Two influential groups are advising Constellation Energy shareholders to vote against the compensation package proposed for CEO Mayo A. Shattuck III.
Glass, Lewis & Co. and Institutional Shareholder Services, which provide guidance on proxy proposals and corporate governance issues, say executive pay at Baltimore-based Constellation was out of line with the company's performance last year — the latest criticism of the company's compensation practices.
With shareholders in most U.S. companies getting an opportunity this year to weigh in on executive compensation, the firms are recommending that investors vote against Constellation's pay plans at the company's annual shareholders meeting next week.
Company spokesman Lawrence McDonnell said, "We respectfully and strongly disagree with their analysis."
Shattuck's total compensation last year was valued at $15.7 million, according to regulatory filings, up from $10.9 million in 2009. Much of the year-over-year increase came from changes in the accounting value of his pension and deferred earnings.
Excluding that accounting change of $4.9 million, Shattuck was paid $10.8 million in base salary, cash incentive, stocks, options and perks.
Constellation, the parent of utility Baltimore Gas & Electric Co., posted a loss of $982.6 million last year, due in part to the reduced value of its nuclear power business. The company posted a profit of $4.4 billion in 2009.
The company took significant writedowns in 2010 to reflect the reduced value of the nuclear power business and the cancellation of its nuclear development venture with the French utility EDF, which included abandoning the development of a third nuclear reactor at Calvert Cliffs in Southern Maryland.
Shareholders at most U.S. companies are getting a say on pay this year for the first time under the Dodd-Frank financial reform act. The votes are advisory in nature, which means company boards are not bound by the results. Constellation's annual shareholder meeting is scheduled for next Friday at the company's Inner Harbor headquarters.
Controversy over Shattuck's pay is nothing new. Gov. Martin O'Malley went after Shattuck's golden parachute package two years ago as Constellation sought regulatory approval to sell half of its nuclear assets to EDF.
Constellation no longer provides severance or a "change in control" payout that would be triggered by a sale of the company.
Other state lawmakers went as far as requesting that Maryland Attorney General Douglas F. Gansler investigate executive pay at the company. Gansler said courts typically defer to a company's board of director on compensation issues.
Constellation agreed last month to sell itself to Chicago-based Exelon Corp. for $7.9 billion. Shattuck, who would become executive chairman of the combined company, will not get a severance related to that deal.
Constellation's McDonnell said, "We believe that our [executive compensation] system is more aligned with performance."
McDonnell said 87 percent of Shattuck's compensation is based on performance. He noted that Shattuck's cash incentive payment dropped from $3 million to $1.7 million last year. Shattuck's stocks and options vest over three years and depend on meeting performance goals, the company said.
In its proxy, the company said Shattuck "directed Constellation Energy in a matter that enabled it to meet or exceed all but three of the 33 metrics established for 2010 performance."
Those metrics included acquiring new power plants and meeting financial objectives such as earnings.
While it followed the SEC-required formula in reporting Shattuck's pay at $15.7 million last year, Constellation offered an alternative estimate based on its own calculations. According to the company's approach, Shattuck's compensation stayed flat at $12 million last year from 2009.
The difference between the two figures is that the company doesn't count the increased value of Shattuck's pension, and the SEC requires the company to account for stock and option awards in the year they were granted regardless of the performance year.
Carol Bowie, head of compensation policy development at Institutional Shareholder Services, said the proxy firm looked at Constellation's total shareholder return over one-, three- and five-year periods, which were all negative. It also examined whether executive pay aligns with performance and how compensation ranks among its competitors.
The Rockville-based firm found that a $100 investment in Constellation's stock at the end of 2006 was worth $50.80 last year.
"Essentially, what we saw here is CEO pay is going up while performance has been severely lagging," Bowie said.
Bowie said ISS has recommended a "no" vote for 11 percent of executive compensation plans at the 2,500 companies it has analyzed.
In a report published this month, Glass Lewis gave Constellation's executive compensation a grade of F on a scale of A to F. It said Constellation pays its executives more than its peers while "performing moderately worse than its peers."
Glass Lewis noted that the company earned a D in 2009 and another failing grade in 2008.
"In the aggregate, we certainly believe there are substantial issues for shareholder concern regarding the company's compensation practices," Glass Lewis wrote recently in its own report. "Thus, shareholders should send a strong signal to the board and to management that the company's executive compensation program should more tightly link the company's performance to executive pay."
The proxy firm also recommended that Constellation shareholders vote against the re-election of two directors on the compensation committee: Freeman A. Hrabowski III, president of the University of Maryland, Baltimore County, and Robert Lawless, a former McCormick & Co. executive.
Glass Lewis noted that Constellation made a $205,000 contribution to UMBC, and said members on compensation committees should be independent. Constellation says the money funded a scholarship for finance and economics majors.
Glass Lewis said Lawless served as a compensation committee member for the past two years when the "company was deficient in linking pay with performance." As chairman of the committee, the firm said, Lawless should be held accountable for the lack of oversight.
McDonnell said the independent members of Constellation's board of directors are impartial. Shattuck chairs the 10-member board.