WSJ Article on Alternative Pay Disclosure

News Brief

By Cydney Posner

You can tell that we're getting closer to compensation season, given the recent increase in articles about executive comp. This article in The Wall Street Journal discusses alternative ways that companies are trying to present executive compensation to make the big numbers more palatable to shareholders. Companies often complain that the Summary Compensation Table in the proxy overstates compensation primarily because it includes unvested grants of stock and options.

One example provided is that of GE, which disclosed its CEO's taxable income last year, as shown on his W-2 form, of $7.82 million in addition to the $21.6 million it reported in the proxy's SCT. The WSJ reports that the difference was largely attributable to the value of equity grants and the change in the value of his pension.

Some companies have tried to show what the executive actually took home in a given year. According to a WSJ analysis, 228 companies mentioned "realizable" or "realized" pay in their proxies or proxy supplements this year, compared with only 119 in 2011, 83 in 2010 and just 68 in 2009. Companies may define these measures differently (limiting comparability across companies), but generally, "realized pay" often includes stock that vested and the value of any options that were exercised during the year (presumably excluding new unvested grants and deferred comp), and "realizable pay" may include old stock or option grants that have vested but have not yet been exercised.

The article suggests that the increase in alternative presentations may result from the new say-on-pay vote requirements. According to the WSJ, the new measures appear to be more prevalent after a poor showing in say-on-pay votes or after a proxy adviser has recommended a "no" vote on a company's compensation. In one example cited in the article, the company received a negative recommendation from ISS and received just 67% support for its executive compensation program. In the subsequent year, the company included "realized pay" amounts for its CEO, showing that he received $24.6 million in "realized pay," compared with the $34.9 million reported in the SCT. The company also explained, among other things, the risks of forfeiture related to the excluded deferred comp. ("Realized pay" excluded unvested stock grants, deferred compensation, changes in pension value and other amounts that the CEO would not receive until some future date.) This time, the company received almost 78% support for its executive compensation program, notwithstanding a negative recommendation from ISS. Other companies have followed a similar approach. (Note that, occasionally, vesting of prior grants may cause realized pay to exceed the total reported in the SCT.)

Some investment managers cited in the article report that the additional measures are useful in providing "the context for how responsive payouts have been to performance." However, the most significant concern expressed among investors is the absence of comparability among companies. As a result, some investment funds have been calculating realized pay figures on their own. The article also cites efforts to standardize the disclosures by Glass Lewis, as well as the inquiry by ISS in its annual survey regarding whether it should consider realizable or realized pay. Interestingly, the article notes that Dodd-Frank required the SEC to develop rules for disclosure of "executive compensation actually paid" and how that is linked to performance. Will the SEC now decide that "actually paid" means realized pay?

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