Just How Much Do Executives Make, Really?

The Securities and Exchange Commission approved sweeping investor reforms earlier this month, making it easier for shareholders to communicate with one another and forcing companies to more clearly disclose executive compensation.

The reforms, which were three years in the making, were particularly sought after by institutional investors, who complained that they were barred from discussing issues of mutual importance.

Under previous rules, anyone who wished to communicate with more than 10 shareholders “in a manner that could influence” voting decisions had to file detailed documents with the Securities and Exchange Commission--a costly enterprise.

This rule frequently came into play when big shareholders vocally objected to a company proposal. If the shareholder ran an advertisement, wrote a newsletter or in any way broadcasted views critical of the company or its management, companies frequently took the shareholder to court charging that it had violated securities laws.

Now, shareholders have the right to broadcast their opinions without first notifying the SEC. And in some cases, companies must assist communication efforts by providing names and addresses of other shareholders.

For individual investors, however, changes relating to disclosure of executive compensation may be more significant.

Executive compensation has become a sensitive issue during the last several years, as the national recession ravaged corporate profits and caused companies to lay off thousands of workers at the same time as executive salaries soared.

Part of the upswing was blamed on compensation packages so complex that neither shareholders--nor the directors who approved the plans--could fully appreciate how much money was being given away.

In particular, a number of companies granted executives rights--called “options”--to buy company shares at a set price in the future. However, SEC rules did not require companies to determine nor disclose what these options cost.

As a result, grants got richer even as company results declined, said Graef S. Crystal, author of “In Search of Excess: The Overcompensation of American Executives.”

Additionally, past SEC rules forced companies to explain all of their benefit plans in excruciating and legally correct detail.

But that caused the cost of these plans, which often boosted executive pay by hundreds of thousands of dollars, to be buried in pages of incomprehensible prose.

The SEC’s new rules say that all the explanations are unnecessary. Instead, companies simply have to disclose the value of all pay and perks in a handful of easy-to-read charts.

One chart will show all forms of compensation, including wages, contributions to savings and retirement plans, as well as other corporate perks. Another chart would estimate the value of stock grants in the year they were given versus the current standard of showing the value only when exercised. (The value of exercised stock options would also be detailed in a chart, similar to the way it is now.)

Finally, a fourth chart would give shareholders a five-year picture of company’s stock price performance measured against other companies in the same industry and against other big companies as a whole.

A look at the most recent proxy published by Palo Alto-based Hewlett-Packard Co.--a company that actually does a better than average job of disclosing executive pay--helps illustrate why this reform was needed.

H-P’s President and Chief Executive John A. Young earned $1,519,420 in cash compensation, plus $15,363 in contributions to his qualified retirement plan, according to a table on Page 15 of the company’s latest proxy statement.

That means Young earned $1,534,783, right? Wrong. Young’s 1991 compensation actually amounted to more than twice amount, or $3,150,269.

And that doesn’t include the value of unexercised stock options and grants.

Where did the additional $1.6 million come from?

A healthy $46,367 was contributed to Young’s “excess benefit plan” (Page 18), $66,239 went to his cash profit-sharing account (Page 19), and $10,980 worth of free financial counseling (Page 21) was provided by the company.

Young exercised stock options worth $1,491,900 in 1991 (Page 22). (That’s the difference between the market value and the amount he actually paid.)

However, he also received 60,000 stock options (Page 22) with an average exercise price of $27.31. The company’s stock now sells for about $55, but the value of this grant is not disclosed.

Hewlett-Packard also gives stock to top managers through a “restricted stock plan.” But since none of those shares “vested”--became the unrestricted property of the executive--during the year, the annual value of these grants was also not disclosed.

The total value of Young’s pay package?

That’s difficult to say, since it will depend on what happens to the company’s stock price over the next several years.

However, experts believe that it is worth at least several million more than what’s clearly spelled out in the proxy.