U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
NOTICE OF EXEMPT SOLICITATION
1. Name of the Registrant:
UNION PACIFIC CORPORATION
2. Name of person relying on exemption:
CtW INVESTMENT GROUP
3. Address of person relying on exemption:
1900 L Street, NW, Suite 900, Washington, DC 20036
CtW Investment Group
April 2010
Dear fellow Union Pacific Corporation shareholder:
WE URGE YOU TO JOIN US IN VOTING "AGAINST" UNION PACIFIC DIRECTOR
THOMAS J. DONOHUE AT THE ANNUAL MEETING OF SHAREHOLDERS ON MAY 6, 2010.
As longtime chair of the compensation committee, we believe Mr. Donohue
bears primary responsibility for the board's failure to set appropriate
compensation and meaningful incentives. This has allowed directors to
exercise undue discretion in awarding performance-based compensation, a
power we believe they have abused. As a consequence, Chairman and CEO
James R. Young's total compensation:
- is higher than at peer companies and is not significantly tied to
performance, with only 12% of his 2009 pay based on objective
performance metrics;
- has increased substantially faster than net income - the compound
annual growth rate for total CEO pay was 22.7% over the past three
years, but only 5.7% for net income; and
- includes excessive retirement benefits, including a severance
package valued at $52 million in 2009 had he been terminated as
part of a change of control.
In addition, we have fundamental concerns with Mr. Donohue's fitness
and independence as a director based on his:
- leadership of the Union Pacific compensation committee in 2003,
when it counted as earnings the proceeds of an asset sale in order
to hit earnings targets in a pay plan;
- conflict of interest as a Union Pacific director and President and
CEO of the US Chamber of Commerce, to which Union Pacific has
contributed $800,000 since 2004; and
- record as a director of scandal-ridden companies that awarded
excessive pay, granted misdated stock options and substantially
overstated earnings due to improper accounting.
Finally, we believe Mr. Donohue's conflict and Union Pacific's poor
compensation practices are symptomatic of a board that is not
sufficiently independent. THEREFORE, WE ALSO URGE YOU TO VOTE "FOR"
PROPOSAL #3 CALLING FOR AN INDEPENDENT BOARD CHAIRMAN.
The CtW Investment Group works with pension funds sponsored by unions
affiliated with Change to Win, a federation of unions representing
nearly 6 million members. These funds have over $200 billion in assets
and are substantial long-term Union Pacific shareholders. We detail
our concerns below.
1. UNION PACIFIC STATES THAT A SIGNIFICANT PORTION OF EXECUTIVE
COMPENSATION IS AT-RISK, BUT CEO CASH BONUSES ARE DOUBLE BASE SALARY
AND ARE DISCRETIONARY.
In each of the four years since Mr. Young became CEO in December 2005
his cash bonus has been more than 200% of his base salary. According to
its 2010 proxy statement, Union Pacific "pay(s) an annual cash bonus in
order to link a significant portion of the Executive's Total Cash
Compensation to specific annual Company results." However, it goes on
to state that "we do not establish a target performance formula for any
of our executives" and that bonuses are awarded on a "discretionary
basis". Cash bonuses that averaged $2.6 million for the past four years
with no measurable incentives
1900 L Street, NW, Suite 900, Washington, DC 20036 - 330 W. 42nd
Street, Suite 900, New York, NY 10036
202-721-6060
www.ctwinvestmentgroup.com
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Do not send us your proxy card as it will not be accepted.
are indicative of a compensation committee that disregards best
practices for ensuring that management incentives are aligned with the
company's business plan and shareholder interests generally.
2. LONG TERM PERFORMANCE STOCK UNITS ARE AWARDED BASED ON ONLY ONE
METRIC, ROIC, FOR WHICH THE COMPENSATION COMMITTEE LOWERED THE TARGET
AND THRESHOLD LEVELS IN 2009.
Performance stock units are awarded based on return on invested capital
(ROIC) over a three year period. For the three year period 2009-2011
the compensation committee lowered the ROIC threshold and target levels
from the previous period despite the fact that Union Pacific is
enjoying increasing returns and is expected to recover along with the
overall economy. The cyclical freight business is gaining strength and
the increasing demand is expected to help both pricing and volume, yet
the compensation committee lowered the ROIC threshold from 8.8% to
7.8%.
3. CEO PAY THAT IS OBJECTIVELY PERFORMANCE-BASED IS ONLY 12% OF TOTAL
COMPENSATION.
The annual cash bonuses awarded with complete discretion and without
measureable targets do not meet the definition of pay "at risk" and
over the past five years have ranged between 217% and 263% of base
salary for CEO James Young. In 2009, long term compensation was a
targeted mix of equity awards comprised of 25% Performance Stock Units,
25% Retention Stock Units and 50% Stock Option Awards which vest over a
three year period. As the RSU and Option awards serve the purpose
primarily of retention, the total annual pay that is objectively
"performance based" is represented by the PSUs which accounted for 12%
CEO James Young's total compensation in 2009 and averaged just below
12% for the past four years.
4. THE LARGEST COMPONENT OF TOTAL CEO COMPENSATION IS A LAVISH AND
GROWING RETIREMENT PACKAGE. THE PROVISIONS IN THE EVENT OF CHANGE IN
CONTROL OR SEPARATION ARE EXCESSIVE.
Since Mr. Young became CEO in December 2005, his total compensation has
grown from $8.2 million to $15.3 million in 2009. While his salary and
bonus both increased during that time, the great majority of gains have
been in the value of his pension and nonqualified deferred
compensation. In 2006, this category made up 13% of his total
compensation, reaching 27% by 2009. If Mr. Young is separated for any
reason from the company, he will receive $107,605 per month for life,
equal to $1.3 million per year. In addition, he could receive a one-
time equity payout from the accelerated vesting of options that in 2009
was worth $23 million and non-qualified deferred compensation of $14
million. In the event of termination as result of a change of control,
he would receive a total severance package that in 2009 was valued at
$52 million with shareholders footing the bill for taxes.
5. CONSTRUCTING A MORE FAVORABLE PEER GROUP IN 2009 ENABLED THE
COMPENSATION COMMITTEE TO CAMOUFLAGE EXCESSIVE EXECUTIVE COMPENSATION
THAT IS OUT OF LINE WITH PERFORMANCE.
In 2009, the compensation committee adopted a new peer group by adding
larger companies with significantly higher revenues and
compensation/1/. For the 13 of the 17 current peer group members for
_______________________________
/1/ The corporations removed from the peer group in 2009 had average
revenues that were 105% of Union Pacific 2009 revenues while the
corporations added to the peer group had average revenues that were
176% of Union Pacific 2009 revenues. Corporations added to the group
averaged CEO total compensation of $13 million in 2009 compared to $9
million for those removed.
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which 2009 compensation is available, only three reported CEO total
compensation higher than Union Pacific: General Dynamics, Northrop
Grumman and Time Warner Cable. Remaining constant within the peer group
are eight companies which include a subset of Union Pacific's railroad
industry peers. For this group of eight companies, the three year CAGR
of the average total CEO compensation since 2006 was negative 8% while
at Union Pacific it was 23%.
While Union Pacific's one- and three-year total shareholder returns of
44% and 48%, respectively, are somewhat above the averages (42% and
37%, respectively) of its three closest railroad peers (Burlington
Northern, CSX and Norfolk Southern), its 2009 total CEO compensation is
substantially higher based on the two peers (CSX and Norfolk Southern)
that have disclosed their 2009 pay. Total CEO compensation at CSX and
Norfolk Southern for 2009 was $10.1 million and $12.8 million
respectively compared to $15.3 million at Union Pacific.
6. MR. DONOHUE HAS A CONFLICT OF INTEREST THAT WE BELIEVE COMPROMISES
HIS INDEPENDENCE.
Mr. Donohue is President and CEO of the US Chamber of Commerce, to
which Union Pacific discloses contributions totaling $800,000 since
2004, including $100,000 in 2009. In our view, this conflict
compromises his independence and disqualifies him from serving on key
board committees. As a result of this conflict, independent proxy
advisor Glass Lewis has historically classified Mr. Donohue as an
affiliated insider and recommended that shareholders withhold support
from him given his role on key committees.
7. THE COMPENSATION COMMITTEE MR. DONOHUE CHAIRED HAS USED ITS
DISCRETION IN THE PAST TO AWARD MILLIONS IN UNEARNED INCENTIVE PAY TO
CURRENT AND FORMER UNION PACIFIC EXECUTIVES.
In 2003, the compensation committee Mr. Donohue chaired counted as
earnings the initial public offering proceeds from the spin-off of
Overnite Transportation, Union Pacific's trucking subsidiary,
triggering an $8 million payout to Union Pacific's then-CEO under a
long-term pay plan approved in 2001. This decision, which was reported
by the New York Times but not disclosed to shareholders, enabled the
company to hit the cumulative three-year earnings threshold in the pay
plan.
While this event occurred more than six years ago, we believe it was
sufficiently egregious to permanently disqualify Mr. Donohue from
serving as a Union Pacific director. Significantly, Mr. Donohue's son
was named to the Overnite board three weeks after the spinoff by two
former Union Pacific executives who themselves received a total of $1.7
million in payouts from the above pay plan as a result of the unusual
discretion exercised by Mr. Donohue's committee.
8. MR. DONOHUE'S ROLE ON OTHER BOARDS RESPONSIBLE FOR EGREGIOUS PAY AND
ACCOUNTING ABUSES FURTHER DISQUALIFIES HIM TO REPRESENT UNION PACIFIC
SHAREHOLDERS.
Mr. Donohue has served as a director of three other public companies in
the past decade, in each case serving on the compensation committee
responsible for serious compensation failures.
QWEST COMMUNICATIONS: Mr. Donohue served on the compensation committee
from 2001 to 2005, a period defined by extraordinary payouts to
executives amid massive accounting and insider trading scandals that
brought the telecom company to the brink of bankruptcy. In October
2002, BusinessWeek named Qwest to its list of Worst Boards, citing an
expert who described the company's
____________________________________________________________________
This is not a solicitation of authority to vote your proxy.
Do not send us your proxy card as it will not be accepted.
compensation committee as "comatose" for awarding ex-CEO Joe Nacchio an
$88 million pay package in 2001, one of the worst years in the
company's history.
SUNRISE SENIOR LIVING: Mr. Donohue served on all three key board
committees from 1996 to 2008, during which time the board failed to
ensure adequate internal controls and approved misdated stock options.
Sunrise was forced to restate historical financial results, having
overstated 1996 to 2005 net income by $176 million, or 94%, including
$27 million ($44 million before tax) relating to misdated stock
options; undergo a Securities and Exchange Commission investigation
into its accounting, insider stock sales and the timing of stock option
grants that remains ongoing; and adopt governance reforms to settle
shareholder litigation alleging that insiders, including Mr. Donohue,
received backdated options and engaged in insider trading.
XM SATELLITE RADIO: Mr. Donohue served on the compensation committee
from 1999 until 2008, during which time he approved and, on two
occasions, may have received apparently misdated stock options. After
receiving notice in 2006 of an SEC investigation into its historic
stock option practices, XM disclosed that its 2006 compensation expense
included $10.4 million "or immaterial adjustments that occurred from
1999 through 2005 as determined by a review of the Company's stock
option practices."
SUMMARY: VOTE "AGAINST" DIRECTOR NOMINEE DONOHUE AND "FOR" PROPOSAL #3.
As longtime chair of the compensation committee, Mr. Donohue bears
primary responsibility for the committee's failure to set objective
performance metrics for executive compensation. As a consequence, the
committee has exercised undue discretion in awarding CEO pay, which is
high, disconnected from performance, and includes excessive retirement
and severance benefits. High director pay - a 2009 increase in the base
retainer fee to $250,000 puts the company above the 75th percentile of
its peer group - is an added concern, especially given the compensation
committee's effectively unlimited authority to award discretionary
bonuses.
Mr. Donohue's conflict, his committee's serious past abuse of its
discretionary authority and high director pay underscore concerns with
his independence and oversight. In addition, his role on other boards
responsible for egregious pay and accounting abuses further
disqualifies him to represent Union Pacific shareholders. Finally, we
believe Mr. Donohue's conflict and Union Pacific's poor pay practices
are symptomatic of a board that is not sufficiently independent.
THEREFORE, WE URGE YOU TO VOTE "AGAINST" DIRECTOR NOMINEE THOMAS J.
DONOHUE AND "FOR" PROPOSAL #3 CALLING FOR AN INDEPENDENT BOARD CHAIRMAN
AT UNION PACIFIC'S ANNUAL MEETING ON MAY 6TH. For additional
information, please contact Michael Garland, Director of Value
Strategies, at 212-471-1317 or [email protected].
Sincerely,
/s/
William Patterson
Executive Director
____________________________________________________________________
This is not a solicitation of authority to vote your proxy.
Do not send us your proxy card as it will not be accepted.