How Much Does Your CEO Really Make?
Washington Post Staff Writer
Sunday, February 8, 2009; Page F04
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
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
"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
Once you get past the philosophical discussion, you can turn to the
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
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
Is there anything else a shareholder can do to demand a better pay
"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."
outraged - along with President Obama - over the eye-popping pay
packages some American executives cart home. But just how much an
individual executive gets is sometimes hard to decipher. Experts tend to
come up with different totals for all the pieces: salary, perks,
bonuses, stock options. Now outrage is turning into action. The huge
payouts are prompting shareholders to demand reform. With annual-meeting
season approaching, shareholders have already submitted hundreds of
proposals to overhaul their companies' compensation practices, according
to RiskMetrics Group, a proxy advisory firm. You can size up the
compensation numbers yourself for any top executive of an American
public company - with a little detective work. The Securities and
Exchange Commission requires companies to explain their compensation
practices in filings such as theannual report, also known as the 10-K.
However, if you're a shareholder trying to find out what your chief
executive was paid last year, the best place to turn is your company's
annual proxy statement.
experts Paul Hodgson and Graef Crystal looked at the same annual proxy
statement for The Walt Disney Co. and came up with different figures for
the total compensation in 2008 for chief executive Robert A. Iger. So it
goes with deciphering executive pay - it's an art as much as a science.