National Post (National Edition)
HARRISON WANTS $US300M TO RUN CSX, AND HE’LL GET IT.
‘EXCEPTIONALLY UNUSUAL’
Hunter Harrison is asking for an “exceptionally unusual if not unprecedented” compensation package from CSX Corp. worth an estimated US$300 million, but analysts say shareholders are likely to vote him into the railway’s top job anyway.
Florida-based CSX will ask shareholders to vote on the “extraordinary requests” made by Harrison, the former CEO of Canadian Pacific Railway Ltd., and activist investor Paul Hilal, who owns 4.9 per cent of CSX’s shares through his investment firm, Mantle Ridge LP.
Harrison and Hilal have been collaborating to take control of CSX, with Harrison as CEO and Mantle Ridge designating at least six of the railway’s 14 directors. Their requests include an immediate equity award for Harrison of one per cent of CSX’s outstanding shares, at least half of which would not be subject to performance measures of any kind; this is worth approximately US$160 million at present value.
Under the proposal, Harrison would also receive an annual base salary of US$2.2 million, a target bonus of 120 per cent of salary, incentive awards, “extensive benefits and severance protections,” and a house in Jacksonville, Fla. All of this adds up to approximately US$300 million, according to CSX.
In addition, Harrison, 72, refused CSX’s request to have an independent physician review his medical records before he’s hired. Harrison was forced to take several weeks off work in 2015 after surgery on his legs led to medical complications, including pneumonia.
CSX shareholders will be asked to vote on two separate proposals: the employment package and the governance arrangements, which include giving Mantle Ridge six of 14 board seats and the power to select the compensation and governance committee chairs.
A date for the vote hasn’t been set, but it will be for investors who own shares as of March 16.
“While we had hoped to reach a negotiated agreement, we appreciate that CSX shareholders will have the opportunity to make their voices heard on the optimal governance and compensation structure that will create the conditions for a successful transformation,” Hilal said in a statement. “We remain fully confident in a favourable outcome for CSX and its shareholders and are excited for the future.”
Jason Seidl, an analyst at Cowen and Co., called the proposal a “classic move” by the two men, who appear to be asking “for more than they think they can get up front with the expectation that the final agreement will be more equitable.”
CSX shares are up nearly 30 per cent since the first reports that Harrison was going to try to claim the corner office.
“Discussion of Mr. Harrison coming to CSX has provided the company with over $10 billion in market capitalization so it is hard to fathom that shareholders will squabble with the compensation package even if the current CSX board finds it excessive,” Seidl wrote in an analysis.
However, he said shareholders may still reject the governance changes.
“This would place the ball back in Mr. Harrison’s hands, which could prove interesting as CSX appears the best fit for him at this stage given that management is somewhat receptive.”
Citi analyst Christian Wetherbee said he thinks shareholders will ultimately decide both proposals are worth the prospect of a significantly lower operating ratio (OR), which measures expenses as a percentage of revenue. Harrison lowered CP’s operating ratio to 58.6 per cent in 2016 from 81 per cent in 2011.
“We believe shareholders will likely look at the compensation package and board asks as worth the potential for a 58 per cent OR and therefore this step should move forward to Harrison running CSX by the end of April,” Wetherbee said in a note, reiterating his buy rating on CSX shares.