New Formulas Reduce Pay of Smithfield Foods CEO

SMITHFIELD, Va.Larry Pope, the president and CEO of Smithfield Foods, Inc., earned nearly $11 million in the 2013 fiscal year. That is more than 20 times the nation's medium annual household income.

But thanks to reduced profits and new formulas for calculating executive compensation, Pope earned $9.4 million less than he did just two years earlier, according to a regulatory filing. In FY2011, with consolidated pre-tax profits totaling $825.8 million, the 30-plus-year Smithfield veteran brought home $20.2 million in total compensation.

Most of Pope's compensation is based on the performance of the world's largest pork processor and hog producer. He earned a FY2013 salary of $1.1 million, representing roughly one tenth of his total compensation ($10.8 million).

Smithfield (SFD: NYSE) maintains changes in how executive compensation is calculated better align with the interests of its shareholders, who will vote next month on whether to approve Smithfield's merger with Shuanghui International Holdings Limited.  

In FY2013, Smithfield redesigned conditions that would trigger the award of "performance stock units" (PSUs). The awards are now tied to total shareholder return based on a comparison to 18 companies in Smithfield's peer group. In FY2012, PSUs were awarded if Smithfield achieved pre-tax profits of at least $150 million in either FY2012 or FY2013, the company explained in the regulatory filing.

Under the new formula, the value of the PSUs was reduced to $4.4 million from $5.1 million in the prior year, according to the filing. Also, while Pope was awarded stock options valued at $936,000 in FY2012, no such options were awarded to him in FY2013.

A change in how an annual "cash incentive award" is calculated further cut Pope's pay by $2.2 million compared to what he would have received under the old formula.

"Beginning in fiscal year 2013, a substantial part of our CEO's potential equity compensation is tied to our total shareholder return relative to that of a peer group of companies," Smithfield stated in the filing with the Securities and Exchange Commission.

Smithfield also amended a formula for calculating benefits under its supplemental executive retirement plan. The amendment cut the amount of the increase in the present value of Pope's pension benefits by $5.9 million, or 64 percent, compared to what he would have realized had the change not been made, the filing revealed.

In FY2013, Smithfield reported net income of $183.8 million (or $1.26 per diluted share) on record sales of $13.2 billion. But the hog production segment suffered due to lower hog prices and higher feed costs.

Smithfield disclosed Pope's compensation in proxy materials filed ahead of its shareholder meeting on Sept. 24 in Richmond, Va.

During that meeting, shareholders will  vote on whether to approve Shuanghui's acquisition of the company for $34.00 per share. That price reflects a premium of 31 percent to the closing price of Smithfield's common stock on the day before the deal was announced, according to the company.

Under the transaction, Smithfield's executive officers could receive total compensation of nearly $134 million, including $72.4 million in cash severance, according to a regulatory filing.

In retention bonuses alone, Pope stands to receive $8.3 million if he meets his obligations to stay with Smithfield through the third anniversary of the closing of the merger.

The prospect of a Chinese firm taking over an American company in the Fortune 500 has drawn economic and national security concerns in Washington. The Committee on Foreign Investment in the United States (CIFIUS) is reviewing the deal.

In prepared testimony last month before the U.S. Committee on Agriculture, Nutrition and Forestry, the 58-year-old Pope said Shuanghui will honor collective bargaining agreements and the contracts Smithfield has with more than 2,000 farmers.

The acquisition will help China meet the escalating demand for pork, bolstering U.S. exports and creating more jobs and production for pork producers in this country, Pope said.

"The reaction from the U.S. agricultural community has been overwhelmingly positive," he maintained.

Earlier this summer, a bipartisan group of 15 senators urged Treasury Secretary Jacob Lew to include the U.S. Department of Agriculture (USDA) and U.S. Food and Drug Administration (FDA) in its review of the Smithfield/Shuanghui merger.

"We believe that our food supply is critical infrastructure that should be included in any reasonable person's definition of national security," the senators wrote in a letter to Lew.