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Gravy Train

Utilities must trim the fat from excessive stock options, stock grants and executive pay.

Fortnightly Magazine - July 2006

broke into a meeting I was having with a colleague of his at the bank’s headquarters in Times Square. At first blush it seemed to me that many of More’s arguments in the merger’s defense were dubious, as the merging parties had retained him as an advisor on the deal on a contingent-fee basis. But on second thought, our discussion over what constitutes egregious pay should at least shed some light on the scope of the problem.

More disagreed with my criticism that Constellation Energy CEO Mayo Shattuck’s $61 million stock sale in late December 2005, was “egregious,” as was my comparison of that action to the selling of $70 million in stock by Enron’s Kenneth Lay. But when the board of directors of Enron found out about Lay’s $70 million sale they were outraged, and that was before any of the criminal activity came to light in 2001. Enron at its height boasted a market cap of between $50 billion to $60 billion. Constellation Energy, on the other hand, can claim a market cap of only $9 billion and change. So if the board of directors of a $60 billion firm could question a $70 million pay out, then $61 million should be enough to raise eyebrows at a much smaller firm.

Even Jeff Immelt of General Electric didn’t make as much money as Shattuck last year—and he’s the CEO of a $350-billion energy company.

Nevertheless, Dan More still defended Shattuck’s pay, explaining that Constellation was like an “investment bank”—a belief I hope does not prevail at the company.

Will Constellation spawn imitators among utilities or their holding companies? If you’re curious, then click on Yahoo!Finance, or the Web site at the Securities and Exchange Commission, and check out the reports of insider transactions for companies such as Exelon, Entergy, Sempra, AEP, Edison International, and many, many more. What will you find?

You’ll find CEOs and senior executives cashing in millions (in some cases) in stock. You’ll also find insider transactions listed for HR executives, CFOs, and CIOs earning millions, as well as government affairs representatives and legal representative who are pulling seven figures.

But the real question is, Did these executives earn their compensation? Pension funds like CalPERS complain that CEOs and top executives should not be compensated excessively just for being at the company during a run-up of the company’s stock price. CalPERS, in press statements, favors compensation incentives only as a reward for actual performance.

It may be that these excessive stock awards stem from record stock price gains in the utilities industry. But if that were true, they would not necessarily be awards for executive performance. That is why a frank discussion about overhead costs, or what management should cost ratepayers and shareholders, must take place in the industry. Some consumer advocates say that a return to basics and greater use of ratebase and traditional regulation indicates that utilities are taking fewer risks, and therefore, utility executives should earn less. I suspect we’ll soon find out whether the compensation committees at utility boards of directors agree. Some