Dow Chemical

Annual Meeting: May 12, 2016 The high pay at Dow Chemical has an interesting but arcane wrinkle I want to highlight. The company reported total disclosed compensation (TDC) for CEO Andrew Liveris as $22,153,611. However, there’s a column to the far edge of the summary compensation table with a lower figure of $21,428,875.

That column, relatively new, does not include changes in pension value. It first appeared in Dow’s proxy last year when Liveris’s increase in pension and deferred compensation was over $7 million. That figure is not the total pension, but simply how much the value of the pension increased in a single year.

The company added the column “to show total compensation minus the change in pension value” because, “the change in pension value is subject to many external variables, such as interest rates, that are not related to Company performance. Therefore, we do not believe a year-over-year change in pension value is helpful in evaluating compensation for comparative purposes.” This was a pretty transparent effort to minimize the shock factor of TDC, as reported under SEC rules, going from $20 million in 2013 to $26 million 2014.

To its credit, the company kept the same disclosure this year when the story it told was different: with the pension number stripped out for both years, it shows that pay increased in 2015.

I’ve seen a number of companies this year where the figure in the pension column declined sharply and total disclosed pay declined just a bit or remained flat. In many of those cases, bonus increased. This is part of what happened at Dow Chemical: Liveris’s cash bonus (NEIC) increased from $4.2 million in 2014 to $5.7 million in 2015.

A look at past Dow proxies shows that a similar uneven change happened once before. In 2012 Liveris’s increase in pension value was over $6 million, his bonus $1.37 million, and total disclosed compensation was $22.9 million. In 2013, again due to arcane accounting rules as much as anything else, his pension only increased by three thousand dollars, but this bonus increased to $4.5 million. The TDC column showed pay as $20 million for 2013, so it looks like pay went down from the prior year, but Liveris actually walked home with more than $3 million more in cash in 2013 than he had the prior year.

This could be a coincidence, of course. One hates to imagine any party going into a board meeting and saying, in effect, “This would be a good year to give more cash, because it won’t be as noticeable.” Presumably, no consulting firm would be that corrupt, no CEO that arrogant, no compensation committee that complacent. But I think that area is ripe for research and would love to see a graduate student somewhere dig in on this.

If that research is done it should include consideration of general tenor of leadership. Note that last year I wrote about how Liveris was accused of having had the company pay for personal expenses, including his son’s birthday party (a really nice birthday party in a suite at a Detroit Pistons game).

As a larger nerdy compensation philosophical issue, I’ve got mixed feelings on how to evaluate change in pension fund increase.

In 2014, many proxy statements showed a huge increase in pension values in part because of low interest rates, and, according to a Wall Street Journal article “new mortality tables released last fall by the American Society of Actuaries extended life expectancies by about two years.”

In a recent analysis by the Washington Post’s Jenna McGregor “changes in pension values were excluded from those figures, since the calculation doesn't reflect the active decisions boards make each year.”

I see the legitimacy in that perspective, and in Dow’s additional disclosure, as long as it is used consistently. (Another research project: check out all the companies that included a TDC-pension column last year and see if they did it this year.)

At the same time, the change in pension value does reflect real money. To not consider it at all in pay analysis is a disservice to those who don’t have such pensions, which presumably is why the SEC requires it. Liveris’s current pension is worth $34.5 million, and he has deferred compensation of $2.8 million.

He’ll be making use of this money soon. Liveris has announced a planned departure after the Dow/DuPont merger and subsequent split has been accomplished. Activist investor Dan Loeb had called for his removal.

In any case, this is the bottom line: whether you include change in pension value in looking at pay at Dow or exclude it, Liveris is overpaid.