By Scott Patterson, Compensation Analyst Manager
In its most recently released proxy statement, Qualcomm Incorporated made it quite obvious to shareholders that the company rewards its executives at the expense of its shareholders. The company clearly states in the Compensation Discussion and Analysis that its Performance Share Units (PSU) could payout at target despite the shares posting a negative Total Shareholder Return. Award of Qualcomm’s PSUs are linked solely on company TSR performance relative to the NASDAQ-100. Because of this, relative underperformance in the form of negative TSR still gives the CEO the potential to earn $8M. Objectively, a board compensation committee has a duty to establish a fair and justified award structure that is mutually beneficial for both executives and shareholders. So when a company is willing to pay out over $8 Million worth of PSUs when common shareholders lose value, one has to wonder about the rigor of its compensation oversight.
Rather than evade the issue by burying the pay for fail structure deep in the proxy, Qualcomm is very open with its intentions. It is hard to miss the fact that executives get rewarded when stock returns are flat to negative.
The company reiterates its perplexing pay philosophy throughout the proxy stating; “The PSU program restricts the amount of PSUs that may be earned to the target amount if Qualcomm’s relative TSR is better than the NASDAQ while our absolute TSR is negative for the 3-year performance period. Thus, no more than the target amount of PSUs may be earned when our relative TSR exceeds the NASDAQ-100 during difficult market conditions.”
While in general, outperforming peers is generally desirable, the fact that the peer group is loosely defined as a broad index, and negative underperformance of a simple benchmark is rewarded with millions, should be a disconcerting realization for shareholders. These practices have been representative of Qualcomm’s ongoing executive pay strategy, which plays a factor in GMI Analyst’s current F ESG Pay rating for the company.
The disregard for an equitable and common sense pay structure reveals that there is a clear disconnect between the Qualcomm boardroom and its shareholders, which has started to manifest itself in the company’s “say on pay” votes over the last two years. The 2011 annual meeting indicated that shareholders had minimum concern about executive pay with over 94% of voters approving the company’s remuneration policy. However, the 2012 meeting was the first notable sign of displeasure among shareholders, as the remuneration approval percentage dropped to 68.5%. Given the 25% year over year drop in approval for Qualcomm compensation practices it will be interesting to see what shareholders have to say in 2013.