UNION PACIFIC GETS CREATIVE TO FATTEN MANAGEMENT PAYCHECKS
[The following story by Gretchen Morgenson appeared on the New York Times website on November 24, 2003]
Beauty is not all that lies in the eye of the beholder. Earnings can also be subjective, especially when executive compensation is at issue.
Three years ago, directors at the Union Pacific Corp., the transportation company in Omaha, Neb., approved a long-term pay plan for company executives and some lower-level employees. They would receive stock units and cash, subject to the attainment of performance goals in the company's share price and earnings. The targets would have to be met by Jan. 31, 2004. Under the plan, executives would receive shares and cash if, after Jan. 1, 2001, the company's stock traded above $70 a share for 20 consecutive days or if the company's cumulative earnings for the three years met or exceeded $13.50 a share.
So far, Union Pacific's stock has not made the grade. Since the start of 2001, its shares have traded as high as $65.05.
And with one more quarter to go, the cumulative earnings figure appears to be falling short, too. From the start of 2001 through the third quarter of this year, the company has earned $11.74 a share. Wall Street expects earnings for the current quarter to be $1.18 a share, bringing the total to $12.92 per share. That's tantalizingly close to the $13.50 target, but not enough to prompt a payout. Unless somebody gets creative.
Well, the Union Pacific executives can breathe a sigh of relief. The compensation committee of the board has decided to add to earnings an estimated $1.45 a share that Union Pacific recorded in proceeds from an initial public offering on Oct. 30 of its Overnite Corp. unit. Adding the IPO proceeds to Union Pacific's earnings will bring cumulative income for the three years to an estimated $14.37 per share.
Whew! That was close.
Kathryn Blackwell, a spokeswoman for Union Pacific, said the company considers the cash from the offering to be funds from discontinued operations and thus appropriate to add to earnings.
But one Union Pacific shareholder is unhappy that a nonrecurring gain from an equity deal will help executives reach the targets.
"As much as we respect management and believe that they should earn salaries and bonuses based upon good work done, we prefer them to get their bonuses the old-fashioned way, which is on operating earnings, not one-time events," said Anthony Maramarco, a portfolio manager who oversees $2-billion at David L. Babson & Co. in Cambridge, Mass. Maramarco's funds own 1 million shares of Union Pacific.
The extra pennies from the IPO mean beaucoup dollars to Union Pacific's executives. According to the company's calculations, if it reported earnings of $13.50 a share, Richard Davidson, Union Pacific's chief executive, would receive 20,000 shares and $1.4-million in cash. And Ivor Evans, the president and chief operating officer of the Union Pacific Railroad Co., would receive 11,000 shares and $770,000. Both men will get more than that, thanks to the offering proceeds.
For Davidson, the award comes on top of a very sweet 2002, when he received almost $1.2-million in salary and $11.4-million in restricted stock awards. The board awarded him the pay, the proxy said, based on his performance and factors "including competitive compensation information." In other words, somebody else was making more, so Davidson got a boost.
"Looks like Santa Claus is coming to Omaha by freight train this year," Maramarco said.
[Brotherhood of Locomotive Engineers, 11-24-03, from New York Times website report]