By Nancy Trejos
Washington Post Staff Writer
Sunday, February 8, 2009
Ask the Securities and Exchange Commission what Walt Disney Co. chief executive Robert A. Iger made last year, and you get $30.6 million.
Now ask Paul Hodgson, a senior research associate for the Corporate Library, and you get a different answer: $21.4 million.
Want another opinion? It's not hard to find one. Here's what Graef Crystal, an expert on executive compensation, came up with: $51.1 million.
Figuring out what and why a company is paying its top executives is no small feat. Although the SEC requires companies to disclose their compensation structures in their annual proxy statements, even some of the nation's leading experts on the topic often disagree on what an executive is actually walking away with in any given year. That's because most companies pay their executives a mixture of salaries, perks, bonuses, stock options and other equity awards that might be paid out in one year or spread out over time.
"As a shareholder, it can be terribly confusing figuring out what the pay is," said Charles G. Tharp, executive vice president for policy at the Center on Executive Compensation.
The financial crisis has made that all the more apparent. Frustrated with executives who walked away with large salaries despite free-falling stock prices and declining company profits, shareholders are proposing changes to their companies' compensation structures. Patrick McGurn, special counsel at RiskMetrics Group, a proxy advisory firm, said he expects the number of shareholder proposals on executive compensation to reach 400 by the time companies have their annual meetings this spring.
Some shareholder activists, ranging from labor unions to church groups, have supported "say on pay," which requires boards of directors to let their shareholders take annual advisory votes on compensation. Other proposals call for shareholder votes on large severance packages and better disclosure of conflicts of interest among compensation consultants that work with a company.
Even President Obama has weighed in on the matter, saying last week that his administration would impose executive compensation restrictions at some firms receiving federal aid.
But any reforms must address one fundamental problem, experts said: Companies don't always make it easy for shareholders to understand what their executives make. Three years ago, the SEC adopted rules that were supposed to make companies' executive compensation structures more transparent. But more transparency has actually bred more confusion, some experts said.
"We've got both a blessing and a curse with the changes that have been made with disclosure," said Timothy J. Bartl, vice president and general counsel at the Center on Executive Compensation. "On the one hand, we have a lot more information about what these programs are, and on the other hand, we have much more information to decipher."
Much of that information is contained in the company's annual proxy statement, which can be found on both the company's and the SEC's Web sites. But just because the information is all there doesn't mean you'll understand what it all means. You'll also need to pull out your calculator. And don't think you can get away with skimming through the proxy. You can miss an awful lot if you ignore, say, the footnotes.
"Particularly large companies in the S&P 500 have some of the most complicated compensation structures you can imagine," Hodgson said.
A good place to start is the section often labeled the compensation discussion and analysis. "It basically takes the reader through the philosophy of a company, the different components of compensation, how they work, how they compare to the marketplace," said Steven Hall, managing director for pay consultancy at Steven Hall & Partners.
The CFA Institute Centre for Financial Market Integrity in Charlottesville, recommends that investors be leery of companies that reward executives despite poor company and share-price performance as well as those that give executives outsize severance packages. Shareholders should also compare the company's payment structure to those at companies of similar size and marketplace.
Keep in mind, though, that sometimes pay raises or bonuses can be justified.
"Just because the share price has gone down doesn't mean the senior management hasn't been making good decisions, doesn't mean it hasn't done things to make the company stronger than it would have been going into the recession," said Jim Allen, director of the capital markets policy group for the CFA Institute Centre. "But at the same time, what's significantly aggravating to investors is when you have a company that has made all sorts of bad decisions . . . yet senior executives come out of this without the same hurt that shareholders or other stakeholders are feeling."
Once you get past the philosophical discussion, you can turn to the number crunching.
Let's go back to our Disney example.
If you look at the summary compensation table in the proxy statement, you will see that Iger made $30.6 million in fiscal 2008. "The table itself looks like a total number of what the executive took that year, except that it's not," Bartl said. "It mixes apples and oranges."
The problem, he said, is that the table joins the current year's salary and incentives with long-term incentives such as stock awards that the executive cannot cash out for years.
Iger, for example, had $7.8 million in stock awards and $6 million in option awards, both of which are included in total compensation.
Compensation experts Hodgson and Crystal subtracted those totals because they were a mix of awards from previous years that were intended to be spread out over time. That left Iger with $16.8 million.
Hodgson then moved to the fiscal 2008 option exercise and stock vested table, which shows the number and value of the shares that actually vested, or were exercised. In Iger's case, it was 150,797 shares worth $4.6 million. The total compensation: $21.4 million.
Crystal went a step further. He added $3.4 million in option awards from the grants of plan-based awards table, which shows what Iger got in free stock and option shares for the year. He also added awards that were granted in fiscal 2008 but would have future payouts. That included $5.9 million in future estimated payments for restricted stock units listed under the column for estimated future payouts under equity incentive plan awards. Then he added 3 million options awarded in 2008 but are scheduled to vest through 2013. Worth $25 million, those options were given to Iger as an incentive to enter into an extended employment agreement.
Hodgson described the differences among the three approaches. The SEC total looks at all the equity awards that might have vested during the year. Included in that could have been awards from the past. Crystal's approach looks at target pay. It takes into account awards made during the fiscal year even if they cannot be cashed out for years.
Hodgson's approach, he said, comes up with a figure for the cash at hand. "This is money that is in his wallet now. It's realized compensation," he said.
Crystal explained why he counted awards that were granted in 2008 but might not be realized for years: "It's like saying part of the bonus is 100 pounds of coffee. Someone says we don't count that because she didn't drink it. But it's still sitting on your shelf."
Iger is not the only chief executive who has thrown shareholders and executive compensation experts for a loop. The SEC said J.P. Morgan Chase chief executive James Dimon made $27.8 million in fiscal 2007, the most recent year available. But Crystal put Dimon's compensation closer to $40.8 million because of current and future payouts on stock and equity awards.
"It's not an exact science," Hodgson acknowledged.
If you're a shareholder dissatisfied with this lack of certainty, you do have some recourse. Any shareholder who owns at least $2,000 worth of shares in a company, and has owned the stock for at least one year, can file a proposal to be included in the annual proxy statement.
Even if you meet those requirements, there is no guarantee your proposal will actually end up in the proxy statement and be brought for a vote at the annual meeting, said McGurn of RiskMetrics Group.
The SEC allows the company to omit a proposal for a number of reasons, such as it being too similar to proposals from previous years that did not achieve a certain vote. The company has to explain its reasons to the SEC. If the SEC rules in favor of the company, the shareholder can appeal but probably will lose, McGurn said.
Only about half the proposals make it on the ballot, McGurn said, either because the SEC allows an omission or the shareholder settles the dispute with the company.
For those proposals that do make it onto the ballot, a majority vote is not necessarily a victory. Most of the proposals are nonbinding, which means that the company's board of directors does not have to implement them. "It's a stacked system," said Richard Metcalf, director of the corporate affairs department for the Laborers' International Union of North America, which has submitted shareholder proposals this year.
Is there anything else a shareholder can do to demand a better pay system?
"You can sell the shares and get out of the stock," said Hall of Steven Hall & Partners. "That's the tried-and-true method and the path of least resistance."