At CSX, Harrison would be among the highest-paid CEOs in the country

Figures raise eyebrows, but structure of employment agreement isn’t unusual
RELATED TOPICS: CSX | EHH | MERGERS | PEOPLE | CLASS 1 FREIGHT RAILROADS
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The compensation package E. Hunter Harrison is seeking from CSX Transportation would likely rank him among the highest paid CEOs in the nation. The latest available information on CEO pay nationwide is from 2015.

Harrison is seeking a four-year contract worth more than $300 million. Although CSX said most of Harrison’s compensation would come in an upfront payment and stock grants, it translates into an average of $75 million per year over the life of the contract.

The highest-paid CEO at a U.S. company in 2015 was Dara Khosrowshahi of Expedia, whose total compensation was $94.6 million, according to the latest Equilar 200 Highest-Paid CEO Rankings, a survey of regulatory filings conducted for The New York Times. Leslie Moonves of CBS was second, at $56.4 million, followed by Philippe Dauman of Viacom, at $54.1 million, Equilar says.

The proposed employment agreement with CSX includes an $84-million payment that would reimburse Harrison for the money and benefits he left on the table by retiring five months early as chief executive of Canadian Pacific. Harrison announced his early retirement on Jan. 18 so he could pursue a management shakeup at CSX with activist investor partner Paul Hilal of Mantle Ridge.

Even without that payment, Harrison would still rank among the highest paid CEOs.

And the proposed compensation dwarfs the $9.2 million current CSX CEO Michael Ward earned in 2015, the last year for which regulatory filings are available, and the $15.1 million Harrison was paid at CP in 2015. The total compensation for the other Class I railroad CEOs ranged between $7.7 million and $10 million in 2015.

Executive compensation experts say there’s nothing unusual about the structure of Harrison’s proposed employment agreement.

In addition to the $84 million reimbursement, it calls for a stock grant worth $159 million, a $2.2 million annual salary, a target bonus of 120 percent of his salary, with a minimum bonus of $2.6 million for 2017, a $2 million annual payment to Mantle Ridge, and a tax indemnity worth “a few tens of millions of dollars.”

“When a company hires a new CEO from the outside, who doesn’t already own stock in company, he or she usually gets large equity grant,” says Steven Balsam, a professor of accounting at the Fox School of Business at Temple University in Philadelphia.

“The concept of equity incentives is perfectly reasonable,” Balsam says. “The amount is at the higher end of the scale and might be the highest ever.”

The $300 million total compensation package “is an outrageous sum to most people,” Balsam says.

Viewed through the lens of corporate finance, however, the picture changes. That’s particularly the case when CSX stock has gone up 30 percent since news surfaced that Harrison and Hilal were targeting the railroad. The stock moves boosted the value of CSX by $10.4 billion.

“It does appear that the market feels that he’s worth it,” Balsam says, adding that Harrison’s compensation represents a small fraction of the growth in the value of CSX.

Ben Branch, a professor of finance at the Isenberg School of Management at the University of Massachusetts, agrees.

“Another way to look at it is how much value is he likely to bring to the shareholders at CSX? And that’s a pretty big number,” Branch says. “The stock is up 30 percent already on the prospect of him becoming CEO. Paying him $300 million as a reward for adding that much potential value to CSX doesn’t seem out of line.”

Branch points out that this is a highly unusual situation.

“It is a lot of money for a CEO – any CEO,” Branch says. “But this deal is more than just a CEO. This isn’t hiring a good CEO to manage a company. This is hiring a CEO who has a dramatic plan for improving that company.”

He likens the situation to when Apple co-founder Steve Jobs was brought back to the company with the expectation of a dramatic turnaround.

“It’s rare,” Branch says. “You don’t have many situations where a CEO almost single-handedly is expected to deliver dramatic improvement.”

CSX this week took the unusual step of asking shareholders to weigh in on the Mantle Ridge’s proposals, which include Harrison’s price tag and the fund’s request for six seats on the railroad’s board, which would be expanded to 14 members. Shareholders will vote at a special meeting, whose date and location have yet to be set.

The railroad said it would not take a position on the matter. But it did say it had concerns with the “exceptionally unusual if not unprecedented” employment arrangement as well as Mantle Ridge’s request for effective control of the company.

By asking shareholders to vote on the matter, the CSX board is seeking to shield itself from investor criticism, Branch contends. If CSX were to approve the Mantle Ridge proposals, it could be criticized for spending too much and giving up too much control of the company to a single investor. If it were to reject Mantle Ridge’s overtures, the CSX board could be criticized for ignoring a plan to enhance shareholder value.

“As much as anything, they want cover,” Branch says of the CSX board.

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