New Proxies Spotlight Execs’ Pay
If you invest in individual stocks, you’re likely to notice some significant changes in this year’s proxy statements.
Proxies, which are annual reports of pay and shareholder proposals, were revamped to comply with new Securities and Exchange Commission regulations that grew out of investor furor over exorbitant executive pay packages.
Most proxies issued after January, 1993, must include new prose and charts that make company salary information far simpler to comprehend. In addition, if shareholders want to object to executive pay plans, those objections must now be included in the proxy. In previous years, managers could reject shareholder proposals that asked to limit executive pay on the notion that they “interfered with the company’s day-to-day activities.”
For someone with a nosy bent, the new proxies are paradise. They not only say how much money company managers earned this year, last year and the year before, but they try to tell you whether managers deserved their wages.
And some believe that the new disclosures will do more than just satisfy your curiosity. They may help improve company performance. They certainly should give shareholders a better read on when it’s time to buy--or dump--a company’s shares, industry experts say.
“The premise behind the new disclosure is that process drives substance,” says Ralph Whitworth, director of the United Shareholders Assn. in Washington. “By holding (a company’s board of directors’) feet to the fire and by giving shareholders information they can use to compare pay policies with actual practices, it is going to empower shareholders with the information they need to conduct activism or decide on their investment.”
Adds Gary Hourihan, president of Strategic Compensation Associates in Los Angeles: “If people start focusing more on strategic compensation, it will influence (corporate) behavior in a positive way. There will definitely be a favorable fallout response.”
Not everyone agrees, of course.
“These changes are relatively insignificant to shareholders because they will not change corporate performance,” maintains Joel Stern, managing partner of Stern Stewart & Co. in New York. All the new disclosures will do is embarrass some managers who are clearly taking home more than they earned, he said.
Just how do the new proxies differ from the old? Mainly in four areas. There are three new charts and one newly required explanation.
The explanation is from the board of directors’ compensation committee, and it’s designed to tell you why the company paid managers what it paid. Ideally, this statement sets out a clear, objective policy that delineates how much cash and stock an executive will get if certain performance standards are met. It should also say how the board arrived at those numbers.
In reality, however, many boards don’t have objective standards, so these statements can be relatively obtuse, says Hourihan. Consultants expect regulators to require more detailed information in the future.
The charts are the fun part. The first chart is an expanded version of the executive compensation table of yore. But instead of simply noting the current year’s cash payments (as was previously the case), it gives three years of salary, bonus and “long-term” compensation history. There’s also an “other” column that lists the value of company-paid perks, such as use of company cars, boats, planes and vacation homes.
Although it’s not calculated for you, the earnings history makes it simple for shareholders to determine what kind of raises--or pay cuts--their executives are taking.
That chart should be considered in concert with another new requirement: the graph of five-year total shareholder returns. Here companies are required to plot the performance of their shares against the performance of a broad market index, such as the Standard & Poor’s 500, as well as to a smaller index of their peers.
It’s a clear picture of how well shareholders of that company have fared. And when held side-by-side with the compensation chart, it may reveal whether shareholders, or managers, are faring the best.
The final chart is also brand-new. It tells you how many stock options were granted to top executives during the year and what those options are worth. (Stock options are rights to buy a company’s shares at some point in the future at a set price. When the options are exercised, the executive reports a gain, which is the difference between what he paid for the stock--thanks to the option--and what the company’s shares are worth in open-market trading.)
There are two basic ways companies value the options in the new proxies. One is called the Black-Sholes method, which takes a number of factors into account--including stock price volatility and the duration of the option--to tell you what those options are worth today.
It is essentially the price that a reasonable person would pay for the same rights if they were buying them on the open market on the date they were granted.
The second valuation method is the “5%/10%” method. It calculates what the options would be worth if the company’s stock rose by those amounts each year. The 5%/10% method generally results in much higher values than Black-Sholes.
But if you want a simple rule of thumb to try to equate the two, divide the value noted in the 5% column by two. It’s not exact, but the result will come close to the value you’d get under Black-Sholes, Hourihan says.
What can you conclude from all this information?
You can tell if management’s pay is rising in the face of declining performance to shareholders. You can tell if the opposite is true. You can see if pay is marching forward generally in tune with stock price performance.
But you can’t really tell if company executives are worth the amount they’re getting, experts agree.
To do that you’d have to compare the manager’s pay to pay at numerous other companies, and that’s a lot of work, says Mark H. Edwards, principal at Sibson & Co. in San Francisco.
In other words, the system is still not perfect, but, says Edwards: “It is a marked improvement over the status quo.”
Highlights of the New Proxy Statement
Shareholders who want to know if company managers are paid based on their performance can get a wealth of information from today’s new and improved proxy statements. Industry experts say there are four key elements to consider:
* Report on compensation. This is a statement from the company’s board that says what the company is trying to accomplish with its pay plans.
* Summary compensation table. It describes pay for the last three years, including salaries, bonuses, long-term payments and the value of company-paid perquisites, such as executive use of cars, boats, planes and vacation homes.
* Stock price performance graph. This shows the performance of the company’s stock compared to the performance of other market indexes. You would generally expect stock price to move in the same direction as pay.
* Option grant chart. This says how many stock options were given to executives during the current fiscal year and approximates their value.
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Using the new and Improved Proxy Statement
Today’s redesigned proxy statements give shareholders a wealth of information about pay and company stock performance. To illustrate how you can compare pay and performance, let’s take a look at the proxy of Atlantic Richfield Co.
The new and improved proxies contain a chart called “Summary compensation Table” that shows pay for top executives. Here it is for Arco Chief Executive Lodwrick M. Cook:
Percent Executive year salary bonus total* change* Lodwrick M. Cook 1992 $1,102,032 $700,000 $1,802,032 +9.6% 1991 $1,043,870 $600,000 $1,643,870 -23.7% 1990 $956,154 $1,200,000 $2,156,154 n/a
** Most proxies do not include the percentage change.
* The new and improved proxies also contain a chart called “Comparison of Five-Year Cumulative Total Return” that details a company’s stock price performance. The chart shows what a $100 investment in the company’s stock made five years ago would be worth today. It compares that figure to the value of $100 invested in the Standard & Poor’s 500, as well as a group of the company’s peers.
Here’s the chart for Arco:
Stock/index 1987 1988 1989 1990 1991 1992 ARCO $100 $122.8 $179.2 $205.0 $185.5 $209.4 Oil Peer Group $100 $121.5 $166.9 $172.8 $192.1 $199.4 S&P; 500 $100 $116.4 $153.3 $148.8 $194.2 $209.1
In ARCO’s case, cash compensation paid to Chief Executive Lodwrick M. Cook seems to be tied to the company’s stock performance. The firm’s stock value fell in 1991 (as did Cook’s compensation) but rose in 1992 (as did Cook’s compensation).
