In a report this released this week in the Wall Street Journal, the paper identified a so-called “less familiar” conclusion – that CEOs often realize more compensation than presented in the Summary Compensation Table due to how the SEC requires equity compensation to be disclosed. The article references realizable pay data from ISS Analytics noting that the value of realizable pay at the end of a three-year period was an average of 16% higher compared to the grant date value in the Summary Compensation Table, with a third of companies seeing realizable pay exceed 25% of that value. Not surprisingly, the article also notes that the heavy use of equity compensation, specifically performance shares, is the key driver of increases – or decreases – in CEO compensation compared to grant date disclosures.
With performance shares, the article notes that in the Summary Compensation Table, companies disclose the assumption that executives will achieve target performance at current stock prices and footnote what maximum performance would look like. However, since performance is not determined and the current share price is used, actual values often fluctuate. The article walks through the disclosed plans of a couple of companies to note the variation on how many shares and the value of those shares depending on company performance. Realizable pay is defined as "cash salary, bonuses and incentives as paid; the value realized from stock options at exercise; and the value of restricted stock when it vests, or becomes fully the executive’s. Unexercised options and unvested restricted stock are valued using the company’s share price at the end of the period, unless forfeited or unearnable."
The article reflects a reality the Center has discussed for years. The Summary Compensation Table presents a value of CEO compensation which does not reflect the end compensation value any of the disclosed NEOs will receive. This is because for long-term incentives, it presents the accounting value of equity expected to be received (the grant date value), which are estimated valuations, along with items such as a change in pension value and adds this into a total pay number. Thus, this number receives the most media attention. However, the ultimate value of the equity compensation is presented two charts in the proxy statement.