How To Get Paid $26.1 Million For Trashing A Company

Automaker Stellantis essentially forced its CEO to resign over a series of weak quarters that quickly demonstrated what many of us were already saying, which is that the company seemingly had no real executable plan to prosper in a difficult environment. In spite of this, Stellantis was in a position where it would have to pay out money to the same guy most people blame for the situation, if shareholders approved.

In recent days, investment management firms and proxy advisers were out telling shareholders not to support either the compensation package for executives or the members of the committee that puts it together. The reasoning is quite sound. Stellantis has done poorly, and if you do poorly, why should you get rewarded for it?

The larger issue shareholders have isn’t even as much about ex-CEO Carlos Tavares, not pictured above, but the way Stellantis pays its executives. Earlier today was the company’s annual meeting, and the Remuneration Committee in charge of setting compensation had its recommendations up for a vote. This included paying everything Tavares was contractually owed, which featured some huge bonus payouts.

Investment management firm Allianz Global Investors put out a release stating that it would cast its large proxy vote against the remuneration committee, both for reasons specifically related to Tavares and for ones unrelated:

The remuneration report of Stellantis CEO Carlos Tavares has faced notable dissent since the Fiat Chrysler and PSA merger, with opposition votes of 44% in 2021, 52% in 2022, 48% in 2023, and 30% in 2024. AllianzGI has consistently voted against the report, citing insufficient assurance of alignment between executive compensation and long-term company performance.

Despite engagement efforts, responses from Stellantis failed to alleviate concerns regarding the incentivisation mechanism. The pay package of €23.1 million for the former CEO proposed under the remuneration report appears overly generous, particularly given the lackluster operating performance and the circumstances surrounding the CEO’s forced resignation. The impact of the profit warning on the variable pay is only reflected in the bonus (with a zero payout) but not in the other components of the variable pay which would still grant him a payout of €20.5 million. In particular, the Transformation Incentive and the Shareholder Return Incentive plans were a recurrent topic of our engagement calls – in our view, the related payments do not warrant our support. There are ongoing concerns about the Remuneration Committee’s actions and oversight. Moreover, since the Chair won’t stand for re-election, AllianzGI will vote against the re-election of two Non-Executive Directors, both of whom are also members of the Remuneration Committee.

There’s a lot going on here, so it’s important to get into some of the details.

I don’t think anyone serious is saying that Tavares shouldn’t get paid his contractual salary, which is $2.25 million (€2.0 million). While you may not personally like someone’s performance, it’s not a great look to withhold a salary you agreed to. Even discounting the inevitable lawsuits that would arise, who would want to come and work for that company? As an investor, you want a great executive, and in the current environment, they expect to be paid a lot.

Here’s what the pay package for Tavares looked like the last two years, according to the annual report:

For those who don’t want to look at the image of the document, for 2024 that’s:

• BASE SALARY: €2,000,000
• FRINGE BENEFITS: €71,224
• SHORT-TERM INCENTIVE: €0
• LONG-TERM INCENTIVE: €20,514,494*
• POST RETIREMENT BENEFIT EXPENSE: €20,514,494

As you can see, this is a lot less than 2023, when pandemic-related shortages allowed Stellantis to make a lot of profits and cash off of consumers who lacked alternatives in a supply-limited market. I’ll talk about that in a bit, but let’s break down what’s going on here, because this is what Allianz and others were objecting to initially.

First, the footnote:

*Long Term Incentive (LTI) of €20,514,494 represents €10,000,000 from the Transformation Incentive and the total LTI expense from the Shareholder Return Incentive and remaining LTI Award expense. No future LTI expense will be recognized. There is no accelerated vesting of LTI Awards.

What is the transformation incentive? There’s another chart, don’t worry:

None of this is entirely abnormal, as all automakers and most large public corporations have these complex matrices for accomplishment. What’s interesting here is that despite a terrible performance for the company in terms of sales, public valuation, and reputation, Tavares apparently hit his marks.

Here’s a closer look at the justification from the Stellantis annual report:

Given the challenges that the automotive industry is facing with the transformation in global mobility, technology and the electrification of vehicles, and in recognition of Mr. Tavares’ essential role in leading Stellantis through the merger, on June 30, 2021, as provided under the terms of the Remuneration Policy, the Remuneration Committee recommended, and the Board approved, a one-time transformation incentive for the CEO. The design of the incentive, through the Remuneration Committee’s comprehensive and thoughtful consideration, reflects direct alignment between the Company’s direction of delivering value to shareholders through the critical merger and integration period while successfully positioning the Company as a global leader in the innovation of electrification of mobility in the industry. It was for this reason that the one-time incentive was defined and awarded in 2021 (after the creation of Stellantis from the merger) – to lock-in long-term goals over a critical fiveyear performance period.

And here’s more detail about that:

Some of these seem either like objectives any automaker should be shooting for (OTA software updates) or extremely specific (getting a deal with WAYMO). Does a modern automaker CEO need to be incentivized to build electric cars with improved range?

In addition to all of the above, what’s also interesting is the Total Shareholder Return Metric (or TSR), which gives bigger payouts relative to how the company performs in a group of peers made up of the other large automakers, including Volkswagen, Toyota, GM, Ford, Honda, and BMW. Specifically, this metric looks at stock price appreciation and dividends, so that the company’s executives profit more when shareholders profit.

Here’s what the chart for determining that looks like:

Hey, sweet! Work your way to 3rd place and still get 150% of the payout target (or 160% under the revised version).

I’m not an expert on executive compensation and, while I do sometimes look back at these filings, they’re extremely complex. Just for the sake of comparison, here’s how Ford explains the compensation for its CEO Jim Farley in its most recent SEC filing on the topic:

As you can see, in a year where Ford saw sales increase by about double the industry average in its primary market of the United States, Farley still made only 69% of his total bonus due to not fully meeting quality goals and cost reduction incentives. By comparison, Stellantis under Tavares saw a 12% drop in sales volumes globally, and while this resulted in an overall achievement of 59%, that’s still a lot of money and feels high relative to how the company is performing and its grim profit forecasts.

What I’m getting at with all of this is that I think the Remuneration Committee of Stellantis, while probably well-meaning, created objectives that, when combined with the pandemic, didn’t result in the best performance. There was a strong focus at the company on producing expensive electric platforms over hybrids. Tavares was incentivized for selling more lower-emissions vehicles and reducing corporate average fuel economy, which is good, but that seems to have led to dropping the Hemi V8 and otherwise diminishing what made the brands successful in the United States.

And rather than invest in more platforms in the United States, Tavares let the company overproduce Chargers and Challengers while otherwise reducing the offerings of most of its brands in the United States. Last year, Chrysler’s only new car was a minivan, and Fiat got almost nothing until the new Fiat 500 debuted. This was good for profits during the pandemic as those platform costs were already covered, but it made consumers and dealers upset with the company.

Looking at this compensation report and comparing it to what Tavares did, it’s easy to see the logic of his choices, even if, as an outsider, those moves felt extremely backward at the time. North America is by far the company’s most important market, which is why if I were an investor, I’d be upset at how little of his compensation feels rooted in North American performance.

It also may explain why Tavares seemed to be constantly in a fight with suppliers, given that the weighting of his LTI plan was skewed towards lower implementation costs. By continuing to produce old platforms and squeeze suppliers, Stellantis was keeping costs down in the short term at the expense of long-term results.

Anyway, did anyone listen to the proxy advisors or investment groups? Per Bloomberg, they did not:

Stellantis NV won support from shareholders for awarding former Chief Executive Officer Carlos Tavares €23.1 million ($26.1 million) for a year of declining sales and earnings.

Investors on Tuesday voted 67% in favor of the Jeep maker’s remuneration report in a non-binding vote at its annual general meeting in Amsterdam. The report included Tavares’ salary for 2024 and an additional €12 million in severance and milestone bonus payments he’ll receive this year.

Stellantis lacks a full-time CEO, and it’s going to have to pay someone to take over a company in a rough position, and one of the best ways to do that is to pay them a lot of money. Perhaps the bonus structure will be slightly more weighted towards North American performance in the future, so this situation doesn’t repeat itself.