Note: This Letter Is Only for those Members With Verizon Stock
Dear Association Member:
We urge you to vote contrary to management’s recommendation on two important items on Verizon’s proxy card for the upcoming Annual Meeting on May 6th in Little Rock, Arkansas:
Vote FOR Item 6: Performance Stock Unit Performance Thresholds
Vote AGAINST Item 3: Advisory Vote on Executive Compensation
We believe that Verizon’s Board needs to hear that shareholders want compensation policies that are better aligned with shareholder interests.
Item 6: Vote FOR a policy to limit large Performance Share (PSU) payouts to achieving Total Shareholder Return (TSR) equal to or above the median among the Related Dow Peers index.
Performance Share Units (PSUs) should not vest or pay out, we believe, unless Verizon’s performance (TSR) is at least equal to or above the median relative to the company peer index selected by the Board.
Each year the Company’s named executive officers receive long-term equity awards with a target cash payout of approximately seven times base salary. These equity performance grants are divided between PSUs (60%) and Restricted Stock Units (40%). CEO Ivan Seidenberg is an exception, as he receives 100% of long-term equity in the form of PSUs.
While we commend the Board for tying the majority of long-term equity compensation to the relative performance of Verizon’s stock, we believe that large pay-outs for below-median performance as low as the bottom 26th percentile does not adequately align pay with performance.
The problem is that PSUs pay out at 50% of Target for relative TSR at the bottom 26th percentile (that is, if Verizon performs as low as 25th among the 34 Related Dow Peers). The Corporate Library’s 2008 update on “Pay for Failure” companies singled out Verizon’s PSUs for criticism: “Verizon’s [PSUs] continue to pay out for TSR performance below the median.” For the performance cycles ending in 2008 and 2009, it noted, “the company would have to perform below the 20th percentile for executives to receive nothing.”
For example, CEO Seidenberg’s Target Award for the 2009-2011 PSU grant is $11 million. He will receive 50% of Target ($5.5 million) if Verizon’s TSR ranks as low as 25th among the 34 Dow Peers – nearly bottom quartile performance. At the high end, Seidenberg will receive 200% of Target ($22 million) if Verizon ranks among the top four (88th percentile or better).
The low performance bar for PSUs seems particularly unjustified because senior executives (except Seidenberg) receive 40% of their long-term “performance pay” in restricted stock (RSUs). RSUs vest after three years regardless of performance. And although the Board justifies RSUs as a “retention-oriented award” (2010 Proxy, p. 40), RSUs pay out even if the executive retires or is terminated without cause, after a change in control, or voluntarily for good reason.
The “Board of Directors’ Position” in the Proxy actually reinforces the need for this resolution, in our view. The Board acknowledges that “in order to earn 100% of the target number of PSUs,” Verizon’s “TSR over the three-year performance cycle must rank at least 16th” among the 34 Dow Peers, which is barely above the median. What the Board fails to acknowledge is that senior executives can still receive 50% of the target award for performance below the 30th percentile.
Item 3: Vote AGAINST Approving the Executive Compensation Package
We urge you to use your “say on pay” to send a message that key elements of Verizon’s executive compensation should be better aligned with shareholder interests. In addition to the more challenging pay-for-performance threshold recommended above (Item 6), we believe the Board should scale back its expensive set of windfall termination benefits, including:
Golden Parachutes: If CEO Ivan Seidenberg is terminated or even retires, he receives a $33.1 million severance, more than seven times his base salary plus bonus. Retired President & COO Dennis Strigl would have received $37.4 million if he had terminated after a change in control – a platinum parachute exceeding 12 times his base salary plus bonus. (2010 Proxy pp. 56-57).
Golden Coffins: Upon termination of employment due to death, Seidenberg would receive an additional $39.4 million, while Strigl would have received $49 million. This is over and above any pension or deferred compensation (which pay out tens of millions more).
Executive Pensions: In 2006 Verizon froze its defined benefit SERP, which provided senior executives with a company contribution equal to 32% of base salary and bonus. While not as generous, the new nonqualified retirement saving plan continues to apply benefit formulas more generous than those that apply to rank-and-file managers or employees. For example, Seidenberg received $893,000 in SERP compensation in 2009: A $419,900 Company contribution to his non-qualified plan and, in addition, $473,390 in “above-market earnings” on his non-qualified plan assets. (Compensation Tables, 2010 Proxy pp. 48-49).
To support its recommendation, the Board describes how it has reformed Verizon’s pay practices in recent years. However, a majority of reforms cited by the Board were adopted only after receiving strong support as shareholder proposals – proposals the Board initially opposed.
For example, beginning this year the Company will stop reimbursing senior executives for personal income taxes paid on life insurance, personal travel and excess golden parachute payments – a practice known as “tax gross-ups” that we have criticized in previous years. In our view, at Verizon pro-shareholder compensation policies are adopted only if shareholders send a strong message. A vote AGAINST Item 3 is the nudge the Board needs.
Please vote your shares FOR Item 6 and AGAINST Item 3.
C. William Jones
President & Executive Director