(PG&E-6)
PACIFIC GAS AND ELECTRIC COMPANY
CHAPTER 16
PERFORMANCE INCENTIVE PLAN
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A. Introduction
1. Scope and Purpose
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The purpose of this chapter is to demonstrate that Pacific Gas and
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Electric Company’s (PG&E or Company) annual variable pay plan, the
Performance Incentive Plan (PIP),[1] is competitive by external market
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standards and is a critical component of PG&E’s total compensation
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package. PG&E’s forecast for 2007 PIP payments—as explained below—is
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reasonable and should be adopted by the California Public Utilities
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Commission (Commission). PIP costs are included in the revenue
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requirement calculation as costs charged to one administrative and general
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(A&G) expense account (Account 920 – Salaries).
2. Summary of Dollar Request
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PG&E requests the Commission adopt its 2007 PIP forecast of
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$56.2 million. This forecast equates to 50 percent of the maximum potential
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PIP award payout based on the 2004 plan year.
3. Support for Request
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Compensation plays a pivotal role in ensuring that PG&E has the
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qualified workers it needs to provide safe and reliable service to its
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14 million customers. PG&E’s total compensation package—pay,
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incentives, and benefits—must be competitive to retain experienced workers
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and to attract new workers to perform the many critical functions necessary
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to provide gas and electric services throughout its service territory. PIP, a
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key component of the total compensation package, is a means of attracting,
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retaining and motivating employees in today’s competitive job market, and it
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is consistent with market practices. While the results of the Total
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Compensation Study for the 2007 General Rate Case (GRC) are not yet
[1]
The annual variable pay plan for officers is called Short-Term Incentive Plan
(STIP). In this testimony, the utility officer STIP cost is included in the PIP
forecast.
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available, it is expected to show that PG&E’s total compensation package is
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reasonable, as it has been shown to be in the past. In PG&E’s last two
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GRC proceedings there has been no disallowance for total compensation.
PG&E requests that the Commission include in the revenue requirement
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50 percent of the maximum potential award as forecast for 2007 because:
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(1) PIP objectives are clearly stated business and employee goals that are
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largely within employees’ control; (2) the achievement of PIP goals benefits
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customers and the Company; and (3) PIP is a reasonable compensation
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expense.
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B. Incentive Plan Description
Since 1987, PIP has been a component of PG&E’s total compensation
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package for management (supervisory, non-supervisory, and senior
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management) and clerical non-union employees. PIP directly ties
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compensation to the performance of employees, the business areas and the
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Company. It rewards employees for meeting and exceeding performance
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objectives that result in improved value to customers and the Company, such as
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improved customer service, productivity, reliability, safety and cost savings.
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In 1999, PG&E modified the PIP to place greater emphasis on the
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achievement of business objectives that benefit customers in a cost-effective
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manner. The current design balances the achievement of operational and
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service goals with budgetary objectives. There is flexibility within that design to
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annually structure the PIP to support PG&E’s vision, mission and key objectives
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for any given plan year.
The PIP design consists of two components, a business area performance
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component (which makes up 70 percent of the award) and a utility performance
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component (which makes up 30 percent of the award). The business area
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performance component measures the achievement of several types of
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objectives and thresholds, including key business and operating objectives,
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service, customer satisfaction, safety, and budget goals. The utility
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performance component measures earnings from operations (EFO).[2]
[2]
PIP awards for executives include both PG&E Corporation and Utility
financial performance along with other objectives.
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C. Incentive Plan Value
The PIP focuses on customer value. At the beginning of each year,
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business areas set PIP objectives and thresholds that direct employees’ efforts
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on key measurable goals that affect customer satisfaction, service, operations,
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and budget at the business area level. After review by the PIP review team (see
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the description of team in Section E, Plan Integrity) and senior management, the
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President and Chief Executive Officer of PG&E approves the objectives. The
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business areas are then asked to communicate the goals to employees, so that
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they understand early in the plan year how their efforts can contribute to
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achieving the PIP goals. The following examples of current business area plans
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demonstrate how customers benefit from employees’ achievement of PIP goals.
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The Customer Service and Revenue Department has robust goals to
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support excellence in customer service. Goals are designed to encourage high
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levels of performance for meters read on time, telephone service, customer
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satisfaction, help ticket resolution, new customer account set-up, on-time
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payment processing, and residential billing and payment. Goals are also
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designed to reduce current levels of delayed bills, missed meters, and the rate
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of employee lost workdays. Some of the goals support key business initiatives,
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such as the successful completion of Automated Meter Initiative (AMI)
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milestones. The successful completion of the AMI will provide both efficiency
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improvements and customer service benefits.
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The Customer Satisfaction Department goals focus employees on improving
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customer satisfaction. These goals include improving levels of business
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customer satisfaction and increasing the percentage of eligible low-income
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customers receiving a discount through the California Alternate Rates for
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Energy or CARE Program. Others focus on achieving air quality emission
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reduction goals through PG&E’s Clean Air Vehicle Program and achieving
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customer energy efficiency megawatt reduction goals for 2005.
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The Transmission and Distribution Department’s PIP emphasizes high
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standards of operation, service, reliability and customer satisfaction. Goals
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pertaining to operational efficiency, service, and reliability include completing
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major capital projects in a cost-efficient manner, controlling the ratio of dig-ins to
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underground service alert tags, and lowering the rate of employee lost
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workdays. Other goals encourage high levels of customer satisfaction with
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project management of new business activities, accurate communication for
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unplanned outages, and the residential reliability quality index. Additional goals
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focus on setting up new customer accounts within 60 days and completing
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regular, incident, and audit reporting in a timely manner. In addition to
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operational, service and safety goals, each business area has budget goals,
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which benefit customers because they encourage employees to work more
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efficiently and to reduce overall expenses.
PIP benefits customers because employees know that a portion of their
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compensation is contingent upon achieving these goals. PIP provides an
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annual variable pay opportunity, or “pay at risk”, to motivate employees to meet
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or exceed objectives. It is a particularly cost-effective component of total
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compensation because it generally does not result in increases to base salary or
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the cost of benefits.
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D. Calculation of PIP Awards
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At the end of the year, PG&E calculates PIP awards by using the final PIP
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score, the eligible employee’s participation rate, and his or her earnings during
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the plan year. The starting point is to calculate the PIP score by evaluating
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business area performance (70 percent) and overall utility performance
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(30 percent) based on the rating scales and standards established at the
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beginning of each plan year.
PIP Score
=
Business Area
Performance Component (70%)
Business Area
Performance Objectives
(Rating of 0.0 – 2.0)
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Operating/Service
x Thresholds
(0 to 100%)
+
Utility Performance
Component (30%)
EFO
(Rating scale of 0.0 – 2.0)
The business area performance component consists of business area
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performance objectives, which are modified by operating and service thresholds.
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Business area performance objectives are meant to encourage stretch
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performance to accomplish key goals and are scored on a 0.0 to 2.0 scale.
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Operating and service thresholds represent important levels of high
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performance that must be maintained and are scored as “on-off” switches, from
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0 to 100 percent. If one or more thresholds are not achieved, the business area
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performance score is modified downwards. The score for the business area
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performance component is obtained by multiplying the total business area
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performance objectives score by the total operating and service threshold score.
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This resulting score for the business area performance component is then
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added to the utility performance component score (which is also scored on a
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0.0 to 2.0 scale) to obtain the final PIP score. The final PIP score can range
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from 0.0 (results in no payout) to 2.0 (results in maximum payout), depending on
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achieved results.
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The next step is multiplying eligible employees’ straight-time earnings for the
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plan year (or adjusted gross earnings for clerical non-union employees) by their
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PIP participation rate. Participation rates vary by job category based on market
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data. For example, the participation rate for clerical non-union employees is
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6 percent and for supervisors it is 10 percent. This product is multiplied by the
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final PIP score to get the final award.
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Beginning in 2002, PG&E introduced an individual performance criterion
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whereby PIP awards may be modified based on the employee’s annual
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performance rating. Those employees who receive the highest performance
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rating of “1” (5 to 15 percent of employees companywide) can receive PIP
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award increases of up to 14 percent (awards are capped at 2.0 or maximum
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payout). Employees receiving a “3” or a “4” performance rating (7 to 15 percent
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of employees companywide) receive award decreases of 14 percent (if rated
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“3”), or receive no award (if rated “4”, which is the lowest rating). Examples of
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award calculations are in Attachment 1.
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PIP is an effective tool enabling senior management to communicate
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important objectives and to motivate employees to achieve those objectives. In
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recent years, employees have met or exceeded many plan objectives relating to
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customer satisfaction, quality of service, productivity, reliability, and safety. The
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average award payout for all participants, including PG&E officers, for the past
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five plan years (from 2000 through 2004), was 67 percent of the maximum
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payout, and the ten-year average (for plan years 1995 through 2004) was
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68 percent of the maximum payout. Therefore, using 50 percent of the
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maximum potential PIP award payout to calculate the forecast provides a
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conservative estimate of future PIP costs. The calculations supporting the PIP
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forecast are in the workpapers supporting Exhibit (PG&E-2), Chapter 6,
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Administrative and General Expense.
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E. Plan Integrity
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In 2001, PG&E revised its process for the review of PIP plans and results.
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The PIP review team was established to scrutinize all PIP results and proposed
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PIP objectives prior to senior officer review and approval. The PIP review team
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consists of compensation employees knowledgeable about incentive plans and
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key leaders responsible for budget and program review functions. Since 2002,
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participation on this team has expanded to include directors from the Utility
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Operations and Generation business areas.
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The PIP review team meets with representatives from over 25 business
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areas and conducts a comprehensive review of the business areas’ PIP results
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for the prior year and proposed plans for the coming year. It compares results
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against objectives, reviews supporting documentation of results, verifies the
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accuracy of calculations, and, as to plans, ensures that business areas meet the
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PIP guidelines by setting stretch objectives that represent key business,
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program, service, safety and financial goals. The PIP review team can
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recommend changes to PIP plans to achieve greater consistency across
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business areas.
Once the PIP review team has completed its review and analysis, it meets
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with the Senior Vice President of Human Resources, the Chief Financial Officer,
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the Executive Vice President and Chief of Utility Operations, and the Senior
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Vice President of Generation to present its analysis. After further review and
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discussion, the plans and results are presented to the Utility’s President and
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Chief Executive Officer for approval.
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F. Ratemaking Policy
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Due to the settlement in PG&E’s 2003 GRC (D.04-05-055), there was no
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policy decision regarding PIP, although in its testimony PG&E had asked the
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Commission to reconsider its policy on incentive pay. Subsequently, in
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Southern California Edison’s (SCE) 2003 GRC, the Commission issued a
decision (D.04-07-022) that was consistent with earlier GRC decisions[3] and
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supported full recovery of forecasted expenses.
[3]
In PG&E’s 1993 GRC decision (D.92-12-057) and in Southern California Gas
Company’s 1994 GRC decision (D.93-12-043), the Commission granted
recovery of 100 percent of the requested costs of the employee incentive
programs.
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In Decision 04-07-022, the Commission approved a 2003 test year forecast
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based on a two-year average of actual payouts, 1999 and 2000, of SCE’s
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Results Sharing Program, which was close to the maximum payout under the
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plan. The Commission was satisfied that such recovery was appropriate
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because total compensation as measured in SCE’s total compensation study
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“does not exceed competitive employment market levels of employee
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compensation” (p. 216). As the Commission observed:
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It would be within SCE’s managerial discretion to offer all cash
compensation to employees in the form of base pay instead of a mix of
base pay and incentive pay. In the event SCE were to do so, we would not
take issue with ratepayer funding of the resulting compensation as long as
total compensation is reasonable. If total compensation does not exceed
market levels, a disallowance …would in effect be a substitution of our
judgment for that of SCE managers regarding the appropriate mix of base
and incentive pay. That is the sort of micromanagement that the
Commission rejected in D.92-12-057, and that we reject here (p. 217).
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The Commission further stated:
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The concern that full ratepayer funding of forecast Results Sharing program
costs would provide SCE with an incentive to enrich shareholders is
mitigated by the fact that the program has clearly stated business area and
employee goals. Whether the goals are met is largely within the individual
and collective control of employees, not corporate officers (Id.).
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Previously, the Commission had taken different approaches. Thus in
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PG&E’s 1999 GRC decision, the Commission approved PG&E’s PIP at the
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1.0 rating level, which is equivalent to 50 percent of the maximum potential
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award, but went on to disallow 50 percent of that amount. This disallowance
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was based upon its conclusion that equal sharing of costs between ratepayers
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and shareholders is “fair” and “provides appropriate incentives to the utility to
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perform in ways that benefit ratepayers and shareholders alike” (D.00-02-046,
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mimeo p. 259). In effect, the Commission’s action resulted in unequal and
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unfair sharing of costs between ratepayers and shareholders. PG&E
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shareholders have, in fact, paid far more than 50 percent of the cost of this
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incentive program, contrary to the Commission’s intent. Over the past ten
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years, from 1995 through 2004, the average PIP payout to all plan participants,
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including PG&E officers, was 68 percent of the maximum potential award, while
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PG&E has been allowed recovery for essentially only 25 percent of the
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maximum potential award.
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Moreover, in PG&E’s 1999 GRC Decision, the Commission held that:
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Since the actual payout is less than the target payout in any year when
employees do not perform well enough to earn targeted payouts, there is an
unacceptable risk of over-collection of costs in the test year if we allow the
inclusion of 100 percent of the targeted payout in rates.
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The Commission’s concern has proven to be unwarranted, since a payout
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below target level, or below 50 percent of maximum, has occurred only once in
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the past ten years, in 1996, and not at all in the past five years.
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By contrast, the Commission granted 100 percent of the requested PIP
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costs (calculated at target payout or 50 percent of maximum payout) in PG&E’s
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1993 GRC decision (D.92-12-057). It also granted 100 percent of the requested
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costs for Southern California Gas Company’s employee incentive plan in its
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1994 GRC decision (D.93-12-043).
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The Commission’s return to its earlier policy of granting 100 percent of
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reasonable incentive costs, as it did in the 2003 SCE decision, was appropriate.
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PG&E’s incentive costs have been a reasonable part of its compensation
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package, as demonstrated in the Total Compensation Study results presented
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in the 1999 and 2003 GRCs. While the results for the Total Compensation
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Study for this proceeding are not yet available, it is expected to again
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demonstrate that these costs are reasonable. PG&E agrees with the
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Commission’s decision in the SCE case that it should be up to utilities to decide
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how to allocate its compensation among base pay, incentives and benefits as
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long as the overall package is reasonable. Further, PG&E believes that the use
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of actual incentive payments as the basis for cost recovery when total
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compensation is reasonable, as it was in the 2003 SCE GRC, is an appropriate
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approach. However, for purposes of this proceeding and without prejudice to
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the position the Company may take in future proceedings, PG&E is requesting
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cost recovery of only 50 percent of maximum award payout, which is far below
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the actual cost.
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G. PG&E Corporation Incentive Plan
PG&E Corporation also has an annual variable pay plan, the Short-Term
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Incentive Plan (STIP), which is similar in design to PG&E’s PIP. All PG&E
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Corporation employees are eligible to participate in STIP. The 2007 forecast of
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$5.4 million equates to 50 percent of the maximum potential STIP award payout
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based on the 2004 plan year. This cost is part of the request for recovery of
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PG&E Corporation costs, which is included in Table 2-3, Exhibit (PG&E-6),
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Chapter 2, The A&G Study Method and Results.
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PACIFIC GAS AND ELECTRIC COMPANY
ATTACHMENT 1
PIP AWARD CALCULATION EXAMPLES
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Calculation Formulas:
PIP Score:
(.70 x Threshold Score x Business Area Performance Score) + (.30 x Utility
Performance Score)
PIP Award:
PIP Score X Participation Rate X Annual Earnings*
Individual Performance Rating Modifier:
1 rating = +14%, 2 rating = no change, 3 rating = -14%, 4 rating = no award
PIP Award
Threshold
Examples
Score
Business
Utility
Area
Performance
Perf. Score
Score
PIP Score
#1
90%
1.00
0.95
0.92
#2
100%
1.00
1.00
1.00
#3
100%
1.40
1.30
1.37
Classification
Annual
Earnings*
Accounting
Analyst
Administrative
Clerk
Participation PIP Award #1 PIP Award #1 PIP Award #1
Rate
1 Rating
2 Rating
3 Rating
$60,000
8%
$5,007
$4,392
$3,777
$45,000
6%
$2,816
$2,471
$2,125
PIP Award #2 PIP Award #2 PIP Award #2 PIP Award #3 PIP Award #3 PIP Award #3
Classification
Accounting
Analyst
Administrative
Clerk
1 Rating
2 Rating
3 Rating
1 Rating
2 Rating
3 Rating
$5,472
$4,800
$4,128
$7,497
$6,576
$5,655
$3,078
$2,700
$2,322
$4,217
$3,699
$3,181
* Annual Earnings = Straight-time or adjusted annual gross earnings
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