Implementing Tally Sheets for Compensation Committees
Myrna Hellerman and Blair Jones are Senior Vice Presidents with
Sibson Consulting, a division of The Segal Company
Compensation Committees, especially in industries experiencing increased
scrutiny by watchdog groups, are finding the Tally Sheets a very helpful tool to
quickly identify potential issues with pay programs. Tally Sheets make it easier
for Compensation Committees to understand the impact of disparate compensation
decisions. They can prompt meaningful conversations about stewardship and
fiduciary responsibility—discussions which can avoid embarrassing "surprises."
We have found that Compensation Committees are particularly interested in
three types of information:
- A longer term perspective (e.g. three-year) about how different
compensation programs relate and interplay.
Exhibit 1[1]
shows an example of a two-part CEO Tally Sheet used effectively at one company.
The ensuing discussion revolved around the interplay among the different equity
programs and grants: the value delivered to the CEO, the inconsistency of the
vesting (which was commented upon in the Comments column), and the fact that
there appeared to be excessive redundancy among all of the equity programs. The
discussion led to a decision to consolidate like programs and add additional
discipline to the award determination.
Exhibit 1
CEO Compensation "Tally sheet" PART A
CEO Annual Compensation Details by Program
Illustrative
| Element |
2002 |
2003 |
2004 |
Comments |
| Salary |
$900,000 |
$900,000 |
$900,000 |
~~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Annual Incentive Cash |
$0 |
$250,000 |
$450,000 |
~~~~~~ ~~~~~~~~~ ~~~~~~~ |
Equity Program #1: Stock Option Bonus
(Grant Present Value) |
N/A |
N/A |
$185,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~~~ ~~~~~~~~~~~~
~~~~~~~~~ ~~~~~~~~~~~~ ~~~~~~~ |
Equity Program #2: Stock Option Bonus
(Grant Present Value[2]) |
$300,000 |
$450,000 |
$600,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~ ~~~~~~
~~~~~~~~~ ~~~~~~~ |
Equity Program #3
(Grant Value) |
$500,000 |
$500,000 |
$500,000 |
~~~~~~~~~~~~~~~~~ ~~~~~~~~ |
Equity Program #4
(Grant Value) |
$400,000 |
$400,000 |
$400,000 |
~~~~~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Vehicle Allowance |
$6,000 |
$6,000 |
$7,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~ ~~~~~~~~
~~~~~~~~~ ~~~~~~~ |
| Group Insurance |
$2,500 |
$2,500 |
$2,500 |
~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Club Memberships |
$30,000 |
$30,000 |
$30,000 |
~~~~~~~~ ~~~~~~~~~ ~~~~~~~~ |
| 401(k) Match |
$4,000 |
$4,000 |
$4,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Supplemental Savings Match |
$10,000 |
$10,000 |
$10,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~ |
CEO Compensation "Tally sheet" PART B
CEO EQUITY AND DEFERRED COMPENSATION GAINS
Illustrative
| Element |
2002 |
2003 |
2004 |
Comments |
| Stock Option Exercises (Value Realized1) |
$800,000 |
$200,000 |
$600,000 |
Options exercised: ~ in 2002; ~ in 2003;
~ in 2004 |
| Unrealized Option Gains (EOY Present Value2) |
$1,500,000 |
$1,300,000 |
$1,400,000 |
Includes both currently exercisable and
un-exercisable options |
| Equity Plan #3: Restricted Share Vesting
(Value when Vested) |
N/A |
$250,000 |
$850,000 |
~ ~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Equity Plan #3: Unrealized Restricted Share
Gains (EOY Present Value[3]) |
$750,000 |
$1,000,000 |
$1,500,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Equity Plan #4: (EOY Present Value2) |
$900,000 |
$1,600,000 |
$1,800,000 |
~~~~~ ~~~~~~~~~ ~~~~~~~ |
| Accumulated Supplemental Savings Plan (EOY
Present Value[4]) |
$200,000 |
$500,000 |
$800,0000 |
~~~~~~ ~~~~~~~~~ ~~~~~~~ |
Note: Years correspond to the year in which the CEO actually received the
award, not the year on which performance was based
- Cost consequences of a termination of employment for CEO and
other key officers.
Exhibit 2[5]
is an example of this type of summary for the CEO. As a consequence of the
discussion generated by this Tally Sheet, the Compensation Committee requested
similar sheets for all key executives plus a calculation of the total cost of
all golden parachutes provided. The Committee ‘s concern was whether the poison
pill, which had made sense years ago, would now be viewed by shareholders as a
substantial deterrent to suitors.
Exhibit 2
CEO PAYOUT EXPOSURE
Illustrative
| |
Value and Provisions if Terminated… |
| Program/Element |
Voluntary (Resignation) |
With Cause |
Without Cause |
Under Change in Control |
| Severance Plan |
$0
Not applicable |
$0
Not applicable |
$xxxx per week
One week per year of service |
$x,xxx,xxx
24 months salary and bonus |
| Equity Program #1: Stock Options |
$200,000
Based on xxxx exercisable options; xxxxxx unvested options are
forfeited |
$200,000
Based on xxxx exercisable options; xxxxxx unvested options are
forfeited |
$200,000
Based on xxxx exercisable options; xxxxxx unvested options are
forfeited |
$1,400,000
All options vest immediately |
| Equity Program #2 |
$0
All restricted stock awards forfeited |
$0
All restricted stock awards forfeited |
$1,154,266 (over time)
Vesting schedule continues as if an employee |
$1,154,266
All restrictions immediately lapse |
| Equity Program #3 |
$0
Full award balance would be forfeited |
$0
Full award balance would be forfeited |
$1,792,354
Immediate distribution, in stock, of full balance |
$1,792,354
Immediate distribution, in stock, of full balance |
| Frozen Pension Plan |
$60,000 annually at age 62 |
$60,000 annually at age 62 |
$60,000 annually at age 62 |
$60,000 annually at age 62 |
| Savings Plan |
$500,000
(Distributed as elected (cash, rollover, installment, etc.) |
$500,000
Distributed as elected (cash, rollover, installment, etc.) |
$500,000
Distributed as elected (cash, rollover, installment, etc.) |
$500,000
Distributed as elected (cash, rollover, installment, etc.) |
| Supplemental Savings Plan |
$800,000
Distributed as elected, or immediate lump-sum if no election on file |
$800,000
Distributed as elected, or immediate lump-sum if no election on file |
$800,000
Distributed as elected, or immediate lump-sum if no election on
file |
$800,000
Distributed as elected, or immediate lump-sum if no election on file |
| Other |
N/A |
N/A |
N/A |
Continuation of health plans, loss of
deductibility, and excise tax gross-up |
- Calibration of CEO pay opportunities across industry "peers" with
different ownership structures.
The Committee at one company constantly
struggled with CEO pay comparisons to the talent and business competitors in its
"peer" group. Using a Tally Sheet, the Committee could clearly see the root of
the anomalies. They saw that if the CEO’s level of beneficial ownership was
high, the base, incentive, and/or equity grant levels may be lower. Exhibit 3[6]
shows an example of such a summary. As shown, a 2% ownership stake can have
quite different values and impact on compensation arrangements.
Exhibit 3
CEO Compensation Peer Matching
Illustrative
| Name, Title, Company[7] |
2004 Base Salary
($) |
2005 Annual Incentive
($) |
2004 LTI
($) |
2004 Other Compensation
($) |
2004 Beneficial Ownership |
Name
Position
Company #1 |
900,000 |
2,000,000 |
5,000,000 |
44,000 |
<0.1%
$6,000,000 |
Name
Position
Company #2 |
1,000,000 |
900,000 |
2,732,895 |
85,000 |
2.0%
$4,000,000 |
Name
Position
Company #2 |
1,000,000 |
3,000,000 |
0 |
15,000 |
2.0%
$100,000,000 |
Name
Position
Company #2 |
550,000 |
1,000,000 |
0 |
5,000 |
18.0%
$400,000,000 |
Name
Position
Company #2 |
450,000 |
450,000 |
1,000,000 |
20,000 |
2.0%
$7,000,000 |
Name
Position
Company XYZ |
900,000 |
450,000 |
600,000 |
30,000 |
0.5%
$10,000,000 |
The Compensation Committees using the Tally Sheet concept have overwhelmingly
expressed a belief that the Tally Sheets add real value. One committee member
commented, "They make it so much easier for us to cut to the chase, see what’s
going on, see where there are inconsistencies and hone in on what is really
important to fix."
[1] Please
consider the exhibit as a format idea only, not as an actual example. The
numbers and comments in the exhibit have been modified significantly to preserve
confidentiality of our clients.
[2] Stock
Option "Grant Present Value" calculated using Black-Scholes option valuation
value of zz%, yy%, xx% respectively.
[3] Stock
Option "Value Realized" equals the number of options exercised times the
exercise date closing stock price, less the total exercise price. This value is
equivalent to the tax deduction allowed to Company XYZ under current tax
regulations.
[4] "End of
Year (EOY) Present Value" indicates the value of holdings as of 12/31 of the
indicated year.
[5] Please
consider the exhibit as a format idea only, not as an actual example. The
numbers and comments in the exhibit have been modified significantly to preserve
confidentiality of our clients.
[6] Please
consider the exhibit as a format idea only, not as an actual example. The
numbers and comments in the exhibit have been modified significantly to preserve
confidentiality of our clients.
[7] Matches
represent executive most similar to the Company XYZ’s CEO in terms of total job
responsibilities.
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