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CEO pay ratio rule underscores competitive median salary of US utilities

In the utility sector, the disclosure of CEO pay ratios has done more to highlight competitive pay for median employees than to exacerbate concerns about whether top executives are overpaid, experts said.

For the first time, the SEC required companies in the 2018 proxy season to disclose the annual compensation of their median employee and the ratio between that individual's pay and the chief executive officer.

"I think the surprising thing coming out of this year was the reason we're not seeing too much pushback or a ton of negative publicity around it is I think people were somewhat surprised at how high the median employee pay was," Daniel Laddin, founding partner at Compensation Advisory Partners, said in a phone interview.

Laddin added that "utilities have the lowest pay ratio" and among the highest median pay across nearly a dozen sectors that Compensation Advisory Partners examined.

"Part of that is it's a U.S.-based workforce, but it's also a very skilled workforce," Laddin said. "It's a very unique industry in that respect."

David Bixby, managing director at Pearl Meyer, said the median employee within utilities is "higher on average than in pretty much any sector we've been tracking in our database."

"It's fairly flat distribution. There are a lot of companies between $100,000 and $140,000 for the median employee," Bixby said.

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S&P Global Market Intelligence analyzed public disclosures for the top 20 U.S. electric utilities by market capitalization as of March 31.

Duke Energy Corp. had the largest reported ratio of 175-to-1 with a median employee pay of $122,365. Duke Energy Chairman, President and CEO Lynn Good's annual total compensation in 2017 was $21,415,936. NextEra Energy Inc. followed with a ratio of 155-to-1 and a median employee pay of $121,355. NextEra Chairman, President and CEO James Robo's total compensation was $18,811,693.

DTE Energy Co. reported the highest median employee pay of $173,839 with a pay ratio of 91-to-1 based off of DTE Chairman and CEO Gerald Anderson's 2017 total compensation of $15,835,907. FirstEnergy Corp. came in second with a median employee pay of $170,299 and a pay ratio of 90-to-1 based off of FirstEnergy President and CEO Charles Jones Jr.'s total compensation of $15,281,885.

DTE defined its median employee as "a senior professional with two master's degrees" that had a base salary, exclusive of overtime, of $101,216. The company wrote in its proxy filing that the difference between this employee's salary, wages and overtime and their total compensation includes non-equity incentive compensation, 401(k) employer matching contributions, other taxable benefits and a change in pension value.

FirstEnergy, meanwhile, said it selected its median employee from "a small group of employees who had the identical amount of estimated annual compensation." The company selected this group based off 2017 base pay and target short-term incentive compensation awards.

FirstEnergy did not provide more specific details about the employee's compensation or skill level.

"FirstEnergy is more of the norm across that sector and across other public companies of just taking a very simple approach to talking about it," Bixby said. "There's no additional explanation of where the employee is [located] or what made up that employee's pay number."

"I think DTE may have done what they did because their median employee pay number is at the high end of the range," Bixby added. "They're probably trying to communicate to their employees why when you look at this number, if your pay is below this number, here are all things that are true of this individual.

"One of the concerns we saw come up as more and more companies got into this is not so much what the ratio looks like externally, but what the median employee pay number looks like internally."

Of the 20 electric utilities examined by S&P Global Market Intelligence, PPL Corp. had the lowest median employee pay of $104,520, while Avangrid Inc. had the lowest CEO to median employee pay ratio of 21-to-1.

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Shareholder interest

The pay ratio disclosure information has received a muted initial reaction from investors.

"I haven't seen any indication from shareholders or shareholder groups, either publicly or through feedback that they've given any of our clients, that this is an issue at all," Bixby said. "I'd say they're more interested, if you think about pay equity, in how the CEO compares to other members of the top management team because that can go to questions of succession planning and whether you've got the right people on the bench."

Rosanna Landis Weaver, program manager on CEO pay at shareholder advocacy group As You Sow, said there is a "pretty narrow definition" of the proposals that shareholders are allowed to file.

While pointing out that it is unlikely shareholders will be leading the effort to increase median employee pay, Weaver said the pay ratio data has shown "the glaring inequality in a new and starker light."

"It highlights again another problematic aspect of executive compensation and I do think shareholders will continue to push back very hard on excessive pay for the CEOs and we certainly will be part of that," Weaver said. "Whether it will be through the format of shareholder proposals in this case, I'm more skeptical about whether that makes sense."