Dear Southern Company Stockholder,
2016 was a successful year for Southern Company with strong financial and operational performance.
In 2016, Southern Company delivered a 9.9% annualized return to stockholders, and over the period from 2014 to 2016 Southern Company delivered an 11.2% annualized return to stockholders. However, in recent years Southern Company’s TSR underperformed as compared to other utility company peers and as compared to the S&P 500. We believe this level of performance is largely attributable to investor sentiment regarding our major construction projects, the implications of actual and potential federal tax law changes and the high correlation of our stock to interest rates. The underperformance of our TSR as compared to utility peers has significantly impacted the pay realized by our executive officers over the past few years.
We continue to provide clean, safe, reliable and affordable energy to millions of customers. We believe that focusing on the customer, operating premier state-regulated utilities and investing in energy infrastructure projects under long-term contracts will continue to support regular, predictable and sustainable long-term earnings and dividend growth. We believe that achieving these objectives will deliver superior risk-adjusted TSR for our investors.
This CD&A describes what we pay, why we pay it and how we made our pay decisions for 2016. It also demonstrates how our executive pay program reflects our compensation philosophy, including the importance of linking performance and compensation.
We target the total direct compensation for our executives at market median and place a significant portion of that target compensation “at risk” – subject to achieving both short-term and long-term performance goals. In fact, only the base salary portion of executive compensation is fixed.
At the 2016 annual meeting, the advisory vote on 2015 executive compensation was overwhelmingly supported by our stockholders, receiving support of 93% of the votes cast.
We have continued with the same compensation program structure for 2016, tying a significant majority of executive compensation to performance. The key performance based elements are the annual cash incentive award and the long-term equity incentive award.
The customer is at the center of everything we do at Southern Company, and this business model serves as our guiding principle. Our goal is to sustain long-term financial and operational success and to create long-term value for our stockholders by keeping customers first and providing them with outstanding customer service and clean, safe, reliable and affordable energy.
Our compensation program is designed to be consistent with our business strategy. By linking pay and performance, we align our executive officers with both stockholder and customer interests. We design our program to attract, engage, competitively compensate and retain our employees.
We focus on talent development at all levels within our organization to drive performance and engagement and foster professional growth. We believe this leads to a deep bench of talent that is important to management succession planning.
We held ten Compensation Committee meetings during 2016, and the average Director attendance at our meetings in 2016 was 94%. We are engaged and take our responsibilities very seriously in establishing and overseeing the Southern Company executive compensation program and overseeing management succession planning.
We thank you for your continued support.
We met with management to review and discuss the CD&A. Based on that review and discussion, we recommended to the Board that the CD&A be included in this proxy statement.