DERAILED: Disaster in East Palestine

Norfolk Southern overhauls exec payouts after Scripps News Probe

The embattled railroad begins a “new strategy” for cash awards to top leaders after investigative reports led to calls for action by Congress members.

Norfolk Southern overhauls exec payouts after Scripps News Probe
Gene J. Puskar / AP
SMS

After a series of exclusive Scripps News investigative reports about cash awards for top executives at Norfolk Southern, the railroad that owns the train that derailed in East Palestine, Ohio has announced a total overhaul of its cash incentives program. 

The Scripps News stories exposed how executives received millions of dollars in cash after the company made its trains longer and took other actions critics say made their trains more dangerous. 

In its "new strategy" for executive compensation, the company now has measures for on-time delivery, its reportable injury rate, and reportable accident rate. The company entirely dropped a controversial financial target that had been the biggest driver of its cash awards, and the focus of Scripps News' previous reports.

The company told Scripps News in a written statement this week it had recently disclosed changes to their incentive plan to the Securities and Exchange Commission (SEC), writing "the compensation of our entire management team will now be based in part on performance on related safety metrics."  

Last month, Scripps News asked the company if it would consider changing its incentive plan in light of the reporting. Pressure on the company began to build as multiple members of Congress responded to the Scripps News report, urging the company to change.

CDC investigators sick after studying East Palestine derailment
CDC investigators sick after studying East Palestine derailment

CDC investigators sick after studying East Palestine derailment

The team assigned to assess derailment-related health impacts became sick with many of the same symptoms residents of East Palestine complained about.

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The biggest shift in the company’s new incentive plan was the decision to completely eliminate its reliance on a Wall Street metric called the operating ratio. Critics say tying incentives to that metric, which measures operating expenses against operating revenues, discourages the company from spending money on needed safety reforms. Its dominance across the railroad industry had grown -- some calling the phenomenon the “cult of the operating ratio.” 

Scripps News found Norfolk Southern tied at least half of cash awards to executives to the financial metric in recent years. Industry insiders said they believed the company's cost-cutting measures to achieve the operating ratio target had become so severe that operations were becoming more dangerous. 

"The disappearance of operating ratio from the bonus criteria for Norfolk Southern executives is a major accomplishment," said the former director of research for the Federal Railroad Administration, Steven Ditmeyer. He and other critics from inside the industry spoke out for the initial Scripps News investigation.

The initial Scripps News report also showed Norfolk Southern had been touting reductions in accidents for the same time period a report from the Government Accountability Office (GAO) found Norfolk Southern's reportable accident rate had hit a 10-year high. The company later acknowledged it was only including reportable accidents on some, not all, of its train lines. In its new performance structure, the company has now pledged to use the same reportable train accident metric used by the GAO.

“They're incentivizing the right things. They're getting away from metrics that ultimately don't help the long term health of the industry,” Rep. Seth Moulton (D-Massachusetts) told Scripps News this week. 

He was among members of Congress, including Sen. JD Vance (R-Ohio), who urged the company to change course on its incentive structure after the Scripps News investigation. Last month, Sen. Jeff Merkley (D-Oregon) went as far as formally demanding Norfolk Southern tell Congress whether it would align the company’s performance on safety with executive performance, Merkley’s office told Scripps News.

The new incentive structure ties 70% of cash awards to financial measures, 20% to customer service, and 10% to safety.  

Financial targets still make up the bulk of incentives, but industry watchers say they won't have the same cost-cutting pressures as when most were tied to the operating ratio. Norfolk Southern wrote in its SEC filing that the new measures are an effort to "emphasize the imperative of operating safely." 

"I think that's, on one hand, wonderful." said Ditmeyer, noting the new incentives tied directly to safety. "But they are still fairly small percentages of the bonus package."

The filing also says the new financial incentives aim to "promote smart and sustainable growth." Ditmeyer and others have pointed to the industry's focus on operating ratio and severe cost-cutting as not just directly damaging safety, but also killing business growth -- causing railroads to lose out to the trucking industry. 

Though it often goes unnoticed, Americans rely on dangerous cargo crisscrossing the country everyday. Growing the railroad industry may actually have an additional safety benefit, said Rep. Moulton, who said transporting hazardous materials by train is still safer than by truck. According to the Bureau of Transportation Statistics, trucking has by far more reportable incidents (total fatalities, injuries, accidents and property damage) caused by the transport of hazardous materials each year. 

He hopes other railroads across the industry follow Norfolk Southern's lead. 

"I think it will make a difference in safety," said Rep. Moulton.  "They've gotten a hell of a lot of criticism, much of it well-deserved, but they deserve some credit for this," he said. 

Rosie Cima, Nathaniel Reed and Patrick Terpstra contributed to this report. 

Contact the lead reporters on this story at mark.greenblatt@scripps.com and carrie.cochran@scripps.com.