Letter from the Compensation and Management Succession Committee (Compensation Committee)
To our Fellow Stockholders:
Southern Company’s strategy is to maximize long-term value to stockholders through a customer-, community- and relationship-focused business model that produces sustainable levels of return on energy infrastructure. In 2017, we continued to provide clean, safe, reliable and affordable energy to over nine million retail and wholesale customers. Operating premier state-regulated utilities and investing in energy infrastructure under long-term contracts are the focus of Southern Company’s customer-centric business model, which is designed to support regular, predictable and sustainable long-term earnings and dividend growth. We believe that achieving these objectives will deliver superior long-term risk-adjusted TSR for investors.
We achieved success on multiple fronts over the last year, while also experiencing a regulatory disallowance of the costs of the gasifier at the Kemper IGCC. Some of the highlights include:
Focus on Safety, People and Culture: As we strive to be a premier employer of choice, in 2017 we built on a strong safety culture through improved incident prevention programs, emphasized diversity and, particularly, inclusion and bolstered talent development and our succession pipeline.
Outstanding Operational Performance and Customer Service: 2017 represented one of our strongest operational performances in recent history. We had strong operational performance on electric generation, transmission and distribution, while continuing a stellar track record of outstanding storm response during an active 2017 hurricane season. Our state-regulated electric and gas utilities continue to be among the most highly rated utilities for customer satisfaction by J.D. Power, which ranks companies based on power quality and reliability, price, billing and payment, corporate citizenship, communications and customer service. Southern Company and its four state-regulated electric utilities continued to achieve top five rankings on the Customer Value Benchmark Survey, while two Southern Company Gas subsidiaries were named among the “Most Trusted Brands” in the industry. Southern Power delivered excellent performance with its natural gas and renewable generation assets, including its best ever performance on a key metric for generation availability.
Constructive Regulatory Outcomes: We continued to foster strong regulatory relationships as evidenced by multiple constructive outcomes at our electric and gas utilities.
Progress on Vogtle Construction Project: At Plant Vogtle Units 3 and 4, the first new U.S. nuclear project in three decades, Georgia Power successfully navigated and mitigated the impacts from the March 2017 bankruptcy of the contractor, Westinghouse. Southern Nuclear has successfully assumed control of construction at the site and the Vogtle owners brought nuclear-experienced Bechtel Power Corporation on site as the prime contractor. In September, Georgia Power received an approximately $1.7 billion conditional commitment for incremental Department of Energy (DOE) loan guarantees, which now total $5.13 billion and are expected to save Georgia Power customers over $500 million in costs. Final approval and issuance of the additional loan guarantees cannot be assured. Along with its co-owners, Georgia Power received payment of 100% of its portion (approximately $1.7 billion) of the $3.7 billion Toshiba guarantee obligation, which will mitigate the cost to complete the facility. In December, Georgia Power received unanimous approval to continue construction under the new cost and schedule from the Georgia Public Service Commission. Earlier this year, Congress extended the deadline for receiving advanced nuclear production tax credits providing approximately $1 billion in expected future benefits for Georgia Power customers.
These achievements supported our strong financial results.
Strong Adjusted EPS: Our adjusted EPS outcome for 2017 was at the top of the guidance range we established at the beginning of the year.
Increased Dividend: We increased our dividend by eight cents per share, effective as of the second quarter of 2017. This marked 70 consecutive years – dating back to 1948 – that Southern Company paid a dividend to its stockholders that is equal to or greater than the previous year.
However, Southern Company recognized charges to earnings in 2017 for the remaining costs associated with the gasifier at the Kemper IGCC. Consistent with our culture of pay for performance and management accountability, and despite the outstanding performance described above, we exercised discretion to meaningfully reduce incentive payouts for the CEO and other key management responsible for the project.
We believe in pay for performance
We design our compensation program to attract, engage, competitively compensate and retain our employees. We target the total direct compensation for our executives at market median and place a very significant portion of that target compensation at risk – subject to achieving both short-term and long-term performance goals. In fact, only the base salary portion of executive compensation is fixed.
CEO Target Pay
We engaged with stockholders and responded to their feedback
At the 2017 annual meeting, the Say on Pay vote received 62% support, which was a decrease from the average of 93% support we received from 2011 through 2016. We were disappointed with the results of the vote and wanted to understand what drove the decrease in support. In response, we reached out to stockholders representing over 35% of our stock, listened to what they had to say and acted on what we heard. These engagements included active involvement of our independent Directors, and the clear message from our stockholders was concern about the exclusion of 2016 charges to earnings related to the Kemper IGCC in determining incentive compensation payouts.
Consistent with the Company’s earnings press releases, we use adjusted earnings results as a starting point for determining payouts. Adjusted EPS is a primary metric that analysts use to evaluate our financial performance because it is an indicator of the earnings from ongoing business activities. We then review the calculated pay outcome and consider whether the calculated payouts are appropriately aligned with Company financial performance and stockholder interests. To ensure alignment between pay and financial performance, we retain the ability to exercise discretion in determining final payouts under the annual and long-term incentive programs.
In 2017, there were many significant accomplishments and advances for the Company, led by the CEO and the executive team. However, it is our responsibility to balance the significant successes against the ultimate actions taken during 2017, in particular the charges to earnings for the Kemper IGCC, to ensure that pay is aligned with financial performance and stockholder interests.
Based on the feedback from stockholder engagement, thoughtful consideration by our committee and consultation with our independent compensation consultant, we applied discretion to reduce 2017 payouts to the CEO and other members of the senior management team for the annual and long-term incentive awards. We reduced total 2017 incentive pay to the CEO by $4.7 million, reflecting a 40% reduction as compared to the calculated incentive award amounts1. This reduction was the equivalent of paying incentive awards for the CEO on GAAP results.
We reduced the CEO’s calculated payout for the 2017 PPP by 55% or $1.6 million and the calculated payout for the PSP for the 2015 to 2017 performance period by 35% or $3.1 million1. We also held the CEO’s base salary flat for 2018.
We reduced PPP and PSP payouts to certain other members of senior management by an aggregate amount of $2.0 million1.
The Compensation Committee and the other independent Directors believe that our CEO and senior management team are one of the most experienced and capable leadership teams in our industry. However, we believe it to be appropriate to take this step to ensure alignment between financial performance and stockholder interests.
As in previous years, stockholders continued to express support for the overall design of the compensation program. We requested input from stockholders on changes we could implement that would further improve program design. Based on this input, thoughtful consideration by our committee and consultation with our independent compensation consultant, we eliminated EPS as a financial performance measure in the 2018 long-term incentive program, so that EPS is not duplicated as a financial performance measure in the 2018 PPP and 2018-2020 PSP. We also reduced the weighting of the CEO’s individual performance component in the 2018 PPP.
Our values drive our social and human capital strategies and are a strategic priority
How we do our work at Southern Company is just as important as what we do. Our employees are our greatest asset, and our actions demonstrate the value we place on our people. We are fully committed to the long-term value that is created by attracting, developing and retaining an engaged, healthy, sustainable and socially responsible workforce, and a robust workforce is a leading indicator of our business performance. Our human capital strategy is integrally linked with our business strategy to drive superior performance and total commitment to our stockholders, customers, employees and the communities where we live and work.
We foster a diverse, inclusive and innovative culture that encourages and embraces change and differences of ideas and perspectives. We fuel this through a robust development environment that is designed to accelerate development for high performers and provide leadership and skill development for all employees. Development and retention of our talent are core to who we are and critical to our ongoing success. Additionally, it helps us create a strong employment brand to attract talent in an increasingly competitive labor market. We invest in the well-being of our employees through a comprehensive compensation and benefits strategy that includes a competitive salary, annual incentive award for nearly all employees and pension and benefits designed to encourage physical, financial and emotional well-being.
Our succession and organization leadership processes are driven by these principles and provide us with a strong and deep bench of leadership for positions, while also affording us the opportunity to attract external talent at all levels to enhance our skills and prepare for the future.
Our committee members are actively engaged
We held eight Compensation Committee meetings during 2017, and the average Director attendance at these meetings in 2017 was 98%. We listened to stockholder feedback from the 2017 Say on Pay vote and responded to what we heard. We are engaged and take our responsibilities seriously in establishing and overseeing the executive compensation program and management succession planning.
We thank you for your continued support.
Report of the Compensation Committee
We met with management to review and discuss the CD&A. Based on that review and discussion, we recommended to the Board that the CD&A be included in this proxy statement.
Henry A. Clark III
David J. Grain
Donald M. James
Dale E. Klein
Steven R. Specker
- Based on a stock price of $44.68, the closing stock price on the date the Compensation Committee made its decisions about 2017 payouts.