The big issue: Compensation for the late CEO E. Hunter Harrison, which shareholders overwhelmingly approved last June.
Although proxy advisory firm Glass Lewis & Co. recommended that shareholders back the CSX compensation plan, Institutional Shareholder Services said investors should reject it.
ISS raised three objections to Harrison’s compensation:
- CSX should have imposed a clawback on the unusual $84 million reimbursement agreement with Harrison and Mantle Ridge, the activist hedge fund that brought Harrison to CSX from Canadian Pacific in March 2017. This would have allowed the railroad to recover at least portion of the payment after Harrison’s death.
- Harrison’s sign-on stock options should have been completely based on performance.
- The operating income target for the management incentive plan should have been higher. It was set below the operating income level CSX reported in 2016.
Companies only rarely lose these say-on-pay votes, which are non-binding resolutions that give investors a voice in how top executives are paid.
But CSX on May 7 urged shareholders to consider the railroad’s improved financial performance, noting that the stock price has increased 53 percent over the past year.
The full-year operating ratio of 66.3 percent was a 3.1-point improvement; adjusted operating income was up $460 million; earnings per share surged 27 percent; and the company returned $2.7 billion to shareholders in the form of dividends and share repurchases.
CSX also rebutted the ISS objections.
The railroad noted that last year ISS recommended that shareholders approve reimbursing Harrison and Mantle Ridge for the salary and benefits that Harrison left on the table by leaving CP five months early.
Harrison had said he would resign if shareholders rejected the reimbursement. Some 93 percent of shareholders approved the reimbursement plan at the annual meeting in June.
CSX noted that Harrison’s stock options were forfeited upon his death in December. In any event, they were evenly split between performance vesting and time vesting over four years, which the railroad said “was not atypical for equity incentives.”
CSX defended the operating income incentive target, noting it was based on the railroad’s outlook in January 2017 and also hinged on hitting certain strategic goals. After Harrison’s arrival, the board replaced those goals with an “aggressive” 66.2-percent operating ratio target.
CSX also noted that its incentives for 2018 and long-term incentives for executives through 2020 “include challenging targets to support our pursuit of exceptional returns for our shareholders.”
Harrison earned a base salary of $1.8 million last year, plus non-equity incentive plan compensation of $3.4 million, and $600,339 in non-qualified deferred compensation. He also received the one-time reimbursement payment of $29 million. Stock option awards worth $115 million were forfeited upon his death in December, according to CSX’s annual proxy statement.
This is not the first time Harrison’s outsized pay has caused a stir.
In 2016, Canadian Pacific shareholders narrowly rejected the railroad’s executive compensation packages due to the pay and perks that Harrison received while serving as chief executive.
In response to investor concerns, CP’s board in 2017 aligned executive pay with long-term performance, made changes to short-term performance measures, limited awards to departing executives, and capped the CEO’s bonus and use of the corporate jet.
The CP board also defended Harrison’s compensation, noting that during his tenure total shareholder return was 192 percent and the company’s value increased by more than $15 billion.
