WSJ Glossary of Alternative Pay Disclosures

News Brief

By Cydney Posner

In a follow-up to the September 25, 2012 article, the WSJ has created a glossary of the various terms used in proxies to describe pay "actually received." While companies wait for the SEC to implement the Dodd-Frank requirement to define executive compensation "actually received," as discussed below, others have taken matters into their own hands and developed their own alternative pay disclosures to supplement the SEC's Summary Compensation Table and other requirements. What's missing, however, is a standardized approach.

The WSJ provides a summary definition of each of the most common terms, along with their pros and cons:

Summary Compensation Table

Prescribed in detail by the SEC, investors "say the table is useful because it shows the board's intent, and the numbers it creates are easily comparable across companies.  But companies say it only describes an executive's pay opportunity, not actual pay." One commentator argued that because the SCT "requires companies to disclose the present value of equity grants and stock options [presumably grant date fair value], investors can only see how the cash salary and cash bonus awards relate to performance…." Most companies use the Black-Scholes model to calculate the fair value of options and other equity awards on their grant date, but the model was designed to value options traded in the market, not employee stock options and, as a result, "can lead to consistent, but sometimes distorted values." Others suggest that the real value of employee options depends on when the employee decides to exercise them.

Realized Pay

Realized pay typically includes the amount that the executive "actually pocketed at the end of the year, including salary, bonuses and other incentive payouts, as well as the value of performance share and restricted stock awards that have vested in the current year. It also includes gains from stock options if the executive chose to exercise them. It does not normally include pension value changes or other compensation. While it shows a figure close to what executives actually made in a given year, realized pay, has its limitations because it depends on when individual executives choose to exercise their stock options."  As a result, there is less comparability among companies "because you might have two people with very similar grant structures who exercise their stock options at different times….The measure can also get distorted if lots of previously-granted stock options vest in the same year, which can make realized pay exceed the summary compensation table total."

The article cites as an example Exxon Mobil's disclosure regarding Realized Pay in its proxy statement this year:

"Realized Pay is compensation actually received by the CEO during the year, including salary, current bonus, payouts of previously granted Earnings Bonus Units, net spread on stock option exercises, market value at vesting of previously-granted restricted stock, and All Other Compensation amounts realized during the year. Excludes the value of new/unvested EBU and restricted stock grants, deferred compensation accruals, change in pension value, and other amounts that will not actually be received until a future date."

Realizable Pay

The article describes realizable pay as the amount that executives "could have pocketed each year, based on how much of their awards are in the money. The measure often includes actual cash compensation earned, the present value of all performance-based cash and equity awards earned, an estimate of unearned performance-based compensation, and the current value of all time-based stock option awards and vested or unvested restricted stock granted during the year.  It generally excludes pension awards, and sometimes includes other compensation perks."  This measure offers more comparability because "it captures the total amount of in-the-money equity awards, whether or not they have vested or an executive decides to cash them. This approach can be particularly valuable when the summary compensation table includes options that are underwater." One consultant is quoted as saying that for "'a company, it's the worst of both worlds….You have annoyed executives and you might fail your say-on-pay test.'" Some criticize realizable pay because, as a hypothetical measure of amounts that executives may or may not have taken home, it "may understate the future value of equity awards that the Black-Scholes model captures."

The article cites as an example Safeway's disclosure regarding Realizable Pay in its proxy statement this year:

"Because a significant portion of [the CEO's] total compensation each year has been in the form of stock option grants, a large portion of this compensation is not the same as cash or even "in the money." We use the term ‘realizable' pay to describe the actual gains or ‘in the money' value that he has received to date. For this purpose,

Realizable = the sum of the following numbers:

Annual bonus
Pension change
Other compensation
Gains realized on restricted stock or options granted in that year
Value of remaining restricted stock and in-the-money options granted in that year, both vested and unvested
We believe that this is a very expansive definition of ‘realizable' that fairly represents the value of compensation actually received."

W-2 Income

A few companies disclose W-2 income. GE selected the measure in 2012 because it is "readily understood." Some compensation consultants contend that W-2 pay is what "realized pay" is trying most closely to approximate.

Here is how GE disclosed W-2 pay:

"The amounts reported in the 2011 Realized Compensation Table reflect income for the years shown as reported on the named executives' W-2 forms. These amounts differ substantially from the amounts reported as total compensation in the 2011 Summary Compensation Table required under SEC rules and are not a substitute for the amounts reported in the 2011 Summary Compensation Table. For 2011, realized compensation represents: (1) total compensation, as determined under applicable SEC rules, minus (2) the aggregate grant date fair value of equity awards (as reflected in the Stock Awards and Option Awards columns), minus (3) the year-over-year change in pension value and nonqualified deferred compensation earnings (as reflected in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column), minus (4) contributions to the S&SP and medical premiums that are deducted from income on a pre-tax basis, minus (5) the difference between the cost attributable to personal use of aircraft as calculated under SEC rules and tax rules, minus (6) the company's S&SP match (as reflected in the 2011 All Other Compensation Table on page 27), plus (7) the value realized in 2011 from the vesting of RSUs or PSUs before payment of any applicable withholding."

Performance-Adjusted Compensation

Instead of disclosing alternative compensation amounts, some companies compare their executives' take-home pay to that of their peers. According to one consultant, the "figure is similar to realizable pay, but includes the performance of shares earned by executives over a rolling three-year period to capture the current value and some of the future value of the grants…" A few companies used "performance-adjusted compensation" this year to disclose "how their compensation program compares to their peers, without publishing a specific number. In proxies they said the measure reflected ‘actual salary, actual short-term incentives and performance-adjusted long-term incentive values.'"

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