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Source: Wall Street Journal, September 24, 2012 article

THE WALL STREET JOURNAL.


CFO JOURNAL  |  September 24, 2012, 7:41 p.m. ET

Executive Pay Gets New Spin


A growing number of companies are producing alternative measures of their top executives' pay, seeking to persuade investors that compensation isn't as high as the government's yardstick implies.

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General Electric Co., for example, disclosed in its annual proxy that Chief Executive Jeffrey Immelt had taxable income last year of $7.82 million, as shown on his W-2 form, far less than the $21.6 million it reported in the standardized summary compensation table required by regulators. The difference between the two numbers was largely the value of equity grants and the change in the value of his pension.

At least 228 companies mentioned "realizable" or "realized" pay in their proxies or proxy supplements this year, according to an analysis by The Wall Street Journal. That's up sharply from 119 in 2011, 83 in 2010 and just 68 in 2009. Compensation experts expect more companies to jump on the bandwagon in 2013.

The measures try to capture what the executives pocketed—or could have pocketed—in a given year. Realized pay, for example, often includes stock that vested and the value of any options that were exercised during the year.

Realizable compensation may include old stock or option grants that have vested but haven't been cashed in.

But the definitions of these measures can vary from company to company, limiting investors' ability to compare them and raising concerns that some companies are merely trying to highlight lower pay numbers.

And because the new measures are voluntary, companies are free to change them from year to year or stop producing them altogether.

GE has tinkered with supplementary figures it provides in each of the past three years. GE spokesman Seth Martin said the company chose W-2 income this year because the figures are "readily understood by U.S. investors."

The disclosures offer an alternative to the summary compensation table required by the Securities and Exchange Commission. Companies complain the table can greatly overstate an executive's compensation because it includes the value of unvested grants of stock and stock options.

The increase in supplemental pay information comes as companies face annual shareholder advisory votes on executive compensation. The results of these "say on pay" votes typically hinge on how well pay correlates with corporate performance and shareholder returns.

Some companies think it is more useful to base that comparison on what an executive actually takes home, rather than stock-related grants that can't be realized for years, if at all.

"There's a big disconnect between actual shareholder results and the pay opportunity that executives may never realize," said James D.C. Barrall, head of the global executive compensation and benefits practice at law firm Latham & Watkins LLP in Los Angeles.

In many instances, companies offer the additional information following a poor showing in say-on-pay votes or after a proxy adviser has recommended a "no" vote on their compensation plans.

In 2011, Exxon Mobil Corp. received a negative recommendation from proxy adviser Institutional Shareholder Services and got just 67% shareholder support for its executive-compensation plans.

The oil giant published "realized pay" figures for CEO Rex Tillerson for the first time this year, showing he received $24.6 million in 2011, compared with the $34.9 million it reported in the summary compensation table.

Exxon's realized pay calculation excludes unvested stock grants, deferred compensation, changes in pension value and other amounts that Mr. Tillerson won't receive until some future date.

"A significant portion of the CEO's compensation is deferred, at risk of forfeiture, and dependent on future performance of the company," Exxon Mobil wrote in a proxy supplement.

The company, which made other efforts to explain its pay practices to investors, got nearly 78% support for its executive-compensation plans in 2012, despite another negative recommendation.

Hewlett-Packard Co., the biggest U.S. company to fail a say-on-pay vote in 2011, disclosed realized pay for its continuing executives this year.

The computer maker said in its proxy that Chief Financial Officer Catherine Lesjak had realized pay of $2.8 million in 2011, down from the $11 million it reported in the summary table. The company received 77% support for its compensation plans this year.

H-P declined to comment beyond its proxy filing.

In rare instances, an executive's take-home pay may be higher than the number reported in the summary table. For example, Ms. Lesjak had realized pay of $10.1 million in 2010, more than the $8.1 million disclosed in the summary table. The difference was largely the vesting of previously granted option and stock awards.

Glenn Booraem, head of governance at investment manager Vanguard Group, said the additional information "helps us understand the context for how responsive payouts have been to performance." He said Vanguard, which oversees about $2 trillion in assets, just started using realizable pay, in addition to the summary compensation tables, which he says are still a useful measure "of the board's intent."

The chief concern among investors is that the various new measures can't be used to make comparisons between companies.

Moreover, many companies say their compensation committees consider realized or realizable compensation in setting pay, but don't provide any numbers. Others show figures that approximate what's on an executive's W-2, but those may not include pension gains or newly vested options.

Because the disclosures aren't standardized, they are "not necessarily something you can fully work in," said Edward Durkin, director of the corporate affairs department of the United Brotherhood of Carpenters pension fund. He said the fund has been calculating its own realized pay figures at some companies for years.

There are some efforts to standardize the disclosures. Proxy-advisory firm Glass Lewis said it would begin incorporating realizable pay figures from compensation-data provider Equilar Inc. into its analyses, and rival adviser ISS asked its investor clients whether it should consider realizable or realized pay in its annual policy survey.

The Dodd-Frank financial law requires the SEC to come up with rules for companies to disclose information about "executive compensation actually paid" and how that is linked to performance.

But the regulator hasn't yet defined the term "actually paid" and how it should be linked to performance. An SEC spokesman said the rule is pending.

Write to Emily Chasan at emily.chasan@wsj.com

Copyright ©2012 Dow Jones & Company, Inc. All Rights Reserved
 

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