March 6, 2017 9:00 AM, EST

Is a CEO Worth $200 Million? Shareholders at Rail Giant Think So

Norm Betts/Bloomberg News

Is superstar railroad executive Hunter Harrison worth a $200 million pay package? For that matter, is any CEO worth that?

The question has arisen in a shareholder activist’s campaign to shake up CSX Corp., one of North America’s major railroads. To sway investors and board members, Paul Hilal has promised to install Harrison as the company’s chief executive officer. In the rail business, that’s like a basketball owner vowing to recruit LeBron James. And like James, Harrison doesn’t come cheap.

In a highly unusual public negotiation, Harrison, 72, is demanding compensation in the nine figures to take the job, much of it tied to stock awards. The CSX board has said it would welcome Harrison as CEO, but not at the pay level requested, calling it “exceptionally unusual, if not unprecedented” for an incoming boss. Indeed, Harrison would be in the rarefied compensation neighborhood of people such as investment banker Paul J. Taubman or Patrick Soon-Shiong, the pharma billionaire.

But stockholders don’t seem to have any qualms about footing a package that’s extraordinary in the railroad industry. They’ve bid up CSX shares by 34% since Hilal’s effort was unveiled in January, adding more than $10 billion to its market capitalization.

“It’s someone saying: ‘I can add billions of dollars in value, and for that I want to be paid extremely well,’ ” said Alan Johnson, managing director of executive compensation consulting firm Johnson Associates Inc. “You don’t see this very often at all. Just like a sports figure, if CEOs believe they’re worth something there’s no reason they shouldn’t ask to get paid.”

If Hilal’s ploy sounds vaguely familiar, it’s because he took a page from activist Bill Ackman, his former boss at Pershing Square Capital Management. In 2012, Ackman lured Harrison out of retirement to run Canadian Pacific Railway, which he was targeting in an activist campaign. Then North America’s least efficient railroad, it’s today hailed for a smooth-running operation that’s helped triple net income during Harrison’s tenure. Pershing Square sold its entire stake in Canadian Pacific last year.

Representatives for CSX and Hilal’s New York-based investment fund, Mantle Ridge, declined to comment — but the two parties may be moving to end the pay impasse as soon as this week, people familiar with the matter said March 3. Harrison didn’t respond to an e-mail seeking comment.

The public drama began after the market closed Jan. 18, when Canadian Pacific announced that Harrison would step down as CEO. The company agreed to waive his noncompete obligation in exchange for forfeiting outstanding awards and benefits.

The reason for the waiver became clear a few hours later as Hilal’s plan to go after CSX and bring on Harrison was reported. Shares of the Jacksonville, Florida-based company, which has the worst efficiency measure among North American railroads, soared 23% the following day.

Hilal wrote CSX’s board that Harrison would require a pay package worth about $32 million a year for four years. The bulk would come in an equity award that’s partly linked to performance. In a separate letter, CSX’s board said it could equal as much as 1% of the company’s outstanding shares.

On top of that, Harrison asked for an $84 million reimbursement for equity awards, benefits and pension payments from Canadian Pacific that he surrendered to leave. CSX would also have to cover taxes on that payment, amounting to as much as $23 million.

The total came to more than $200 million, based on Hilal’s figures. The CSX board, however, valued it much higher — about $300 million.

In any case, it’s a lot. The package exceeds the C$94 million ($89 million) in compensation he got from Canadian Pacific for the four years ended in 2015, and dwarfs the $39.8 million CSX outgoing CEO Michael Ward received for those same years.

The total compensation would be big enough to place Harrison among the country’s top-paid public company executives. The highest-paid, Soon-Shiong, CEO of cancer-researcher NantKwest Inc., received a package worth more than $300 million for 2015, while Taubman, who runs PJT Partners, got awards valued at more than $160 million. Sundar Pichai, CEO of Alphabet Inc.’s Google, was granted about $150 million.

“Astronomical” pay packages sometimes come when companies are hiring someone to lead a turnaround situation, said Aalap Shah, managing director at compensation consultant Pearl Meyer. In those cases, the usual practice of setting pay — by looking at what peers receive — can get scrapped. Instead, businesses sometimes “end up paying the price tag that the individual demands,’’ Shah said.

In 2015, for example, Toys ‘R’ Us Inc. hired David Brandon to reverse losses and prepare the company for an initial public offering. Brandon, who had led Domino’s Pizza Inc. through an IPO a decade earlier, was offered a package worth more than $50 million. Toys ‘R’ Us has yet to go public, though Brandon is credited with stabilizing the business.

Harrison’s package, tied mostly to stock appreciation, “only has meaningful value if Hunter knocks the cover off the ball,’’ Hilal said in his letter to CSX’s board. “And it would certainly be deserved.”