Caterpillar Inc., which has drawn attention for tinkering with
financial targets it uses to help set executives' bonuses, will see
its executive pay plans put to a shareholder test Wednesday.
Caterpillar last year reduced a target for operating profit used
to set bonuses to $20 million from more than $2 billion the
previous year, and then easily exceeded that target.
The change helped CEO Douglas Oberhelman earn a $4 million bonus
that boosted his total compensation 14% from a year prior.
CtW Investment Group, a union-backed investment fund, has urged
shareholders to vote against pay packages for top executives,
saying the heavy-machinery maker changed its pay metrics in ways
that made the bar easier to clear.
Proxy advisory firm Institutional Shareholder Services Inc. has
also urged Caterpillar investors to vote against the compensation
package.
A Caterpillar spokeswoman declined to comment. Caterpillar has
said in regulatory filings that the lower $20 million target was
"challenging," since the company had an operating loss the previous
year.
The so-called say-on-pay vote, to be held Wednesday at the
company's annual meeting in Kansas, isn't binding. But it could
prove significant as low levels of support on such a vote—typically
anything below 70%, advisers say—-can draw closer scrutiny from
proxy advisers like ISS or prompt boards to court investors to head
off greater dissent.
Compensation experts say some companies are willing to "move the
goal posts" on executives' incentive pay—lower the
financial-performance levels a company must hit or change the
performance metrics they use, to make it easier for management to
be awarded incentive bonuses even if the company falters.
"Investors are likely to take a very dim view of a compensation
committee making changes to targets or calculation methodology to
enable executives to obtain awards they would not have otherwise
achieved," said Charles Vaughn, a lawyer at Nelson Mullins Riley
& Scarborough LLP in Atlanta who advises boards on
compensation.
In addition to the operating-profit issue, CtW also criticized
Caterpillar's switch to calculating long-term bonuses based largely
on profits per share, a metric the group sees as susceptible to
large stock buybacks and other moves. Caterpillar previously used
total shareholder return and return on assets as the basis for the
bonuses, and its performance had fallen short of targeted levels
for those measures, filings show.
Caterpillar said in a filing that the new metrics, which will
determine long-term payouts starting in 2016, will "further focus
[executives] on profitability."
CtW also in recent years has made similar criticisms of pay
packages at Wal-Mart Stores Inc., which the group said has "made
numerous after-the-fact adjustments" to the metrics that determine
bonuses for top executives. Among the items it strips out are costs
associated with store closings and acquisitions, as well as sales
lost to Wal-Mart's related online operations.
Yet, the company's say-on-pay vote last week drew support from
more than 96% of shares voting.
"We heavily link our incentive pay to our company's
performance," said Randy Hargrove, a Wal-Mart spokesman. The
company's adjustments to its metrics are "subject to a rigorous
process," he added.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
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