Dominion Energy’s Climate Metrics in CEO Pay: Progress and Pitfalls
Annual Meeting: May 10, 2023
Robert Blue, CEO of Dominion Energy, was awarded $6,794,985 in total compensation for 2022. Last year, we posted a blog scoffing a bit at Dominion Energy’s sustainability “target” in the annual bonus that was deemed met for “95% of leaders and employees participated in a town hall focused on sustainability initiatives and the importance of such initiatives.” The inaugural report, Pay for Climate Performance, identified best practices in linking CEO pay to climate metrics and scored the largest greenhouse gas emitters in the United States based on their performance according to best practices. Dominion Energy received an F.
Dominion has continued again this year with sustainability "targets" in the CEO's annual bonus. Five percent of the CEO's 2022 bonus was based on company-wide operating and stewardship goals in the categories of Safety, Diversity, Equity & Inclusion, and Environment & Sustainability. The Environment & Sustainability category, of which Dominion gave full achievement for pay purposes listed several “achievements.” One was, “Dominion Energy Services launched a team to develop ideas to reduce waste and measure waste reduction.” Great start, but shouldn't we be looking for actual waste reduction?
Another achievement highlighted was, “Dominion Energy Virginia’s leadership teams crowd-sourced ideas to improve sustainability.” Read this one again, “crowd-sourced ideas to improve sustainability.” What does that mean? Was it at the town hall? Is it a survey? How many ideas did they get? Were the ideas put into practice? Were they good ideas? The proxy statement provides no more detailed information.
Another sustainability achievement listed as having been achieved was “Dominion Energy - South Carolina is recycling 150,000 tons coal ash from a legacy site.” However, it's important to note that this cleanup is mandated by the EPA's Coal Combustion Residuals (CCR) regulation. While it's crucial that the company comply with these regulations, framing it as an exceptional accomplishment for which the CEO should be awarded with additional compensation is more than problematic.
Examining these goals certainly raises questions about their effectiveness, but considering they make up less than 5% of the annual bonus even when you include in the Safety and Diversity, Equity & Inclusion category goals, they can be considered de minimus.
However, Dominion also added a climate metric to the 2022 – 2024 long-term incentive plan that is 10% of performance share units (PSUs). Ten percent of PSUs is not de minimus so I was interested to dig into the details. This is where I hit the first roadblock. Details in the proxy statement are limited. The proxy states, “The NCGC performance metric measures the company’s wind, solar, nuclear and conventional hydro generation capacity as a percentage of its total generation capacity.” No quantitative disclosures in the proxy statement. There is a footnote that states that one can find the quantitative metric in “Exhibit 10.21 to the Company’s 2022 Annual Report on Form 10-K for the specific performance targets”.
Here's the disclosure from Exhibit 10.21 in Dominion’s 10-K.
What I found was a quantitative metric with specific payout percentages based on NCGC performance. A quantitative climate metric in the long-term incentive plan is a step in the right direction for creating an incentivizing, quality link between climate and compensation. But the next question that arises is: Is this a legitimate climate target? Best practice is an actual emissions reduction target aligned with the 1.5-degree goal across the value chain. Input metrics like non-carbon generation capacity can still lead to increased emissions while the CEO gets paid. In addition, these metrics are harder to evaluate.
I explored Dominion's Climate Report to try to determine the quality level of the climate target tied to their compensation package and I still cannot confidently answer whether they are quality climate goals. This unsolved mystery isn't just a Dominion-specific issue; it speaks to the broader issue of how companies are starting to weave climate metrics into CEO compensation. First, transparent disclosure is important. Having to access a separate document for climate metrics fails to offer the transparency investors require. With 38 pages dedicated to compensation discussion and analysis, adding in one additional page to provide the LTIP metrics could help dispel concerns about obfuscation.
Secondly, using emissions reduction metrics in compensation provides a much clearer picture of whether the company is meeting its climate targets. While increasing non-carbon generation capacity is good, it's not clear if Dominion's goal of 42.8% non-carbon generation is ambitious or easy, which could affect CEO pay without incentivizing hitting emissions reduction targets.