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Norfolk Southern railroad execs got cash, in part, for 'record' train length

A Scripps News investigation found Norfolk Southern gave top leaders millions of dollars in awards after they hit a controversial financial target.
Posted at 4:39 AM, Feb 28, 2023

While concerns have been building across the railroad industry for years about the growing length of trains, our Scripps News investigation found that Norfolk Southern’s top executives personally pocketed millions of dollars in incentives and cash rewards after the company hit a controversial financial target and made its trains longer. Critics from within the industry say the specific financial metrics the executives were incentivized to hit can pressure them to cut costs — potentially at the expense of safety. The Norfolk Southern train that derailed just outside the small Ohio town of East Palestine stretched nearly two miles long. 

National Transportation Safety Board (NTSB) preliminary report said trouble with the train began with a suspected wheel bearing that overheated on the 23rd car.

When that car came off the rail, it set in motion a disaster that has put a national spotlight on the potential dangers of increasingly long trains. Scripps News has learned the length of the train in East Palestine is being investigated as a potential contributing factor to the crash. 

In Norfolk Southern's 2019 annual report, the company told shareholders that it had launched a major overhaul in its operations, saying it had begun "running fewer, heavier trains." 

That same year, Securities and Exchange Commission (SEC) documents Scripps News examined show Norfolk Southern began to make big changes in how top executives could qualify for large cash awards, tying more of those payouts to a number known on Wall Street as the operating ratio.

It is calculated by dividing operating costs by operating revenues, and records we discovered show that it has grown in significance at Norfolk Southern in recent years.

"Railroads are seeking to have that number be the smallest, lowest number possible," said Steven Ditmeyer, the former director of research and development at the Federal Railroad Administration. "You want to squeeze the costs and increase the revenues."

Ditmeyer is among those industry experts who say the drive to lower operating costs can be directly linked to longer, more dangerous trains.

"The longer they make it, the per-car-cost of labor is less. And the longer trains have greater damage done, greater, larger pileups, fires and so on," he said. 

"This sharp emphasis on operating ratio and how that's driving behavior on railroads is a severe disappointment to me," he said.

Ditmeyer says while longer trains increase his concerns about safety, they can push the operating ratio down. And with millions of dollars in payouts to executives on the line, SEC filings reveal the importance of that operating ratio had grown at Norfolk Southern to account for 60% of its cash awards by 2020 – surpassing every other performance measure combined. And the incentives worked — each year, the ratio dropped.  

In 2021, when Norfolk Southern hit a record low operating ratio, it helped then-CEO James Squires land nearly $3.5 million in cash — almost three times what he’d earned the year before. At least four other executives got more than a million dollars each, including Norfolk Southern’s current chief executive officer Alan Shaw, who was executive vice president at the time.

Scripps News showed Jared Cassity, safety director of the nation’s largest railroad union, how under Norfolk Southern’s rules driving down the operating ratio by just a fraction of a percent could lead to huge cash payouts.   

"You're showing me numbers that I've not seen and that's — it really is disgusting," said Cassity, who worked as both a train engineer and conductor prior to taking on his national safety position for the SMART Union. "What that tells me is the railroads are going to keep flirting with danger or flirting with disaster as long as people are getting rich."   

Cassity said the families in East Palestine are paying the price and he believes more communities are at risk.  

"You have these executives that are getting rewarded. And so the instructions keep coming down. No matter what happens. I want more. I want more. I want more. And that's why you see the railroad saying that the train length is going to continue to grow no matter what," Cassity said. 

NTSB is formally consulting Cassity’s team in its ongoing investigation. Cassity says investigators are now looking into contributing factors to the East Palestine crash.

He says the train’s length is a big one.

"If you look at East Palestine, that one car that's bad ultimately is going to derail and when it stops, it's going to stop like that (snaps). And then everything else behind it comes crashing in. It exacerbates the damage. It exacerbates the likelihood that a car is going to be breached and leak hazardous materials into a community."

There is currently no limit on train length, but the Federal Railroad Administration is studying the issue and noted this past December that "train lengths increased before infrastructure, technology, equipment, and operating practices could accommodate them." 

An executive with Norfolk Southern testified on Capitol Hill this past year and defended the value of long trains, saying that "running longer trains is — is allowing us to more efficiently move what we can move and safely." 

When we asked the company about how these long trains tie into its compensation for executives, a spokesperson wrote: "our incentive compensation is based on financial performance" and "not predicated on things like train length, weight, and speed."

But that is not what we found the company told the Securities and Exchange Commission in a proxy filing when it touted its 2021 "record performance for train length and weight" to justify one reason why corporate executives earned a cash payout that year.  

When we shared the document we found with Norfolk Southern, a spokesperson offered another explanation, acknowledging that train length was a factor in cash awards, but said it was not the only one. 

Norfolk Southern did not agree to an interview with Scripps News and never responded to our questions about the biggest factor in those cash awards: the company’s "operating ratio." A spokesperson did tell us part of the company's incentives were also for improving safety. 

This past December, when the Government Accountability Office reported on Norfolk Southern’s accident rate, it found the company had hit a 10-year high in 2021.  

"This isn't about doing what's safest. And it's it's extremely concerning when you when you see the fallout and what's happening," Cassity said. 

Legislative records obtained by Scripps News show Norfolk Southern has spent tens of millions of dollars over the years lobbying Congress and federal agencies — numerous times trying to block potentially costly safety reforms, including fighting against whistleblower protections and speed limits for high-hazard flammable trains. They also are opposing a current federal effort to require a minimum number of crew members on a train. Just this past December, the company told the Federal Railroad Administration that running trains with one-person crews is safe.  

Cassity, who is also the union's alternate national legislative director for their transportation division, believes there is a direct correlation between what the company is lobbying for and against, and their incentive structure.

"You see the payouts. That is what is driving their decisions," he said.

After Norfolk Southern said it produced an "industry-leading total shareholder return," it gave its then-C-E-O $8.5 million in stock and options on top of his cash award, bringing his total 2021 compensation to more than $14 million.

"What we experienced is not okay," said Cassity. "And I don't want to say that we dodged a bullet in East Palestine, but the next one may be in a major urban area. It may be in a downtown Chicago. It may be in a downtown New York City," he said.

Norfolk Southern told Scripps News, "We are going to learn from this terrible accident and work with regulators and elected officials to improve railroad safety."

So far, they say they’ve set aside $5.8 million for East Palestine families. 

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