Max Garland | Memphis Commercial Appeal

Ray Padilla, Memphis Commercial Appeal

Although FedEx is expected to nix its annual bonus again, top executives remain on pace to reach a separate bonus payout.

FedEx’s long-term incentive compensation program (LTI) can lead to big dollars for the Memphis company’s leaders. The payouts are contingent upon FedEx meeting aggregate earnings-per-share goals over a three-year period.

Chairman and CEO Fred Smith made $6.3 million from the most recent LTI payout, according to FedEx's annual proxy statement. CFO Alan Graf ($1.88 million), CIO Rob Carter ($1.88 million), FedEx Ground CEO Henry Maier ($1.58 million) and retired President and COO David Bronczek ($2.5 million) are among the other higher-ups who received the LTI payouts.

The payout is for members of FedEx management, per the proxy statement, but it's not clear exactly how many are eligible to receive it.

“The payout under the FY17-19 LTI plan was based largely on strong adjusted EPS in FY18, which offset weaker than expected adjusted EPS results in FY19," FedEx said in a statement, which referred to its proxy statement and supplemental materials for more information.

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FedEx management should receive the LTI payout for the 2018-2020 fiscal year period if the company's estimates for 2020 are correct.

That’s despite several rough financial quarters for FedEx, which said in October an annual bonus for many employees across the enterprise is unlikely to happen in 2020. The company said it isn’t expecting to have enough to fund the annual incentive compensation payout due to “the current challenging business environment.”

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FedEx Memphis super hub

That annual bonus applies to "many of our salaried employees on an enterprise-wide basis" and is based on both financial and individual objectives, said the proxy statement.

The business struggles primarily stem from a slowdown in global trade and mounting costs from its TNT Express acquisition slamming FedEx’s largest company, air cargo giant FedEx Express.

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$4.6 million target payout for CEO

The LTI program’s main purpose “is to motivate management to contribute to our future success and to build long-term shareowner value and reward them accordingly,” according to FedEx’s annual proxy statement.

The earnings-per-share goal is set by members of FedEx’s board of directors. The payment amount depends on the company’s three-year average EPS growth rate — the higher the rate, the larger the payout.

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FedEx Founder Fred Smith through the Years

The payout is capped at a 15% growth rate, which leads to executives receiving 150% of their target payouts. There is no LTI payout if the growth rate is less than 5%.

For the 2018-2020 LTI program, Smith’s target payout is set at $4.6 million, with a maximum payout of $6.9 million. Other top executive officers are targeted for payouts of more than $1 million.

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“The Compensation Committee and the Board of Directors believe that the EPS performance measure provides the best incentive for executives to manage FedEx’s business and affairs for the long-term benefit of, and effectively aligns management’s interests with those of, our shareowners,” the Compensation Committee said in a recent letter to shareholders.

In its own letter to FedEx shareholders, the International Brotherhood of Teamsters said FedEx has an “overly generous approach” to executive perks, adding that the company has a history of easy-to-reach targets for its long-term incentive plan. The union referenced Barclays research that pointed out FedEx relies on EPS as a performance measure more than most in the transportation industry.

In September, shareholders approved the FedEx executive compensation plan, including the long-term incentive payments, in a non-binding, advisory vote.

FedEx should hit next year’s goal, despite struggles

To reach the minimum for the 2018-2020 LTI payout, FedEx needs an aggregate adjusted EPS of $40.02.

FedEx’s aggregate adjusted EPS sat at $30.61 at the end of fiscal 2019. With just 2020 to go, FedEx expects to reach the threshold. FedEx projects earnings of $11 to $13 per diluted share for fiscal 2020, excluding certain adjustments.

Dave Darnell/The Commercial Appeal

The EPS being adjusted means FedEx won’t factor in costly TNT Express integration expenses or adjustments to its retirement plan accounting. FedEx’s proxy statement said this allows the EPS calculations to “more accurately reflect FedEx’s core financial performance.”

The LTI has paid out above target seven times in the past eight years, per the Teamsters. The union alleges this is aided by aggressively adjusting earnings measures, with FedEx excluding nearly $3 billion in business costs from the LTI calculations, such as the TNT integration.