Freeport-McMoRan CEO Pay Change a Positive Step

The news that Freeport-McMoRan Copper & Gold (NYSE: FCX  ) had terminated its CEO's contract and compensated him with a $36 million stock award did not initially inspire me with confidence that this was an improvement. Coverage of the recent announcement referred to FCX's terrible record on executive compensation and its excessive golden parachutes.

It's true, the company lost its "Say on Pay" vote this year, with a whopping 71% of shareholders voting their disapproval of executive pay at the company. 2012's vote was a marginal win for management, but the company lost again in 2011. That's a pretty poor record.

But golden parachutes are only paid out when executives are actually fired. This sounded pretty unlikely in CEO Richard Adkerson's case. A former Arthur Andersen partner, Adkerson has been with FCX since 1989, and has been CEO since 2003. Although Adkerson and the company restructured terms of employment, he will continue in his role as president, CEO, and vice chairman.

With this move, it sounded like the board had just avoided the potential cost of terminating Richard Adkerson by replacing it with a definite cost – the stock award.

Then I read that at the same time as terminating his employment agreement, the company accelerated the vesting of all outstanding stock awards. Accelerated stock is typically the largest cost within golden parachutes. For example, back in 2006, when UnitedHealth (NYSE: UNH  ) let go its CEO, William McGuire, 63% of the $286 million golden parachute was accelerated stock. And in 2007, when Merrill Lynch fired Stanley O'Neal, 70% of the $187 million parachute was stock. This didn't sound like it was going to save shareholders any money at all in the unlikely event of Adkerson being fired since they were already on the hook for any outstanding stock anyway.

But the truth, as with many things, lies in the numbers. As a matter of fact, the stock acceleration for Adkerson represents only about 11% of the $125 million total "walk away" cost of terminating him, as disclosed in the 2013 proxy. Cash severance was an astonishing $61 million in the event Adkerson was fired after a takeover. Shareholders will still have to pay for a sizable pension of $27.6 million, and for that $36 million stock award. But another positive element: that stock award will only vest when the CEO retires.

My only carp – and it's only because I'm a perfectionist – is that the new stock award is not subject to the company's clawback arrangements. In other words, if Adkerson is convicted of cooking the books, he gets to keep the stock, whereas in most cases the pay would be taken away from him. Again, it's unlikely that he will suddenly be found guilty of fraud, but then why make the exclusion in the first place.

There are, apparently, more changes to come. And if this is the standard of them, I am a lot more hopeful for FCX's "Say on Pay" vote next year than I expected.

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