Philip Morris: Are all shareholders being heard?
Meeting: May 3, 2023
At Philip Morris CEO, Jason Olczak, received total compensation of $15,775,108, an increase of 49 percent over the prior year. Olczak’s stock awards more than doubled in 2022. Philip Morris was number 67 in our list of Overpaid CEOs in our most recent report, and has appeared on the list three out of the last nine years.
Last week the company filed a letter to shareholders with the SEC in response to ISS recommending a vote against the pay proposal. Last year, 30 percent of shareholders voted against compensation at the company, and ISS noted, “the [Compensation] committee did not demonstrate concrete actions taken to address shareholder feedback with respect to the problematic severance payment. Given that the committee's responsiveness is limited, support for the say-on-pay proposal is not warranted.”
The company has two major points in refuting this claim:
- The company did reach out to shareholders following the vote.
- Shareholders objected to a one-time severance payment and not a continued practice.
Let’s deal with these in order. The company trumpets that it did engage with shareholders. Specifically, it notes, “We contacted shareholders representing approximately 40% of our total shares outstanding and invited them to participate in calls to discuss our executive compensation programs. Shareholders representing approximately 20% of our outstanding shares accepted our offer to provide feedback.” There’s been a habit of companies disclosing in such fashion by percentage of ownership. It can be quite misleading. In this case, the top five shareholders (Capital Group, Vanguard Group, BlackRock, GQG Partners, and State Street) combined owned approximately 36.5 percent of shares at the end of last year. From the data the company provides we cannot ascertain whether the company called five shareholders and three of them subsequently responded. If that is the case, then it hardly seems like an appropriate effort. My impression, upon reading this language in proxy statements for the past few years is that in fact other companies have done considerably more outreach.
On to the second matter. While it is true that shareholders were offended by the size of the retirement severance offered to a departing executive, that was not their only concern. In many cases, shareholders publicly disclose their rationale for voting and we subscribe to one service that collects and shares such data. A number of shareholders last year also called attention to the fact that the company’s performance share units linked to relative Total Shareholder Return can pay off even if the company is underperforming its peers. In the case of Philip Morris, for awards issued in 2022 and in 2023 the company states that, “For the TSR metric, the threshold (50% performance factor) and target (100% performance factor) performance metrics remained at the 25th and 50th percentile relative to the Peer Group, respectively.” In other words, executives can receive some payment for this award even if more than two thirds of their peers outperform them. Shareholders contend that such awards that vest in part below median relative performance essentially disconnect pay and performance.