(New Math) x
(SEC Rules) +
Proxy=Confusion

As a maker of semiconductor equipment, Applied Materials belongs to an industry of mathematical whizzes. Yet the complexity of its proxy this year reflects a trend that extends far beyond Silicon Valley. Even Deere & Co., the maker of tractors, has produced a proxy that uses three formulas, four tables and a graph to illustrate the calculation of executive bonuses.

This explosion of mathematics was sparked by the Securities and Exchange Commission, which in 2006 began requiring more information about how companies calculate executive pay. After the first batch of proxies using the new rules arrived last year, the SEC told 350 companies they hadn't been specific enough.

Among those companies was Applied Materials. So this year, it expanded by 76% the word count of its proxy's compensation section. In all, the compensation section contains 16,245 words -- twice the length of the U.S. Constitution and its 27 Amendments -- along with 10 formulas, 10 tables and 155 percent signs.

The result, according to some experts, is unfathomable. "Can even the executives figure out what they have to do to get these awards?" asks Carol Bowie, head of corporate-governance research at RiskMetrics Group Inc., which helps investors sort through such filings.

The SEC has said that it wants disclosure to be clear and concise, as well as comprehensive. But striking that balance is difficult, companies say. So, many are erring on the side of detail.

"Bonus multiple x target bonus x base salary earnings = payout," explains the new proxy from drug maker Eli Lilly & Co., which last year received a letter from the SEC calling its executive-pay disclosure inadequate. Just in case that term "bonus multiple" isn't clear, the proxy explains that it is "(0.25 x sales multiple) + (0.75 x adjusted EPS multiple)." To find the sales and EPS multiples, investors must consult graphs.

Some firms may be throwing up their hands and deluging the public with figures. "I know a couple of companies where the frustration level with the SEC was so large that they said, 'Just put it all in,'" says John A. Hill, a trustee at mutual-fund giant Putnam Funds. Mr. Hill often chats about pay practices with officials of companies whose stock Putnam investors own.

An SEC spokesman says it's too early to comment on 2008 proxies.

Even activist investors who pushed for more disclosure on executive pay are scratching their heads. "There have been some proxies when I've gone through and said, 'Wow, I have no idea what I just read,'" says Scott Zdrazil, director of corporate governance at union-owned Amalgamated Bank, which manages around $12 billion in pension-fund assets.

The Smell Test

Mr. Zdrazil says he uses a "smell test" to judge whether companies are trying to obscure poor pay practices with lots of detail, or just being wonky. "If you can clearly understand the algebra involved, it passes," he says.

One that doesn't pass his test is software maker Novell Inc. Its proxy tosses around such terms as "assigned weighted quantitative performance objective achievement percentage," and describes a two-step process for calculating executive bonuses:

First: "Bonus Funding Percentage x Weighted Quantitative Performance Objectives Achievement x Qualitative Performance Factor = Performance Factor."

Then: "Performance Factor x Target Bonus Percentage x Base Salary = Recommended Bonus Amount."

Mr. Zdrazil says Novell fails to explain how difficult it is for executives to achieve performance targets.

Asked about the formulas, Novell says it gave more detail in response to the SEC's push and that its proxy statement complies with SEC rules.

At first glance, the bonus formula at software maker Adobe Systems Inc. seems straightforward: "Target Bonus x Unit Multiplier x Individual Results."

But then comes the definition of unit multiplier. Adobe says it is:

"Derived from aggregating the target bonus of all participants in the Executive Bonus Plan multiplied by the funding level determined under the funding matrix, and allocating a portion of the funding level to each business or functional unit of Adobe based on that unit's relative contribution to Adobe's success, and then dividing the allocated funding level by the aggregate target bonuses of participants working within each such unit." Got that?

After all that calculating, Adobe's top five executives somehow received the exact same unit multiplier -- 200%. Adobe says that was the highest possible percentage and that it reflects how well the company performed.

Degree of Transparency

Adobe also says it "strives for a high degree of transparency" in financial reporting, and that it added detail this year on executive compensation "in that spirit, and in response to new SEC requirements."

Applied's bonus formula was created a decade ago by an employee who majored in math, but the company hadn't previously included it in its filings. General Counsel Joe Sweeney says the new compensation discussion has won praise from investors and lawyers. Proxy adviser Glass Lewis & Co., which says it has no financial relationship with Applied, called the company's proxy "clear and concise."

But Applied shareholder Robert Friedman, a retired computer programmer, isn't so sure. "This is too much," he says, munching on a cookie and flipping through a proxy moments before the company's March 11 annual meeting. "I own about a dozen companies, and if I did this for every company..."

For all its length, Applied's proxy doesn't reveal some crucial information, such as the target to which the company would like to see its market share increase. That number -- key to calculating the CEO's bonus according to the formula -- must be kept from rivals, Mr. Sweeney, the general counsel, says. For the same reason, the document also excludes some information about other executives' performance goals. "I hate to think how long the [compensation section] would have been if we had included all the factors for all the individuals," says Mr. Sweeney.

So if some important factors remain secret, what's the point of all the math? Mr. Sweeney says it is meant to give shareholders a taste of the decision-making process.

Write to Phred Dvorak at phred.dvorak@wsj.com²