WALL STREET JOURNAL.
| Heard on the Street
CEO Bonuses: How Pro Forma Results Boost Them
Reported earnings faltered last year; to help set bonus payments,
many companies relied on pro forma measures
New York's Financial District. PHOTO: RICHARD DREW/ASSOCIATED
May 26, 2016 1:57 p.m. ET
Earnings before the bad
stuff can do good things for executive pay.
Last year was tough for
many companies, so many asked investors to imagine what things would
have looked like if the tough things had never happened. This led to
biggest divergence since 2009
between pro forma results, which exclude items such as restructuring
charges and stock-based compensation, and results under generally
accepted accounting principles, or GAAP.
But these adjusted metrics
aren’t just showing up in earnings releases. Pro forma figures have
been proliferating in annual proxy statements, too. There, when used
with compensation metrics, they can help executives draw bigger pay
Research firm Audit
Analytics finds that the term “non-GAAP” appeared in 58% of proxies
for companies in the S&P 500 that have released them so far this year.
Five years ago, that term showed up in 27% of proxies for current S&P
There is nothing improper
about using non-GAAP measures as long as they are disclosed properly.
And corporate boards decide on the measures they want to use for
compensation purposes. Plus, there is an argument to be made for
sometimes excluding items from results for compensation purposes. If,
say, a natural disaster hits a company with expensive repairs, perhaps
an adjustment is in order.
But other items that often
get excluded in pro forma results, such as layoff-related charges, do
seem like a reflection of management’s performance. And boards have
too often shown a willingness to set awfully low bars for executives
That, though, can
disadvantage shareholders and wreck the idea of pay for performance.
In that vein, the dramatic rise in the number of companies using pro
forma measures to determine bonuses would indicate the balance between
shareholders and executives is being skewed in executives’ favor.
Indeed, an examination of
the most recent proxy statements from companies in the Dow Jones
Industrial Average shows about a dozen of the index’s 30 constituents
had annual pro forma earnings well in excess of GAAP ones and used the
pro forma ones in annual bonus calculations.
Coca-Cola’s pretax income increased
by 3% under GAAP. But after adjusting for the impact of the stronger
dollar and “nonrecurring items,” the income growth figure the Dow
component used for bonus purposes rose to 5.5%.
Absent adjustments, Dow
reported operating income of $11.77
billion last year. But the pro forma figure of $12.06 billion it used
for compensation figures excluded the impact of the strong dollar and
costs associated with
its 2014 credit-card data breach.
earned $1.11 per share last year under
GAAP. But the Dow component excluded a number of items from the pro
forma results it used for bonus purposes,
pushing earnings per share to $2.20—above
the $2.05 it had targeted for its annual incentive program. Without
that adjustment, the chief executive’s bonus under the company’s
annual incentive program could have been significantly lower. While in
most years, the pro forma earnings the pharmaceutical company has used
for compensation purposes have exceeded GAAP, in 2013 they were lower.
Several other Dow
components with pro forma earnings in excess of GAAP mentioned those
measures in their compensation discussion, but left it unclear how
they affected bonus amounts. Some used non-GAAP measures other than
earnings, such as economic profits, to set bonus amounts.
More worrisome, using pro
forma to set bonuses provides executives with an incentive to exclude
items not because they should, but to hit performance bogeys. That
creates a risk that pro forma results say less about a company’s
underlying health than about executives desire to get paid more.
Justin Lahart at