Boeing Leaders’ Windfall Predates New Safety Goals Tied to Pay (Correct)

A pair of top Boeing Co. bosses who announced their departures as the company faced scrutiny over near-catastrophic manufacturing flaws in its 737 series jets are still poised to collect a combined $45 million in compensation based on the most recent company disclosures.

CEO Dave Calhoun and former Executive Vice President Stan Deal aren’t likely to face an internal clawback policy in part because they were not fired in connection with quality management issues in the 737 program. By cashing out their large stock options now, they also are avoiding criteria which shareholders are poised to approve connecting compensation to performance for executives involved in production of two of the company’s most embattled jets.

If production problems persist, their successors might not be so lucky. Investors are expected to approve a board-endorsed proposal at Boeing’s annual meeting May 16 that would tie the compensation of the company’s incoming executives directly to safety improvements.

The proposal was sparked by a January incident in which a door panel missing four bolts blew off of a Boeing 737 Max 9 jet during an Alaska Airlines flight. The company’s share prices have fallen nearly 32% since the incident, and the company faces intense scrutiny from investors, the public, lawmakers, and regulators to focus on quality and safety.

Boeing announced a leadership shakeup two months after the January incident. Deal, who led the Boeing Commercial Airplanes division for five years, announced his retirement while Calhoun agreed to retire by the end of the year.

The retirements allow Deal and Calhoun to bypass the company’s executive compensation clawback policy, which states the board may recoup past incentive pay in the event of “misconduct or certain types of negligent conduct, in addition to and even absent a restatement of financial results, including where such conduct has compromised the safety of our products or services.”

If they were fired or laid off, their pay would be subject to being recouped, Temple University accounting professor Steven Balsam said. The retirement arrangement resembles a “golden parachute,” where executives are well taken care of during major changes like mergers or acquisitions, he said.

“By any other name—it is,” Balsam said.

The Boeing executives are not the first to escape clawback rules through retirement. Former consumer-credit reporting agency Equifax CEO Richard Smith, for example, left the company with $165 million after he retired following a massive privacy breach in 2017. Investors angry with the payout pushed the company’s board to adopt a <-bsp-article-citation state="{"cms.site.owner":{"_ref":"00000166-e5a9-d785-a767-fffdcac50000","_type":"00000151-acf5-d1ce-a159-bff728d6001e"},"cms.content.publishDate":1713814716142,"cms.content.publishUser":{"_ref":"00000171-1256-d7ce-af71-d3d7b4e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"cms.content.updateDate":1713814716142,"cms.content.updateUser":{"_ref":"00000171-1256-d7ce-af71-d3d7b4e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"articleCitation":{"linkArticle":{"_ref":"00000160-03d2-d33f-a171-efda47ad0000","_type":"00000151-acf5-d1ce-a159-bff728d50010"},"_id":"0000018f-0751-dda8-a78f-077518c40000","_type":"00000160-bca2-df03-a1ef-bcef37330000"},"_id":"0000018f-0751-dda8-a78f-077518bf0000","_type":"00000160-bca2-df03-a1ef-bcef37350000"}">stricter clawback policy after he left, affecting his successor.

Golden Landing

Calhoun was paid $2.5 million in 2023 in salary and other compensation, while Deal netted $2.4 million in salary, bonus and other compensation for 2023. Calhoun declined an estimated $2.8 million bonus payout in 2023 in a short-term incentive, but he reaped more than $30 million worth of stock awards, bringing his total compensation for the year to almost $33 million. Deal was awarded nearly $10 million in stocks, based on the share price of $260 at year’s end, bringing his total potential payout for 2023 to more than $12.5 million, including a $756,000 bonus. The actual amount both receive will vary based on the stock price at the time the shares vest.

Still—Calhoun’s total compensation is poised to increase 45% percent since 2022, when he received $22.6 million in total compensation including stock awards. Deal’s total year-over-year compensation increased 42% from $8.8 million to $12.5 million, records show.

According to Boeing’s clawback policy, the board may recoup “incentive-based compensation paid to any executive of the company in the event of certain types of misconduct or negligent conduct, including where such behavior has compromised the safety of any of the company’s products or services.” That means 94% CEO compensation is subject to the clawback policy, and 89% for other named executive officers, Boeing’s 2024 proxy statement shows. For Calhoun and Deal, that means the board could attempt to recover all but their salary.

Boeing spokespeople declined to comment if the company is considering clawing back any pay.

The payouts also come as problems continue to emerge with Boeing manufacturing. The compensation agreements, disclosed in Boeing’s 2024 proxy statement released April 5, show the massive payouts promised top executives as aircraft failure after aircraft failure kept occurring.

The bar to trigger a clawback review is rather high, said Jun Yang, director of Indiana University’s Institute for Corporate Governance. Executives would have to do something egregious to trigger the clawback policy, she said, and their retirements—as opposed to being fired—signal their actions did not rise to that level.

The criteria for clawing back executive pay was established by the 2002 Sarbanes-Oxley Act following the Enron scandal and further enhanced by the Dodd-Frank Act in 2010 after the financial crisis. An SEC rule finalized in 2022 forces companies to undergo a review of executives’ involvement in financial-statement mishaps. If companies have to revise their financial statements—in small or large ways—companies have to analyze executive liability.

Boeing did not restate its financial statements or disclose if it would initiate a clawback review.

Financial restatements can trigger clawbacks when it indicates executives hid—or tried to hide—mismanagement. Even then, just because a company makes a restatement doesn’t mean it has to recoup executive pay. Though Archer-Daniels-Midland Co. corrected years of inaccurate statements in March and suspended its CFO, top bosses at the grain and agriculture-product giant asserted those revisions didn’t warrant a review.

“Usually, there’s strong reasons,” Yang said. “Rarely are the executives fired for being incompetent—or for bad luck.”

Time for Change

Boeing’s 2024 proxy statement for its May 16 annual meeting includes a provision to overhaul the Commercial Airplanes division’s compensation structure weighting 60% toward operational performance and 40% toward financial performance. In 2023, the division weighted 25% toward operational performance and 75% toward financial performance. The proxy also says operational performance metrics will be “focused entirely on quality and safety goals.”

Further, “completion of 787 join verification rework, delivery of 737 Max inventory built prior to 2023" also falls on the Commercial Airplanes division, now headed by Chief Operating Officer and CEO of the unit, Stephanie Pope, who took over from Deal in late March.

Pope is the best leader to lead the type of turnaround the board is seeking, Jefferies Managing Director and equity analyst Sheila Kahyaoglu said. Her performance as head of Boeing’s general services division delivered strong results in 2023, and she has “an amazing track record” during her nearly 30-year career at the aircraft maker, Kahyaoglu said.

Still, it won’t be easy: “Wherever you are at Boeing, it’s definitely a difficult position,” she said. “You have to put in a major turnaround to make the organization look good.”

Investors are poised to vote on new compensation criteria for named executive officers, which the company has gone to lengths to retool to prove to shareholders its serious about making changes. For example, the company changed the upper range of its annual incentive target to 120% from 200%. Those and the recent leadership changes are likely to placate investors and pass without a hitch, Kahyaoglu said.

Voting down executive pay packages rarely happens. Data from 2023’s proxy season showed 58 companies failed to receive majority support for their proposals in the Russell 3000, according to corporate governance consulting firm Georgeson.

What the company needs is time for the proposed changes to take effect, and to support Pope in delivering results that please customers, regulators, employees and shareholders, Boston College accounting professor Mary Ellen Carter said. But that change isn’t going to happen overnight.

“You have to give the leadership a chance to make the changes that need to be made—they have put some things in place,” Carter said. “It would be unfair to only give them a couple of months and expect miracles.”