Compensation Confrontation

There's a lot more to executive pay than meets the eye.

Down in the weeds of executive compensation, things can be pretty hard to fathom. Not just for ignorant folk, but for experts, too. “Even for people like me who are in it every day, it’s still hard to understand sometimes,” confesses Aaron Boyd, head of research for Equilar, a compensation-research firm. Indeed, others who make their living analyzing compensation data or consulting on the topic have said much the same.

On July 2, The New York Times published an article declaring the median total compensation for CEOs at the 200 largest public companies that filed their proxies by June 23 leaped by 23% in 2010. The attention-grabbing headline was, “We Knew They Got Raises. But This?”

That prompted a call to CFO by Gary Pokrassa, finance chief for a $100 million public company called Lakeland Industries, which makes protective clothing. Both he and, he says, Lakeland’s directors were incensed by the article. In fact, they’ve been incensed since late 2009, when the Securities and Exchange Commission required companies to report in their annual proxy statements the maximum possible grant-date fair value of top executives’ equity-based compensation awards.

Many such awards vest over multiple years, yet the new rules — effective for proxies filed after February 28, 2010 — also require proxies to assign the entire amount to the year of grant, which can drastically increase total reported compensation for that year. The move was intended to give investors another data point on compensation to consider. Previously, companies reported in proxies the amount actually expensed for each specific year, just as in their financial statements (which continue to display the expensed amounts).

The eventual worth of all equity awards is subject to the stock’s future performance, but Pokrassa points out that in any particular case the stock might never even be issued, because such awards are often subject to the executive’s meeting earnings-per-share or other performance targets. “The Times article was based on a false premise and fallacious logic,” he charges. “But it was inevitable that an article would come out proclaiming how much executive compensation has increased.”

But there are few airtight arguments when it comes to executive compensation.

First, let’s further flesh out Prokrassa’s view. As an example, he points to Howard Schultz, CEO of Starbucks. The company is too small to be among the 200 in the Times‘s data set, but the paper identified Schultz as making more money last year than the median CEO in that group.

Starbucks files its proxy annually in January, so this was the first year it had to comply with the new rule. The document shows Schultz as having total 2010 compensation of $21.73 million, a 45% jump from $14.97 million in 2009. But he was given restricted stock, to vest over three years, valued at $10.5 million. If that column included only the expensed amount shown in the company’s financial statements, his total pay would have been virtually the same as the previous year.

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