s subsidiary and $445 million at Dudkin’s.
The annual incentive awards made up 20% of Spence’s compensation, 21% of the CFO’s compensation, 22% of the COO’s compensation, and 23% of the compensation for all other NEOs in 2019.
The long-term incentive rewards executives with ownership of stock based on return on equity (ROE), which is weighted at 40%, and total shareholder return (TSR) over a three-year period, which is weighted at 40%. The remaining 20% of the long-term incentive is an automatic, non-performance based grant of stock which vests over a three-year period.
The long-term incentive makes up 65% of the CEO’s compensation, 51% of the CFO’s compensation, 55% of the COO’s compensation, and 48% of the compensation for all other NEOs.
The Board of Directors’ Compensation Committee has the responsibility to review and evaluate the performance of the CEO and other executive officers of the company, including setting goals and objectives, and approving their compensation, including incentive awards.
The Compensation Committee retained Frederic W. Cook & Co., Inc. as its independent executive compensation consultant.
PPL uses the Philadelphia Stock Exchange Utility Index (UTY) to determine its TSR performance. TSR determines a portion of PPL’s long-term incentive award.
PPL bases 40% of its NEOs’ long-term incentives on ROE, which measures how much a utility is allowed to earn in profits on capital expenditures, and is determined by state regulators.
PPL’s subsidiaries have some of the highest ROEs in the nation, and its compensation policy incentivizes executives to lobby regulators for even higher regulated rates of return, as well as to increase capital expenditures to attain those rates. In 2019, PPL increased the ROE achievement required for executives to receive their target payout from 10% to 11%, and increased the ROE achievement required for their maximum payout from 14% to 15%. Additionally, for performance periods beginning in 2020, PPL added a requirement that PPL’s ROE from ongoing operations be in the top half of companies in the UTY in order for the ROE-based performance units to pay above target.
PPL said that its Electric subsidiary exceeded its 2019 ongoing net income target primarily due to “higher electricity usage and effective cost management” (emphasis added). In other words, some of PPL’s compensation structure functionally disincentivized its NEOs from investing in energy conservation and efficiency.
PPL has established a voluntary corporate goal to reduce CO2 emissions 80% from 2010 levels by 2050, yet the company does not incentivize any of its executives for progress toward this goal. PPL’s corporate goal is inconsistent with pathways to limit global warming to 2 degrees Celsius or below.
|CEO compensation ranking among utilities studied, 2019||13/19|
|Compensation ratio: CEO to median employee, 2019||96:1|
|Percent change in CEO compensation, 2017-2019||+4.4% ($602,236)|
|Maximum payout of performance-based shares as a percentage of target, 2019||200%|
|Is PPL’s executive compensation structure aligned with decarbonization?||No. PPL does not incentivize any executive for progress toward its carbon reduction goal. Moreover, PPL says that its electric unit exceeded its ongoing net income target in 2019 primarily due to higher electricity usage and effective cost management. In other words, some of PPL’s compensation structure functionally disincentivized its NEOs from investing in energy conservation and efficiency.|
|Is there evidence from SEC filings that PPL is using misleading financial metrics to determine executive compensation?||No.|
|What key perquisites or benefits do PPL executives receive?||PPL provides its executives with financial planning and tax preparation up to an aggregate cost of $11,000 per year, and estate planning up to $5,000. Additionally, each NEO is eligible for an executive physical, up to an aggregate cost of $6,000 every two years, and genetic testing not to exceed $5,000.|