Profit from Executive Compensation Research

By Kevin Sweeney
March 12, 2007 11:06 AM

Former Home Depot CEO Robert Nardelli recently grabbed headlines with a $210 million severance package even though the company reported poor financial results and saw its stock value decline during his tenure.

Such corporate decisions can lead to widespread shareholder unrest, which can add up to a business reporter's dream at a company's annual meeting.

When an executive compensation story crosses your desk, there are some key areas to explore in order to determine the fairness of a CEO's pay package. For example:

1. Take a close look at performance and how it relates to executive compensation.

2. Compare pay with peers and CEOs of similarly sized companies within the same industry.

3. Finally, identify compensation trends in that industry and investigate how stock options are determined and their value once exercised.

Financial documents can be one of your closest allies in researching executive compensation stories. The key is to know where to look.

"I think there is a lack of understanding of how to read and understand a proxy statement," says Hannah Clark, a staff writer with Forbes. "A lot of journalists take a company's word at face value."

While companies may report that their top executives are making a specified amount in salary and bonuses, this number may fail to factor in stock options.

As an example, Whole Foods likes to promote the fact that CEO John Mackey makes approximately 14 times the pay of the company's average worker. However, when you account for stock options Mackey exercised, the total compensation is closer to 84 times that of the average Whole Foods employee, pointed out Clark in a recent article.

Corporate spin also surfaces when a major CEO reveals he or she will only accept $1 in salary for a year and fails to mention signing bonuses and stock options. Steve Jobs of Apple has announced such a move for the past several years. Yahoo's CEO and the co-founders of Google have also taken the $1 salary per year pledge.

Reporters need to go beyond the base salary to get the total compensation picture for the CEOs of the companies they cover. The most common way of getting that picture is through mandated federal filings.

"It's really important to turn to SEC filings to figure out all aspects of the executives' compensation," notes Tim Higgins of the Detroit Free Press. "Comb these for little nuggets often hidden deep within complicated language and math."

To gain further perspective on what's included in a proxy statement or overall compensation trends, Higgins suggests consulting with veteran reporters in your newsroom. After passing a seasoned colleague's test, present your findings to the company.

"Look to a veteran on staff to help you guide you through it," he says. "When you think you've figured it out, run it by company officials. Let them have their say. You may be right or you may be reading something wrong -- I'd rather hear that before the story runs."

Firms that research compensation trends such as Towers Perrin, Watson Wyatt and Mercer Human Resources can provide useful research and quotes for your stories. Clark also suggests reporters turn to corporate governance entities which tend to support shareholder power. These may include The Corporate Library and Institutional Shareholder Services.

Reporters should also pay close attention to larger industry trends taking place. As executive compensation comes under closer scrutiny, boards of directors are increasingly on the chopping block since they approve compensation packages.

Shareholders are also pushing to have a greater voice in the total compensation of top executives. Initial changes among boards and shareholders may just be the tip of the iceberg.

"Boards have a lot more power to negotiate and there's a lot of pressure from shareholders," Clark says. "It's definitely changing."

Although some of these changes might not be evident for a few years since many pay packages have already been approved, one such shift already occurred this year. In February, Aflac became the first company to adopt a shareholder vote for executive compensation. Clark sees this move as beginning a trend.

"When other companies see the sky doesn't fall down, they'll follow suit," she says. "If companies don't adopt these changes voluntarily, that's when the SEC will step in."

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