Navigating the Executive Compensation Disclosure Maze

by Malak Kazan, CECP, CCP, CBP, GRP 7. April 2011 12:31

 

How executive compensation is disclosed in SEC filings still requires additional effort to “tell the story” so that shareholders and the general public can answer this key question: Is the executive’s annual compensation aligned to performance?

In proxy statements, the Summary Compensation Table (SCT) includes cash compensation earned for one year with a fair value estimate of stock-based compensation earned over three years based on accounting standards. The table reports the size of the accounting charge taken for the executive's compensation in the three most recent fiscal years and any bonuses earned (e.g., bonus accrued not actually paid to the executive). Because the reporting requirements include accounting estimates and not actual compensation income earned, some companies are taking creative approaches to include additional information in their proxy statements to bridge this information gap and enhance transparency. For example, GE’s most recent proxy statement included a column entitled "Total Realized Compensation" (shown below):

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Executive Compensation

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Total Realized Compensation was defined as follows:

Realized Compensation

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This type of compensation disclosure can help give context to executive pay and also diffuse some of the controversy around the CEO Employee Pay Ratio reporting that may become a required disclosure. Business leaders point to the cost and resources that will be required to report this ratio relative to the informative utility it will deliver. On the other hand, consumer activist groups often criticize business leaders for skirting the issue of out-of-control executive pay and being reluctant to measure CEO pay year over year by reporting this ratio.

At the end of the day, it’s all about communicating and creating transparency for shareholders and the general public to understand why and how much a CEO gets paid. Best practices like GE’s reporting of “Total Realized Compensation” can be a benchmark for companies that wish to preempt any negative shareholder activism toward executive compensation.