Reporter Offers Resources and Advice on CEO Pay

By Kevin Sweeney
May 24, 2006 09:39 AM

As corporate salaries continue to raise eyebrows, business sections are ramping up their coverage related to the excessive state of executive compensation packages. From picking apart who serves on boards of directors to deeper investigations into total compensation, journalists are widening the span of reporting on this important subject.

Reporters need go no further than the headlines this week that fault Fannie Mae's board of directors for manipulating earnings to trigger bonuses for top executives. Or the controversial $245 million pay package of Home Depot CEO Robert Nardelli, even as the home improvement giant's stock suffers.

For a look at some common trends and issues across the board, Managing Editor Kevin Sweeney speaks with Alyce Lomax, staff writer with The Motley Fool. Lomax recently authored a piece for the Fool on out-of-control CEO compensation.

Q. Executive compensation is on the rise again. What does this signal for the investing public at large and how do you think reporters should be covering their own local leaders' compensation packages?

Lomax: I think that this is an issue that has definitely been in the public eye and will continue to be - I think the investing public is going to focus more on the idea that someone should be held accountable for pay that doesn't reflect performance. In my commentary, I focused on cases where executives seem to be getting rich salaries despite the fact that their companies haven't been performing so well for shareholders (or, they are receiving large severance packages - I think another object for shareholder contention would be the idea that sometimes, company leaders seem to be paid awfully well for failure).

Although there are certainly arguments as to why CEOs should be paid well - peer-based compensation as well as the often cited idea that it's stressful to be responsible for running a company - I think it's also important to keep a close eye on tracking leaders' effectiveness and performance for such vast pay (as well as holding boards of directors accountable for giving such compensation packages the stamp of approval). "Superstar" CEO salaries are getting a lot of attention these days, and I'm not inclined to think that that's a very good use of company money - but then again, if a company is doing well, in some cases lucrative pay might seem perfectly acceptable from a shareholder point of view.

Q. Boards of directors must approve these packages. What are your feelings about profiling exactly who is on a particular company's board and their ties to the top executives?

Lomax: I think that paying attention to who's on the board of directors at a particular company is a very important element to track for the reasons you cite. Many shareholders are hoping for majority voting for corporate boards to give them more control over who is on corporate boards - directors are supposed to be working in the best interests of shareholders, not corporate managements.

Q. Who are the best sources to speak with to determine how fair a particular executive's pay is? Is it effective to look at historical compensation packages for comparison purposes?

Lomax: Here at the Fool we're investors writing for investors, so I was basically mining for information on these issues when my story idea got sparked. For my article, I liked comparing different CEOs' pay - and how well their stocks have been performing. I think that one of an individual investor's (and a financial reporter's) best friends is the SEC filing database at SEC.gov, where you can find historical compensation data from proxy statements going back many years. One suggestion of a resource is Institutional Shareholder Services (ISS), since they track proxy filings and corporate governance.

Q. How do you feel about talking to everyday readers about their feelings about executive compensation?

Lomax: This was the first time I had written about the idea of "insane CEO pay" but I found I did get a lot of reader feedback about the article. I think it struck a nerve; many individual investors - and everyday readers - seemed very frustrated by the widening gap between CEO and worker pay, as well as the frequent discrepancy between CEO pay and stock performance. I enjoy hearing every day readers' feelings on such issues because it helps me gauge what people are thinking about such issues these days.

Q. What do you think a lot of reporters fail to report or miss when it comes to TOTAL compensation?

Lomax: I think that stock-based compensation and stock options are a greatly overlooked element. As it stands now, that information is less cut-and-dried than normal salary information (base salary plus bonus is pretty straightforward in proxy statements) and often is taking into account things that haven't happened yet (exercising of stock options in the future that haven't vested yet) - however it's still part of the same picture. For example, while it's gratifying that some CEOs only accept $1 per year in salary, say, it is still important to note that in most cases they very likely have plenty of company stock and stock options.

There are also perks with a money value, such as use of corporate jets or premium health care or other insurance plans. Reporters can find out a lot of this information but it takes a little extra digging, although some of the information is very stealthy. One well-known example was all the perks GE's Jack Welch got into retirement, which were not revealed through SEC disclosure documents but rather through documents filed in his divorce. However, the SEC has proposed new rules for compensation disclosure, which hopefully will make it easier for shareholders and financial reporters alike to get a more accurate picture of executive pay.

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