The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

September 11, 2017

Incentive Pay: Activist Challenges Calculations

Liz Dunshee

Verifying calculations for incentive payouts always made my skin crawl. Usually because I’d learn of payday adjustments for things “everyone’s always agreed on” a day before printing the proxy. So that would lead to a mad scramble to ensure that the proxy disclosure, minutes & actual payouts aligned. Spoiler alert: you usually have to fix them all. And since pay is a sensitive topic, probing questions and further adjustments aren’t warmly received.

But this SEC complaint from “Change to Win” Investment Group shows there’s at least one reason to keep fighting the good fight: activists are also tying out the numbers – and might alert the SEC to discrepancies. CtW’s press release explains its allegations:

T-Mobile’s executives were paid $4 million more in 2016 than they would have been if T-Mobile had followed the methods described in its own proxy statement for calculating executive pay, according to a complaint the CtW Investment Group filed today with the SEC.

The complaint documents T-Mobile’s explanation of how it calculates executive pay – in particular its annual bonuses – and then shows that it is not possible to replicate the bonuses awarded to T-Mobile executives by following these methods: T-Mobile awarded bonuses to executives as if they had exceeded targets on four performance measures by an average of 187%, when in fact they exceeded the board’s targets by only 128%.

Moreover, the Investment Group’s complaint highlights T-Mobile’s inadequate disclosure surrounding the calculation of non-GAAP metrics T-Mobile relies on to measure performance in its executive pay plans. For instance, T-Mobile claims to include gains or losses from the disposal of spectrum licenses in its Adjusted EBITDA measure, but fails to take into account an $835 million loss on spectrum license disposals reported on its financial statements for FY 2016. Another non-GAAP measure T-Mobile relies on – Operating Free Cash Flow – is impossible to calculate based on the vague description T-Mobile provides.