EXECUTIVE COMPENSATION – One Large Problem, Comparing Apples to Watermelons
One of the hardest issues during this time of proxies and compensation reporting is the ability to separate truth from fiction; to compare an apple with an apple. To do so depends a lot on how one defines “pay”. Is it the amount reported on the SEC filings, those numbers that usually are used by the media to create outrage? Or is it what the executives could potentially earn—what they are “targeted” to earn if they meet all their performance criteria? Or is it the amount they take home at the end of the year—what is actually “realized”? How well people understand these numbers—and communicate—is of absolute importance.
Back in 2013, we authored an article for The Corporate Board entitled “How Do We Define Executive Pay?” The article was considered a eye-opener of sorts as it dealt with the three basic definition alternatives used today for determining compensation. These compensation alternative were not purely based on mathematical formulas, but considered other factors that aren’t innately quantifiable. The alternatives included:
– Targeted Pay – Which is what is reported in survey sources and CD&As to determine competitive market levels;
– Reportable Pay – Which is referenced in the article below. is talking about where In this approach, accountants try to determine what they think the value of the long-term incentive will be at grant. This number is then put into the proxy. Although this is a requirement of the SEC, this number does not take into account the stock price movement after grant. In one case we worked on at NFPCCmp;A recently, the long-term incentive was reported due to GAAP as $21 million.
– Realized, or Actual Pay – Which is what the executive actually receives, or commonly understood as what she or he takes home in payment. This number is really what matters to the executive. In the case of the chairman we worked on above, the realized or actual pay was zero! The difference between $21million and $0, in problematic…however, what the media reported was not what was realized!
Do you remember this great discussion?
Lou Costello: Well then, who’s on first?
Bud Abbott: Yes.
Costello: I mean the fellow’s name.
Costello: The guy on first.
Costello: The first baseman.
Costello: The guy playing…
Abbott: Who is on first!
Costello: I’m asking you who’s on first!…
Before they are done, we find out their leftfielder’s name is “Why,” “Because” is the centerfield, and “Sure” is their pitcher.
Confused? Absolutely. Yet if you think this vintage Abbott and Costello routine is tough, just look at executive pay in regard to publicly traded companies. Trying to understand the concepts of “targeted pay” versus “reportable pay” versus “realized or actual pay” can be even more confusing than hanging out with Bud and Lou.
There needs to be consistency here. The SEC is the one governing body that can make this happen. Until then, it is a sure bet that the higher number will always appear in the news will always be the higher number. Unfortunately this is rarely, if ever, what the executive actually took home!
Here is a link to the article.
Written by Brent Longnecker, Chairman & CEO, & Todd Henke, Director, at Longnecker & Associates