Alcoa Inc.
Summary:
If the executive compensation program continues as is and the reloaded options come off the books, this could be an A+ program. However, while those options remain on the books, we have to downgrade the program slightly. We will also take a wait and see approach in relation to the compensation of new President and CEO, Klaus Kleinfeld. Good program overall.
Analysis:
The wind whips through your hair as you come screaming down the hill. Then, only a short time after, you are relaxing on the way up a steady incline. As you approach the peak, you realize that another sudden fall is about to come and you will be starting the process all over again…
If we were describing a roller coaster, this might be fun. Unfortunately, we are talking about shareholders in the Metals and Mining Industry. The weak and uncertain U.S. economy has made this industry a volatile market to invest in recently. The ride called "Alcoa Inc." is no different, as you may be pretty dizzy after experiencing the ups and downs of their stock price.
With about two-thirds of revenue coming from aluminum, Alcoa is heavily reliant on energy-intensive processes. This can make their business fairly volatile, as costs rise and fall with energy costs. In 2007, Alcoa was hurt by these rising energy costs, along with a weakening U.S. dollar. In spite of increased sales prices due to increased demand for commodities worldwide, their business was hurt by the before-mentioned variables. This resulted in only a moderate increase in net income for 2007.
Management has responded by focusing on opportunities to generate their own electrical energy, which will decrease their concerns about market swings. This is a good move for the long-term, but still leaves them vulnerable to short-term volatility, which has continued thus far through 2008. Due to an overall average performance, but good long-term decisions being made, we would expect executive compensation to be moderate.
So… What Are They Paid?
Salaries for the Chairman and NEOs all look very reasonable. The Chairman made almost $1.5 million, while the NEOs averaged $560,000 each in salary compensation. Bonuses and non-equity incentives were all very reasonable as well. Most importantly, the bonus/incentive program is very well structured and uses a very quantitative approach.
Stock awards were average for the NEOs and a little high for the Chairman. Nothing too out of the ordinary here. Options, on the other hand, were very high. The main reason for this high number was a program that allowed executives to "reload" their options, that is reactivate options that have expired without being exercised. This program was discontinued in 2003, but the reloaded options still remain on the books. Options with a "reload" feature are bad. Period. We give them credit, however, for being aware of this fact and discontinuing the program.
Perquisites were all average or below average. A small car allowance was given to the Chairman, Alain J.P. Belda, ($22,000), but nothing unreasonable. The company also covered $110,000 in his incremental aircraft costs in 2007, but this is not out of the ordinary.
Finally, you may be wondering why we keep talking about the "Chairman" and not the CEO. Well, that's because a new CEO, Mr. Klaus Kleinfeld, was hired in 2007 and his compensation numbers are skewed because of sign-on bonuses, relocation costs, etc. Therefore we decided to talk about the Chairman, who was the highest paid executive in 2007. Mr. Kleinfeld appeared to sign a very generous deal to become President and CEO of Alcoa, but we are hoping that much of this money is temporary and that the company's performance will improve as a result of his hiring.
Compensation Details:
| CEO | NEO Avg. | |
|---|---|---|
| Base Salary | $1,457,500 | $560,302 |
| Bonus | $1,000,000 | $7,000,000 |
| Stock | $6,978,791 | $1,518,382 |
| Options | $12,422,250 | $2,323,028 |
| non-Equity Incentives | $2,000,000 | $541,667 |
Reference Links:
(1) Annual
Proxy Statement
(2) Annual
Report