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Associated Press (as published by Forbes), March 30, 2007 column


Associated Press

ALL BUSINESS: Proxies Fall Short on Pay
By RACHEL BECK 03.30.07, 12:12 PM ET

Shareholders shouldn't rely on the new "total" compensation disclosures in this year's proxy reports to tell everything about CEO pay. The numbers presented are hardly the real deal.

That's because total pay is calculated using accounting rules that can greatly sway - and at times downplay - the true size of the pay for the nation's corporate leaders.

The result makes it hard to have faith in what's being reported, especially those showing CEOs taking big pay cuts - or in some cases even negative numbers.

This isn't what many shareholders were looking for when they lobbied hard for one number to appear in corporate proxies that would give them an easy-to-understand and complete picture of an executive's compensation in a given year.

For a while last year, it looked like they would get what they want. The Securities and Exchange Commission proposed new disclosure rules requiring companies to present a straightforward "total" amount in a new Summary Compensation Table that was intended to tie together all aspects of compensation.

That fell apart in December when the SEC decided to change how stock options and awards would be presented.

Instead of companies using the fair value of the stock options and awards granted to executives in the last fiscal year as the basis for the stock compensation figure on the summary table, the SEC instead directed them to use a figure that reflected the cost of options and awards that vested during the fiscal year.

The SEC made such changes so that only options actually earned in a given year are accounted for, and that would then match the option expense being deducted from earnings. Critics, however, say the move could lower costs by spreading them out over several years, and stock grants from previous years could be included in total compensation for a given year.

"The number in the summary table is the compensation cost recognized by the company, but it isn't how the (board's) compensation committee was thinking about the pay package granted to the executive that year," said Alexander Cwirko-Godycki, senior analyst at compensation research firm Equilar Inc. in San Mateo, Calif. "That's where there is a disconnect."

With the proxy season now under way, it is clear how dramatically that has altered what is being reported as total compensation.

Just look at the situation at Brookfield Homes Corp., where CEO Ian Cockwell lost $2.3 million last year - at least according to its negative "total" compensation figure in its proxy statement.

That was entirely due to how the Fairfax, Va.-based company measured the cost of its stock options and deferred shares, which were revalued based on a decline in its stock price. Brookfield reported a negative $3.08 million on its summary compensation table for stock options and awards as a result.

But Cockwell hardly lost money - his compensation really came to about $1.7 million. He made $300,000 in salary, $320,000 in bonus and about $170,000 in other compensation, all of which were detailed on the summary table. Investors then had to jump to the Grants of Plan-based Awards table, also a new table, to find that the estimated value of the stock options and awards the company granted him during the year totaled $950,000.

Marshall & Ilsley Corp. also reported a negative total pay for its former CFO John Presley. He left the Milwaukee-based financial services company last March, and as a result, he forfeited options to purchase 85,000 shares of common stock, 15,000 restricted stock awards and 10,000 stock units under the company's 1994 incentive plan.

That resulted in his total compensation for last year coming in at a negative $315,734, despite the fact that he earned $86,833 in salary and $45,927 in other compensation for the three months he worked at the company in 2006.

Equilar looked at 900 executive compensation totals using the new proxy disclosure rules and found that 2 percent of executives had a negative number within the summary table, and 0.3 percent had a negative total number.

Total pay amounts can also be skewed by requirements to vest all stock awards and options for any executives reaching retirement age - even if they have no intention to retire.

In the year that executives become eligible for retirement, pay can be inflated because the full value of stock compensation will be included all at once, rather than spread over the vesting period. Pay then may be lower in the subsequent years.

That requirement also could make an executive's pay look much larger or smaller than others at his company, or his peers in the industry. In addition, the age when executives hit retirement eligibility varies from company to company, with some starting around 55 while others go into the mid-60s.

To illustrate the difference, Equilar's Cwirko-Godycki noted that United Technologies Corp.'s CEO George David received option awards valued at $7.2 million while COO Louis Chenevert received option awards with a value of $3.7 million. But Chenevert got more stock options last year - 501,500 compared with David's 390,000.

Since the 64-year-old CEO David was eligible for retirement, all of his options vested. Chenevert is only 49, so a third of his options vest each year, resulting in a lower compensation figure in comparison.

With the total pay numbers not being all they seem, some companies are taking the initiative to give shareholders a better view of what executives were granted in the last year.

Among those is Charlotte, N.C. -based Goodrich Corp., which Equilar notes, offered up the standard summary table and a supplementary table, which adjusted the stock compensation figures to include the fair-value of stock awards and options granted in the last year instead of what vested in that time.

That adjusted the pay for the aerospace and defense products manufacturer's CEO Marshall Larsen from $15.8 million on the summary table, to $8.9 million in the revised table - certainly a smaller number, but a far better one for anyone who wants a more accurate fix on pay.


Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)


Copyright 2007 Associated Press. All rights reserved.



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