Author: ERI

New ERI White Paper

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ERI Economic Research Institute’s recent white paper, “Cost-of-Living Data and Models: Credible? Defensible? Robust?” by Marillyn Tefft, ERI Relocation Assessor Product Manager, is available for download.

Tefft explores “What matters in a cost-of-living model?” using various examples, complete with actual Relocation Assessor reports.

“It is not uncommon for mobility professionals to struggle with justifying the cost-of-livingadjustments/payments offered to a transferee in a relocation package,” writes Tefft. “Each part of the modeling process should be based on sound economic theory and use widely-accepted estimating techniques.”

Can the Creativity of Financial Disclosures be Applied to Executive Compensation Disclosures?

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As part of ERI’s on-going data collection efforts for executive compensation, we came across the annual report filed by a company in the United Kingdom, Land Securities. While reviewing the filing for compensation data, the data researchers felt as though they were reading someone’s personal copy of the annual report with “hand-written” comments. The summary pages of the annual reports are mocked up almost like a white board, helping the readers “connect the dots” easily through the presentation.

Is it possible to be more creative with how executive compensation is disclosed? An argument can be made that if CFOs can simplify the “line of sight” to the business results in their disclosures, the compensation committee should be able to do so as well. What if Land Securities’ example was applied to executive compensation disclosures? Would it help the Board explain to shareholders the recommendations they put forward for their top executives?

Proxy disclosures report the required tabular information, yet much of the critical information is footnoted to explain the data. More footnotes do not necessarily equal transparency. An obstacle may historically have been the complexity of the executive compensation programs; however, we are seeing fundamental changes in executive pay packages to improve line-of-sight by replacing discretionary plans with pay-for-performance plans. With the increased rules and regulations governing proxy disclosures, compensation committees and their resources (consultants and internal functional staff members) are rethinking how they convey their recommendations.

For more information regarding Land Securities’ annual report, click here. Visit www.erieri.com to learn more about our executive compensation analytics and tools.

ERI Salary Surveys Rolls Out 2011 Collection

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ERI Salary Surveys has released its largest collection of industry-specific and job function surveys, more than 170 in all, for organizations researching market-based compensation data. Each survey reports employer-provided data derived from survey participants, digitized public records, and ERI Economic Research Institute’s patented online, interactive salary surveys and Assessor Series databases.

Salary information for each job title represents actual data points—no attempt is made to alter the data as collected, reported, and graphically displayed other than to normalize collected compensation amounts to a common date.

ERI Salary Surveys, which has been conducting surveys since 1967, offers electronic and hardcopy versions of its reports. Organizations seeking benchmark job comparisons have the opportunity to choose surveys by the size of their organization (large and small) and by location (state or national basis). In addition to reporting total annual direct compensation for each benchmark job, each survey identifies means, medians, and percentiles, as well as incentive and variable pay, and provides full job descriptions.

From All Manufacturing and Food and Beverage to the newest addition, Aerospace, ERI Salary Surveys covers a wide range of industries and job functions, starting at $244.50 per survey.

Surveys are available for online purchase at www.salary-surveys.eri.com. Participation in 2012 surveys opens October 1, 2011. Organizations that contribute information receive a 50 percent discount on the survey purchased and a complimentary copy of the Executive Summary. Participation is not required to purchase surveys.

ERI Salary Surveys also offers two surveys exclusively detailing employee benefits. The first, 2011 Benefits in Nonprofit Organizations identifies trends in nonprofit medical and dental coverage, as well as retirement plans and paid-leave options, among other benefits. The second, 2011 Health Care Benefits Benchmarking Surveycompares health care benefits among the nonprofit, for-profit, and government sectors.

Nonprofit Executive Compensation Under Scrutiny

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With increased scrutiny from the IRS, various state regulators, the media, and even donors and funders, nonprofits need to be able to show that their executive compensation is reasonable. The newly-released 2011 All Nonprofits Salary Survey published by ERI Salary Surveys provides reliable comparable data for 20 executive positions, as well as 151 non-management benchmark jobs, accompanied by verifying source comparisons used by the IRS, courts, and thousands of ERI Economic Research Institute Assessor Series subscribers.

The survey reports market-based pay data covering approximately 12,000 incumbents in nonprofit organizations across the United States. Unique participant data is complemented by two of four distinct salary survey data collections for either management or non-management families. The result is a comprehensive analysis of up to three verified sources for a particular benchmark job. Sources include ERI’s exclusively licensed Executive Compensation Assessor and Salary Assessor (both with for-profit data), along with ERI’s Nonprofit Comparables Assessor and Tax-Exempt Survey databases.

The 2011 All Nonprofits Salary Survey affords tax-exempt organizations comparable data to aid compliance with reporting executive salaries on IRS Form 990. Information for each job title includes a job description and data for total compensation, averages, percentile ranges, variable pay, and more. Breakouts of the survey are available by the size of the organization, as well as by state. ERI Salary Surveys also provides sector-specific nonprofit surveys ranging from arts, culture and humanities, to social science services and research, for organizations both large and small.

In addition to compensation data, ERI Salary Surveys offers two surveys exclusively detailing employee benefits. The first, 2011 Benefits in Nonprofit Organizations identifies trends in nonprofit medical and dental coverage, as well as retirement plans and paid-leave options, among other benefits. The second, 2011 Health Care Benefits Benchmarking Survey compares health care benefits among the nonprofit, for-profit, and government sectors.

Nonprofit surveys are available for online purchase at www.salary-surveys.eri.com. Participation in 2012 surveys opens October 1, 2011. Organizations that contribute information receive a 50 percent discount on the survey purchased and a complimentary copy of the Executive Summary. Participation is not required to purchase surveys.

New ERI White Paper

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ERI Economic Research Institute’s recent white paper, “Five Technical Aspects of Compensation Data” by Jonas Johnson, Senior Researcher, is available for download via www.erieri.com.

In this white paper, Johnson explores the curvilinear nature of data, outliers, wage fluctuation, accurately aging data, and heteroscedasticity.

“Compensation professionals should consider these factors prior to setting pay practices,” writes Johnson. “Ignoring them could result in less than optimal data analyses, potentially resulting in a loss of talent or overpayment for labor.”

How is LinkedIn’s CEO, Executive Compensation Impacted by the IPO?

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The business-to-business (B2B) social media networking site, LinkedIn, had its initial public offering on May 19, 2011. There has been much media coverage of LinkedIn’s IPO, and we thought it would be of interest to understand the executive compensation package of LinkedIn’s CEO, Jeff Weiner.

Annual Cash Compensation:

According to the Prospectus filed May 18, 2011, by Linkedin, prior to its IPO, Jeff Weiner’s salary in 2010 was $250,000, and in April 2011, it was increased to $480,000. This represents a 92% increase. For 2010 business results, a 140.7% cash incentive multiplier was achieved, and Weiner’s non-equity incentive payout was $290,194 in 2011. This payout represents 116% of his $250,000 base salary where the target payout was set at 60%. If they achieve the same or better results for 2011, Weiner can expect a total annualized cash compensation of $1,036,800.

Equity Compensation:

Upon being hired, Jeff Weiner was granted 3,844,512 shares at an exercise price per share of $2.32, which have a monthly vesting schedule over a 4-year period. As of December 31, 2010, he had 3,521,237 outstanding shares, of which 1,598,982 were vested. Subsequent to the IPO, Weiner sold 115,335 shares at $41.85 per share on May 24, 2011, netting him over $3.7 million. (See Form-4 filing for details http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=7639933.)

Unless Jeff Weiner cashes in more options, he will realize over $4.7M of compensation income in the 12-month period since the IPO. Given the current stock price $103.87, as of this posting, and depending on whether LinkedIn institutes stock ownership guidelines for their named executive officer, we can anticipate Mr. Weiner’s compensation income to increase significantly.  Let’s take a scenario where remaining stock options vest and are exercised. The possible gain would potentially calculated as follows:

  •   (Current stock price MINUS Exercise price) TIMES # of stock option = Net Gain
  •   ($103.87-$2.32) * 3,521,237 = $357.6M

When executive compensation packages are reviewed for competitiveness or within context of relative comparison, business practitioners will often review the tenure of the incumbent (i.e., recent hires, long tenured etc.)  LinkedIn’s CEO start-up/pre-IPO compensation package was highly leveraged, comprised mostly of equity, which is typical given the business cycle of the organization as they tend to be “cash strapped”.  In an IPO environment, the true compensation value the equity components are more ascertainable as illustrated in our example.

For more information on executive compensation analytics and tools, visit www.erieri.com.

Geographic Pay for Executives

Geographic Pay for Executives

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Pay varies by geographic location for most jobs. Executive positions, however, tend to be treated differently for a variety of reasons.

Salaries for the same job have different competitive levels from one city to the next. The magnitude of the differential from a national norm also varies by income level, with entry-level positions showing the greatest sensitivity to local practices, particularly in places that override the federal minimum wage. Low-income workers are typically tied to jobs close to their homes. Professionals and managers tend to be paid on a regional basis since they are more apt to commute farther or to be recruited away by nearby rival employers; that drives up the area rate to a higher, more stable equilibrium point for their jobs. Directors and top executives operate in a national (if not international) job market for their talents. Local competitive market conditions for jobs tend to create pressures for companies to pay whatever is right for that particular place, but many employers hold their executives to a different (usually national) common standard rate.

Location does make a difference, even in top executive compensation. Researchers who have studied this for over forty years (1) see geographic pay differentials continue up into top executive levels. All else being equal, executive pay still varies by geographic location. Chief executive officers at same-sized hospitals in California earned 25% more than their peers in Indiana, for example.

Nevertheless, there are many reasons why employers don’t pay all jobs according to the local pay pattern.

In the federal government, jobs paid according to the General Schedule can earn localized pay, but the geographic variances stop at the Senior Executive Service and the Executive Schedule levels. Private employers do much of the same. If a company has separate pay by location, then the geographic pay differences are usually greatest at the lowest levels where the entry level jobs are affected by the minimum market-clearing wage rate. Employer pay practice variances tend to change at different job levels, and typically the differentials taper off and stop at some level.

The rationale is, if recruiting targets the national labor market for a particular job level, then national pay scales should be used. If recruiting is from local or regional labor markets for a particular job level, then local or regional pay scales should be used. Also, the total rewards offering for executives tend to make up for these geographic differentials with another form of long-term focused programs.

Even though the actual proofs of geographic pay differentials extending through CEO levels beyond $500,000 are indisputable (2), most employers don’t choose to capture the reality with a separate offset to their top executive salary structures as they do for lower levels. Executive compensation packages are so large and complex that the influence of any one component variable can be hidden or overshadowed by many others. Nevertheless, the reality remains true even at firms of identical size in the same industry (e.g., executives working in Manhattan earn a lot more than they do in central Kansas).  Most organizations find it more appropriate to exclude senior executive jobs from geographical pay differential programs than to call attention to an additional premium added to jobs already paid premium rates.

1 D. Thomsen, “Geographic Differentials in Salaries in the United States,” Personnel Journal (Sept. 1974): 670

2 D. Thomsen, ERI Update, (Vol. 76, Oct 2006): pg. 3, bottom

Earnings Quality and Executive Compensation, Any Correlation?

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Every year industry market analysts evaluate earnings quality. Let’s review what it means to conduct a financial assessment for quality earnings in the context of executive compensation disclosures. Earnings quality is the degree of reliability in reported earnings to reflect a company’s true earnings and to help predict future earnings. What analysts and investors are trying to ascertain from reviewing earnings quality is the company’s sustainable revenues, which is critical input in determining a company’s market valuation and overall long-term organization effectiveness.

Some variables companies use to measure earning quality are:

  • Margins, gross or net.
  • Capital expenditures and R&D relative to industry/peer group.
  • Sales and administrative expenses relative to sales.
  • Significant change in effective tax rate.
  • Cost structure relative to industry/peer group.
  • Change in labor force.

The underlying framework to assess earnings quality is demarcating the earnings capabilities of the company as an ongoing business concern from outliers like one-time charges and acquisition/divestiture issues. For companies that tend to use conservative accounting practices, there’s a bias toward higher earnings quality. Whirlpool and GE beat market expectations for revenue growth this year. When you take a closer look as to how this growth was achieved, it is attributed to energy tax credits, not organic growth in operating profit or a basis in a sustainable revenue stream.

In addition to analysts that give “high” or “low” assessments of companies’ earnings, there are companies such as Starmine (a division of Thomson Reuters) and Standard & Poors that evaluate companies’ earning quality and issue ranking or scores. Starmine’s recent newsletter highlights Three D Systems as a high earnings quality company with a score of 96 (scale of 1 to 100, 100 being the highest) primarily due to Free Cash Flow (FCF), Net Operating Margin, and Return on Net Operating Assets (RONOA). In reviewing Three D Systems proxy disclosures related to executive compensation, the overall level of transparency is excellent. Here are some supporting observations in the proxy:

  • In addition to NEOs’ compensation, the compensation committee reviews all compensation requests for employees earning 200K or more in base salary.
  • Executives’ and employees’ compensation strategy/philosophy is aligned, one in the same.
  • Comprehensive explanation of compensation risk and oversight (could be used for SOX audit).
  • Clawback and hedging policies “proactively” disclosed in proxy; currently, they are recommended, not required disclosures.
  • Specifically mentioned formal succession planning process; knowing they are “on-top” of the leadership pipeline is key to sustainability of the organization’s effectiveness.

To read Starmine’s newsletter and Three-D’s proxy, see http://www.starmine.com/newsletters/index.phtml?newsletter=eqa and http://www.3dsystems.com/investors/datafiles/3DSystems-2011-Proxy-Statement.pdf.

Reporting Nonprofit Compensation on the Form 990 – Which Form Should Be Used?

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What nonprofits must disclose to the IRS about executive compensation depends on which version of the IRS Form 990 (the annual report required of most tax exempt organizations) must be filed. What’s more, the form needed may have changed recently.

Even the very smallest nonprofits must now file annually, even though it may involve a very short postcard. For the past few years, the IRS has changed the thresholds of financial activity that triggered filing the full Form 990 rather than the short form, called the Form 990-EZ, as the major revision in Form 990 was phased into use. As always, churches are given automatic tax exempt status and are not required to report to IRS annually.

What triggers the use of the more complex Form 990 versions and thus the more detailedcompensation reporting level of “annual gross receipts,” defined by the IRS as the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses?

If a charity has a fiscal year that coincides with the calendar, then the May 15 deadline for filing is used. Returns are typically due on the fifteenth day of the fifth month after the end of the organization’s fiscal year, but filing a Form 8868 before the due date gives an automatic three-month extension; an additional three-month extension may be requested on Form 8868 if the organization shows reasonable cause why the return cannot be filed by the extended due date.

Check out which form to file below – and remember reporting on executive compensation is different for each form!

2010 Tax Year and later

(Filed in 2011 and later)                           Form to File           Instructions

Gross receipts normally ? $50,000            990-N                      n/a

(May also choose to file a full return)

Gross receipts < $200,000, and                990-EZ                Instructions

Total assets < $500,000                             or 990

Gross receipts ? $200,000, or                     990                      Instructions

Total assets ? $500,000

Private foundation                                       990-PF                  Instructions

Some Must File Electronically

Almost all types of Forms 990 and Forms 8868 for the extension can be e-filed, but some organizations are required to e-file. These include the following organizations:

  • e-Postcard (Form 990-N) filers – Small tax-exempt organizations (those normally with annual gross receipts up to $50,000 for tax years ending on or after December 31, 2010).  Learn more and file at e-Postcard (Form 990-N).
  • Certain large tax-exempt organizations – Exempt organizations with $10 million or more in total assets if the organization files at least 250 returns in a calendar year, including income, excise, employment tax and information returns. Private foundations and non-exempt charitable trusts are required to file Forms 990-PF electronically regardless of their asset size if they file at least 250 returns annually.

All nonprofits can take advantage of the benefits of e-filing:

  • Identify errors before filing – Software shows location of errors in the return.
  • Faster acknowledgements – IRS sends acknowledgments within 24 hours.
  • Built-in accuracy checks – Typical paper Form 990 returns have an average error rate of more than 25 percent, whereas e-filing software catches most errors before the return is submitted.

Check out www.efile990.org for more information.

Executive Compensation: Realized Option Pay

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The October 2010 study of executive compensation, “What do CEOs Realize from Option Pay?” by Mark Anderson and Volkan Muslu of the School of Management, the University of Texas at Dallas, looks at the estimated fair market value versus realized value of CEO options pay relative to incompleteness of option transfer rights and tenure with company. The study considers the incompleteness of the transfer of option rights to the CEO at grant date due to performance vesting conditions, black-out and minimum equity holding restrictions, and forced exercise or forfeiture provisions upon resignation. Also, the authors discuss the flaw in relying on values derived from option pricing models since they do not factor in the performance vesting contingencies, and the distribution of outcomes is not as balanced as is anticipated in the models (e.g., Black Scholes), resulting in an asymmetrical option payout structure. The study also looks at externally versus internally hired CEOs, as well as how this factor influences the cash realization of option pay.

Using pay data of 1,403 CEOs who began and ended their tenures at all S&P 1500 companies between 1992 and 2007, their findings include the following:

• 29% of CEOs stayed in their positions for less than two years and realized only 16% of their nominal option pay.

• 31% of CEOs stayed between two and four years and realized 40% of their nominal option pay.

• 20% of CEOs stayed between four and six years and realized 57% of their nominal option pay.

• 12% of CEOs stayed between six and eight years and realized 77% of their nominal option pay.

• CEOs with eight years or longer tenure realized proceeds equal on average to their nominal option pay.

• Similar relationship exists between firm performance, CEOs’ tenure, and realized option pay.

For more details on this study, see http://business.gwu.edu/accountancy/files/effect-mandatory-ifrs-adoption.pdf.