A couple of U.S. Steel Corp. executives had to hit a low bar to get a bonus last year. How low? Their divisions could have lost millions of dollars and they’d still get a fat payout.
Shareholders have long complained about companies that set easy compensation targets for their executives. U.S. Steel’s below-zero benchmarks are especially glaring, but they suggest that the decades-long drive in corporate governance to tie executive pay to companies’ financial performance seems to have met its Waterloo in the highly-volatile commodities sector.
When prices plunge, bosses might receive only fractions of their multimillion-dollar pay packages due to factors they can’t control. But softening targets can result in excessive bonuses when prices turn, drawing ire from compensation watchdogs and investors.
“Even the best-conceived formulas fail at some point,” John Roe, head of analytics at proxy advisor Institutional Shareholder Service Inc., said. “Compensation programs are just not designed to cope with these drastic changes.”
U.S. Steel’s board adopted the negative benchmarks in response to a rocky 2015, when the price of steel slid by more than 35 percent and shares took a nosedive. So for 2016, forecasting another poor year, directors slashed performance goals that set bonus payouts -- in some instances putting earnings targets below zero.
Bonus Payout
Senior Vice Presidents Douglas Matthews and James E. Bruno would be awarded 100 percent bonus payouts if the company’s flat-rolled division, its largest operating segment, lost $15 million in 2016. That reflected the bad year the unit had in 2015, when it lost $237 million.
But as it happened, the steel market rebounded and the flat-rolled unit made $345 million before interest and taxes. Their cash payments as a result hit 175 percent of targets. Chief Executive Officer Mario Longhi got a $4.53 million bonus, his biggest ever, reflecting total company net income that was more than double the target.
“In sectors like steel, your compensation program can be completely wrong just a couple of months later,” said Brent Longnecker, CEO of compensation advisory firm Longnecker & Associates. “It’s so fluid that you have to watch it constantly.”
U.S. Steel declined to comment beyond commentary provided in the proxy statement.