Proxy published 3/19/2015 Annual meeting: 5/4/2015

Daniel Amos, who has been CEO of AFLAC for nearly 25 years, received total compensation of $15,477,348, including over $6.8 million in change in pension value.  The company’s proxy states that Amos received “a decrease of 51% in total direct compensation for the CEO” resulting from its performance compared to peers. The decline, however, was based in the reduction of his stock grant.

The feature we are taking a closer look at, however, is annual incentive pay, which increased from $4.7 million to $4.8 million in 2014, despite performance issues. This payment was 335% of Amos’s annual salary, significantly above a target level of 220% of salary.

How did executives achieve an increase in bonus when many performance factors decreased? The answer is available in comparing data from two years of proxy statements. The targets for 2014 (designed, according to the proxy statement, to be achieved 50% to 60% of the time) were below the actual achievements in 2013 in several categories. For example, the rate of operating return on shareholder equity (excluding foreign currency effect) was 25.8% in 2013. The target set for 2014 was 20%, and the actual rate was 22.9%. So even though year over year operating return was down, this metric of the annual incentive plan paid above target.

The board is forthright in its acknowledgement that CEO and President/CFO recommend to the Compensation Committee the specific performance objectives and their ranges. Likewise the proxy statement notes that, that in establishing 2014 MIP objectives, it “considered certain headwinds […] that pressured expected EPS growth, direct premium growth and pretax operating earnings growth in Japan. Therefore, these objectives were lower than the prior year.”

Headwinds can be real and targets should be achievable. There may be situations where in order to retain key executives it is necessary to lower the bar. However, it is both unseemly and unnecessary at a company where the CEO is related to the founder and the family has special voting rights (and where – in another aspect of the proxy worthy of critique – Amos’s cousin, John Shelby Amos, received compensation of over $4 million in his role at a newly created position at the company).