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Rejecting claims by a prominent institutional shareholder advisory firm of a “pay for performance disconnect” at the utility company, National Fuel Gas Co. urged its shareholders to approve the company’s compensation for CEO David F. Smith and other top executives at its annual shareholders’ meeting next month in Florida.

The Amherst-based energy company and public utility dismissed the analysis and recommendations of ISS Proxy Advisory Services, which on Friday encouraged its clients to vote against the company’s compensation for its top five executives.

ISS had said the pay packages are not in line with the company’s performance, but National Fuel said it “believes ISS’ analysis is incorrect,” according to a letter to shareholders filed with the Securities and Exchange Commission.

ISS – formerly Institutional Shareholder Services – is a research and consulting firm that provides pension funds, mutual funds, corporations and other institutional investors with advice on how to vote on company and shareholder resolutions.

“The company believes that its compensation policies and procedures encourage a culture of pay for performance and are strongly aligned with both the short- and long-term interests of the company’s stockholders,” National Fuel wrote.

Executive compensation has increasingly become a lightning rod for shareholders, who now demand more of a tie between how well a company performs and how much its CEO and top leaders should get paid. That can lead to disagreements, as companies seek to reward their executives enough to retain them while shareholders and other critics of high pay want the companies to be better stewards of their investments.

Typically, companies try to justify their pay based on their performance, the complexity and demands of the job, and the need to be competitive with the marketplace. But while National Fuel does defend its performance, as well as its focus on long-term results instead of short-term gains, it also takes aim at the methodology ISS used to reach its conclusions.

In its letter, National Fuel notes that it has “successfully pursued significant opportunities” on its Marcellus Shale land over the last five years while also “managing substantial challenges resulting from the lowest natural gas prices the country has seen in decades.” It’s been disciplined and cautious in developing its land and spending capital, while its business mix allows it to remain flexible so it can shift resources and attention quickly, it said.

“This approach has not always been rewarded by the stock market in the short term,” it said. But “over the last year, the market has handsomely rewarded the company’s shareholders.”

The company admitted that “in many instances, the company’s decisions differed from approaches of other companies with similar prospects,” such as not overextending itself by drilling wells without the pipeline to move the gas to market. But that’s deliberate, it said.

“Such approaches may lead to short-term share price rewards but have significant negative long-term consequences,” the company argued. “National Fuel made decisions not on the basis of short-term share price movements, but on the long-term benefits to the company’s shareholders.”

And while that’s meant it “faced short-term challenges in its total shareholder returns for fiscal 2011 and fiscal 2012,” that’s also “made the company one of the best performing companies” in the last 12 months. Specifically, National Fuel posted a total shareholder return of 26.05 percent from Feb. 16, 2012 to Feb. 15, 2013, second only to Cabot Oil & Gas Corp. among 24 energy firms.. The peer group median was just 1.17 percent.

National Fuel also criticized ISS for focusing too much on the change in the value of Smith’s pension, which represents the largest portion of his 2012 pay package. For one thing, it’s not a cash payment to the executive, and it’s also affected by volatility in interest rates. If you take that out of Smith’s package and the peer median, the company argued, his compensation is 15 percent below the median.

National Fuel said it’s one of a dwindling number of companies with traditional pensions. Other companies issue large stock awards as a substitute, but they’re only reported in the year they’re granted, while changes in pension values are listed yearly.

Also, it said, ISS doesn’t regard “stock appreciation rights” as “performance-based compensation,” even though the Internal Revenue Service does and the rights only have value if the stock price increases.

email: jepstein@buffnews.com