Dig Deep to Get the Complete Executive Compensation Picture

By Kevin Sweeney
May 8, 2006 11:04 AM

With executive salaries on the rise, business journalists are placing total compensation under an ever-tightening microscope.

Earlier this year, the Securities and Exchange Commission proposed sweeping changes to the manner in which companies report executive perks and pay.

In addition to executive compensation for the last three years among top earners, the SEC proposed that organizations disclose more detail about equity-based compensation interest holdings and retirement compensation. These rules are set to take effect in the spring of 2007.

The retirement component has come under increased scrutiny since the packages of former NYSE Chairman Dick Grasso and, more recently, ExxonMobil CEO Lee Raymond, became headline news.

And just last week, the UnitedHealth Group announced that it would cease equity-based awards to two senior executives just before an annual meeting. The company also disclosed it would stop covering the cost of personal use of the corporate aircraft.

A study by Pearl Meyer & Partners found that compensation for CEOs rose to $8.4 million in 2005 - an increase of 10 percent.

Reporters are highlighting that perhaps more than anyone else, the investing public has a vested interest in the salaries that corporate executives are reeling in.

"Investors have to wonder who's paying for these soaring compensation packages," says Jeff Ostrowski, business reporter with The Palm Beach Post. "It's probably the investors themselves."

Ostrowski points out recent research that indicates as a share of corporate profits, executive compensation has risen from less than 5 percent 10 years ago to more than 10 percent today.

"Reporters need to take a close look at exec comp packages," he says. "The bad news is that we often don't do that. The good news is that it's not difficult: Companies lay out the details of their pay packages in their public filings."

For information on salaries and other perks, business reporters need look no further than the company proxy statement or Form 14-A. Included in the proxy is a report on executive compensation from board members who decide the salaries of top executives. This explanation may provide interesting nuggets for justification of an increase or decrease in total compensation.

Speaking of board members, dig deeply to determine who exactly serves on these boards and if they are all just golf buddies patting each other on the back. Details about the relations between company executives and board members can be found in the related party transactions entry in the proxy statement.

"Reporters need to scrutinize these relationships and report them when they're questionable," Ostrowski says.

So who can reporters turn to in order to get solid perspective on what is and isn't fair when it comes to executive compensation?

"This is a tough one because it's almost impossible to define 'fair,'" Ostrowski says. "But by looking at a company's profits and its stock prices, it becomes pretty obvious when a comp package is out of line. Mutual fund managers, pension fund managers and other institutional investors can offer good perspective."

Also investigate whether executive pay at the companies you cover is tied to organizational performance. It would be interesting to note when an executive's pay is on the rise while the company's financials are falling short of expectations.

And always keep the total compensation picture in mind. Ostrowski points to Office Depot awarding its new CEO, Steve Odland, $15 million. A further look into Odland's total compensation revealed he received an additional $23 million from his previous employer, AutoZone. And don't forget the extra $22 million in option gains.

"In general, reporters do a good job in reporting total compensation, as opposed to just salary or bonus," Ostrowski says. "But we have to stay vigilant. Hefty payouts illustrate the large issue of the concentration of wealth in American society."

For more information on proxy statements and other SEC filings, visit Chris Roush's tutorial on BusinessJournalism.org.

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism