The Executive Compensation Controversy - Fondazione Rodolfo ...

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THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISFigure 2.1 2008 CEO Pay firms in the USA S&P 500Note: Figure 2.1 is based on proxy statement information compiled in Standard & Poors’ ExecuComp database for 496 S&P500 firms with fiscal closings between June 2008 and May 2009. US Dollars converted to Euros using the 2008 yearendexchange rate (€1 = $1.3919).Expected Pay:Base Salary and Discretionary Bonus reflects amounts actually received for the fiscal yearNon-Equity Incentives evaluated at target level (or average of minimum and maximum if target not reported)Stock Options evaluated at grant date using firm-estimated present value (typically Black-Scholes (1973)calculations)Stock Awards evaluated at grant-date using firm-estimated present value (typically grant-date market price)Other Compensation includes perquisites, signing bonuses, termination payments, above-market interest paid ondeferred compensation, and the change in the actuarial value of pension benefits.Realized Pay:Base Salary and Discretionary Bonus reflects amounts actually received for the fiscal yearNon-Equity Incentives defined as payouts during the fiscal year (including payouts on awards made in prior years)Stock Options defined as gains executive realized by exercising options during the fiscal yearStock Awards defined as value of awards vesting during the fiscal year (valued on the date of vesting)Other Compensation includes perquisites, signing bonuses, termination payments, above-market interest paid ondeferred compensation, and pension benefits paid during the year.The percentages for Average Pay are calculated by dividing the average salary (for example) by average total compensation(or, equivalently, by dividing aggregate salaries by aggregate total compensation). The percentages for Median Payare calculated as the average ratio of salary (again, for example) to total compensation for each CEO.Figure 2.1 illustrates the 2008 expected and realized compensation for CEOs in firmslisted in Standard and Poor’s “S&P 500” (essentially the largest 500 USA firms ranked bymarket value). The data are based on fiscal 2008 proxy statement information reported in-11-
THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSISStandard & Poors’ ExecuComp database. 21 For both measures, total compensation iscomprised of six basic components: base salaries; discretionary bonuses; non-equityincentives (based on both annual and multi-year performance measures); stock options; stockawards; and other pay. These six categories are designed to correspond to the SEC disclosurerequirements effective as of December 2006. Under the prior disclosure requirements, firmsseparately reported “annual bonuses” and “payouts from long-term performance plans.”Under the 2006 requirements, both annual cash bonuses from short-term incentive plans andlong-term performance bonuses are considered “non-equity incentive compensation” if theyare based on pre-established and communicated performance targets. If they are not based onpre-established and communicated targets the SEC (and us) treat them as discretionarybonuses.Base salaries and the payouts from discretionary (non-formulaic) bonuses are the samefor both expected and realized total compensation. However, the definitions of the remainingpay components vary with the measure utilized.For expected pay, non-equity incentives are evaluated at the target level of payout (or,calculated as the average of the minimum and maximum payout if the target is notreported). 22 The expected value of stock options is defined as the company’s estimate of thepresent value of the options on the grant date: this value is typically based on Black andScholes (1973) or similar methodologies and approximates the amount an outside investorwould pay for the option. Similarly, the expected value of stock awards is calculated as of thegrant date using the grant-date market price, which in turn approximates the amount anoutside investor would pay for the stock. “Other compensation” includes perquisites, signingbonuses, termination payments, and above-market interest paid on deferred compensation. Inaddition, “other compensation” includes the change in the actuarial value of pension benefits,which typically constitutes a large percentage of compensation for those executives withsupplementary defined-benefit pension plans. 2321 We adopt the convention that companies with fiscal closings after May 31, in year “T” are assigned tofiscal year “T” while companies with fiscal closings on or before May 31, Year “T” are assigned to fiscal year“T-1”. Thus, the 2008 fiscal year includes companies with fiscal closings between June 1, 2007 and May 31,2008.22 The actual payouts during the year are used as an estimate for expected non-equity incentives in firmswithout reported targets or caps.23 The “change in the actuarial value of pension benefits” is the year-to-year change in the actuarial presentvalue of the CEO’s accumulated benefit under all defined benefit and actuarial pension plans, assuming anormal retirement age as defined in each company’s plan (or, if not so defined, the earliest time at which the-12-
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