DEFA14A: Archrock Defends Executive Pay Amidst ISS Disagreement, Cites Strong Shareholder Returns

Archrock is urging shareholders to approve its executive compensation plan, highlighting strong shareholder returns and disagreeing with ISS's assessment of pay misalignment.

Summary

• Archrock is seeking shareholder approval for its executive compensation (Say-on-Pay) proposal at the upcoming Annual Meeting on April 25, 2024.
• The company has historically received strong support for its executive compensation programs, averaging over 95% approval from voting stockholders in the last five years.
• Proxy advisory firm Glass Lewis recommends voting for the Say-on-Pay proposal, while ISS recommends voting against it.
• Archrock disagrees with ISS's assessment, arguing that its pay and performance are aligned, especially considering the company's strong shareholder returns.
• Archrock's total shareholder return (TSR) was 87% in 2023, placing it at the 100th percentile among its company-selected peer group.
• The company's CEO pay increased by an average of only 8% per year from 2021 to 2023, while shareholder returns increased dramatically.
• The Compensation Committee exercised discretion under the 2023 short-term incentive (STI) program, adjusting payouts from 146% to 170% to ensure fair compensation for record-setting performance.
• The company is increasing the weighting of performance-vesting long-term incentive (LTI) awards, moving to a 50%/50% mix of time and performance-vesting awards beginning in 2025.
• Archrock believes ISS used an inappropriate peer group for comparison, including companies outside of the natural gas compression industry.
• Glass Lewis found strong alignment between Archrock's executive pay and performance when compared with a more refined peer group.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. While Archrock defends its executive compensation and highlights strong performance, the disagreement with ISS and the need to address concerns about pay alignment introduce a negative element.

Positives

• Archrock has a history of strong shareholder support for its executive compensation programs.
• The company delivered strong shareholder returns, with an 87% TSR in 2023.
• The Compensation Committee exercised discretion to ensure fair compensation for employees, adjusting STI payouts to reflect record performance.
• Archrock is increasing the weighting of performance-vesting LTI awards, aligning executive compensation more closely with company performance.
• Glass Lewis found strong alignment between Archrock's executive pay and performance when compared with a more refined peer group.

Negatives

• ISS recommends voting against Archrock's Say-on-Pay proposal.
• ISS believes Archrock's pay and performance are misaligned.
• ISS used an inappropriate peer group for comparison, including companies outside of the natural gas compression industry.

Risks

• Shareholder rejection of the Say-on-Pay proposal could negatively impact investor confidence.
• Disagreement with ISS could lead to negative publicity and scrutiny of executive compensation practices.
• The use of an inappropriate peer group by ISS could distort the perception of Archrock's pay and performance alignment.

Future Outlook

Archrock will implement a 50%/50% mix of time and performance-vesting LTI awards beginning in 2025. The company has updated its STI program and does not expect to implement similar discretionary increases in the future.

Management Comments

• We strongly and respectfully disagree with ISSs suggestion that our pay and performance are misaligned.
• Our Compensation Committee remains committed to the ongoing evaluation of our executive compensation program, taking into consideration market trends, best practices, industry conditions, our performance and feedback received from our stockholders, and asks for your support for our Say-on-Pay proposal.

Industry Context

The document highlights the importance of selecting an appropriate peer group for executive compensation comparisons. ISS's inclusion of companies outside of the natural gas compression industry is criticized for skewing the results of pay vs. performance alignment tests. The document also mentions the trend among U.S. public companies to utilize a 50%/50% mix of time and performance awards.

Comparison to Industry Standards

• The document mentions that many U.S. public companies, including those in Archrock's peer group, utilize a 50%/50% mix of time and performance awards for LTI.
• The document compares Archrock's TSR performance to that of its company-selected peer group, noting that it placed at the 100th percentile for TSR in 2023.
• Glass Lewis found that Archrock paid above the median of its selected peers but performed better across TSR, change in Operating Cash Flow, Return on Assets, and Return on Equity.

Stakeholder Impact

• Shareholders are asked to vote on the Say-on-Pay proposal.
• Employees are impacted by the STI program and the Compensation Committee's decisions regarding payouts.
• Executive officers are directly affected by the executive compensation program.

Next Steps

• Shareholders will vote on the Say-on-Pay proposal at the Annual Meeting on April 25, 2024.
• Archrock will implement a 50%/50% mix of time and performance-vesting LTI awards beginning in 2025.

Key Dates

Keywords

executive compensation, Say-on-Pay, total shareholder return, TSR, peer group, ISS, Glass Lewis, LTI, STI, performance-vesting, time-vesting, Archrock