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April 29, 2019 – The Court hearing the PG&E Corporation case issued an order approving the Debtors’ Short-Term Incentive Plan as modified by the Debtors further to a Court hearing held on April 23, 2019 and the Court's consideration of numerous objections (the “Modified 2019 STIP”) [Docket No. 1751]. The Modified 2019 STIP reflects a heightened overall importance to be accorded to safety metrics (and a corresponding reduction in importance as to financial metrics) in determing plan payouts.
The order states, “The weighting for the Public Safety Index has been increased from 10% to 25%, thereby increasing the weighting for the safety metrics in the 2019 STIP from 50% to 65% (with a corresponding 15% reduction in the Financial Performance weighting, from 40% to 25%); If, as a result of its review of the Debtors’ 2019 Wildfire Mitigation Plan, the CPUC changes any of the safety targets that is a metric in the 2019 STIP, such metric will be changed to match that change; The threshold and maximum targets for the financial metric in the 2019 STIP for Earnings from Operations have been changed from 95% to 105% of target to 90% to 110% of target; The Individual Performance Modifier component of the 2019 STIP will be applied on an annual rather than quarterly basis—and, as in previous years, the IPM will be based on year-end performance, with the potential IPM ranging from 0–150% and for both upward and downward adjustments for all STIP participants…”
As previously reported, on April 23, 2019 the Court approved the Debtors' proposed $350.0mn (maximum payout, with $235.0mn target payout) short-term incentive plan, notwithstanding multiple objections, ranging from those questioning the appropriateness of encouraging a compensation culture which has failed to provide for the public safety…to more tradition objections based on ensuring the adoption of appropriate operational and public safety metrics.
On March 28, 2019, the Debtors' Official Committee of Tort Claimants (the “TCC”) and Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ motion requesting approval of the 2019 STIP [Docket No. 1109]. The objections took very different approaches; the TCC launching an emotive attack on a compensation culture which has failed to provide for the public safety and the Committee with a more traditional approach, focusing on operational metrics as well as ones that would incentivize on public safety issues.
On March 26, 2019, the U.S. Trustee assigned to the PG&E Corporation cases also objected to the 2019 STIP [Docket No. 1044, which we covered separately] citing concerns over (i) the open-ended quantum of the 2019 STIP (up to $350mn), (ii) the possible participation of insiders and (iii) elements of the STIP that appear to be more geared towards retention than incentive.
The TCC Objection
The TCC's emotive objection drips with sarcasm and specifically calls out the Debtors' compensation committee and VP of Human Resources as cpntributing to a compensation culture that failed to keep the public safe. The objection states, “During the past three years we have witnessed unparalleled death and destruction in Northern California as a result of PG&E’s equipment and corporate culture that promises ‘safety; every single year, but produces more and more calamity, and more and more falsifications of recordkeeping concealing managerial problems at PG&E. Throughout this period, the Company paid its employees, supervisors and managers a base salary, and bonuses that the Company calls ‘short term incentive pay’ based on ‘target metrics’ that supposedly incentivize ‘safety,’ ‘customer satisfaction,’ and ‘financial performance.’ The so-called short-term incentive plans (generally, a ‘STIP’) and resulting ‘awards’ of multi-million dollar bonuses have failed to keep the public safe.
Considering this history, one would think a prudent and careful director would have: (1) investigated the Company’s employees, supervisors and management and determine who did what and when, so that the culpable would be held accountable within the Company and its compensation process; (2) imposed sanctions or reprimands on supervisors and management who falsified the Company’s safety records or failed to repair the system when the honest employees reported a ‘high risk’ of failure on the ‘corroded’ system, so supervisors and management would be incentivized to do the right thing (after all, the ‘incentive’ payments have not kept us safe; they produced widespread safety violations); and (3) implemented Judge Alsup’s wildfire safety conditions of probation when he finalizes the conditions (now set for April 2, 2019).
But the four directors (‘Directors’) who make up the Company’s compensation committee (the ‘Compensation Committee’) and their Vice President of Human Resources (the ‘HR VP’) did exactly the opposite of taking those prudent measures. The Directors and the HR VP had a conflict with investigating and reprimanding the Company employees because they would have incriminated themselves in a derivative lawsuit that accused them of breaching their fiduciary duties by failing to conduct proper oversight over the culpable employees, supervisors and managers.”
The Committee Objection
The objection of the Committee is far less emotive than that of the TCC, with a focus on the adoption of a properly constructed plan that incentivizes both operational and safety-related performance. The objection states, “In particular, the Committee continues to evaluate the safety performance metrics in the proposed STIP. Given the Debtors’ history on various safety issues, the STIP should reflect ‘best in class’ safety metrics designed to send a loud and clear message of the Debtors’ stated intent to prioritize safety throughout its operations”
“As a threshold matter, the Committee supports a market-based, employee incentive program that appropriately motivates non-insider employees to perform their responsibilities in ways that serve the best interests of the Debtors’ business. In these cases, those interests include both operating performance and appropriate and effective safety programs. Maintaining a properly motivated and compensated workforce is a value-maximizing proposition that will inure to the benefit of the Debtors’ estates and all of their stakeholders. Thus, from the Committee’s perspective, the question is not whether a short-term incentive plan should be implemented at all, but whether the STIP the Debtors have proposed is properly constructed. While the Committee does not take issue with the aggregate dollars associated with the proposed STIP, the Committee does believe that the STIP, as proposed, needs to be adjusted in a number of respects if it is to function as intended.
First, the Committee has concerns regarding the change to the STIP compared to prior years which provides for measuring metrics and making payments, inclusive of the value from the discontinued long-term incentive plan ('LTIP') program and Individual Performance Modifier, more frequently than annually. The incremental LTIP value included in the STIP for senior-level employees would historically have been part of the LTIP program that was granted on an annual basis, vested over time and payable in equity. It is not clear to the Committee that the timing of these grants should be changed in this manner, and the same is true for the timing related to the Individual Performance Modifier component of the STIP for top performers.
Second, another STIP change from prior years is the inclusion of specific wildfire reduction measures from the Debtors’ 2019 Wildfire Safety Plan in the STIP’s Public Safety Index, which accounts for 10% of the STIP weighting. The California Public Utilities Commission ('CPUC') has not ruled on the adoption of the measures contained in that plan. As such, should the CPUC require those measures to be more stringent, the Committee requests that the Public Safety Index reflect those changes.
Third, the threshold and maximum targets of the Earnings from Operations financial performance metric are 95% and 105%, respectively. The Committee continues to review the propriety of these bands, including a review of analogous metrics used by comparable companies.
Fourth, the payment of STIP awards currently does not provide for any notice period for the Committee to review the calculations underlying the STIP scorecard, including any adjustments for items impacting comparability. The Committee has therefore requested seven (7) business days’ notice prior to the payment of any STIP award.”
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