Prudential CEO Can Be Rewarded for Missing Target

Prudential Financial Inc. (PRU) Chief Executive Officer John Strangfeld, who told investors to expect return on equity of at least 13 percent next year, can miss that goal and still qualify for his performance share awards.

Prudential set an ROE target of 12 percent, on average, for the three years through 2014 as the only measure of achievement for Strangfeld and other executives, the Newark, New Jersey- based life insurer said March 16 in a filing. Prudential’s ROE was 11 percent to 11.5 percent in 2011, Strangfeld said Feb. 15.

Strangfeld, 58, told investors last year he was focusing on boosting ROE, a measure of how well the company reinvests shareholder money, to 13 percent to 14 percent in 2013. That target, which Strangfeld has reiterated at least twice this year, is “a stretch objective,” said Bob DeFillippo, a spokesman for Prudential.

“If they want to give a stretch goal to investors, they should be thinking about maybe the same stretch goal for executives,” said Wayne Guay, a professor of accounting at the University of Pennsylvania’s Wharton School of Business.

Prudential, the second-biggest U.S. life insurer, gained less than 1 percent to $64.11 yesterday in New York and has surged 28 percent this year.

Prudential targeted 2012 ROE of 10.9 percent to 11.9 percent, meaning Strangfeld would qualify for 100 percent of his performance share awards by achieving the low end of the ranges this year and next, and turning in less than 13 percent in 2014.

‘It’s Just Cushion’

“It’s just cushion for the executives,” Dan Theriault, an analyst at Portales Partners LLC, said of the performance-award targets. “Because they are very publicly out there that they have to achieve this objective” of 13 percent to 14 percent ROE, he said. Theriault rates Prudential “sector perform.”

Strangfeld is eligible for 150 percent of the target awards if he achieves a 13 percent average over the three years, DeFillippo said. Prudential will give him 75 percent of the awards for an 11 percent ROE average and 50 percent of the target for a 10 percent return, DeFillippo said.

“This is consistent with our 13 to 14 percent objective,” DeFillippo said. “It also takes into account where our peer companies are right now.”

MetLife Inc., the biggest U.S. life insurer, said in December it expected 2011 operating return on equity of 10.6 percent to 10.8 percent. Hartford Financial Services Group Inc., the property-casualty and life insurer, said in December it expected a 2012 core earnings ROE of about 8 percent.

Strangfeld is boosting returns by buying back stock and integrating the Japanese businesses he bought last year from American International Group Inc. Prudential’s 2011 results “enhance our confidence” in the achievement of the 2013 ROE target, Strangfeld said on a Feb. 9 conference call with investors.

Strangfeld’s total compensation rose 7.9 percent to $23.7 million for 2011, the company said. The performance share awards were also offered to other named executive officers, a group that includes Chief Financial Officer Richard Carbone, Vice Chairman Mark Grier and Executive Vice Presidents Edward Baird and Charles Lowrey.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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