June 24, 2010
You Can’t Buy a Ferrari with Grant Date Fair Value
– Fred Whittlesey, Hay Group
I was being interviewed by a business writer for his publication’s annual executive pay story and he asked about an interesting footnote in a proxy statement. A CEO had received performance share grants in 2007 and 2008, which of course appear in the Summary Compensation Table at their grant date fair value. The performance thresholds were not achieved so he had received zero compensation from the grants that had been reported as $1.75 million and $1.15 million for those two years.
I happen to be familiar with that company’s executive compensation practices because it is a member of the peer group of a client of mine. I had noticed the interesting disclosure when reading their recent proxy:
The stock awards granted to Mr. X in 2008 and 2007 were performance restricted stock grants with multi-year performance goals. The goals were not achieved and none of the stock awards vested. Accordingly, Mr. X received no common shares or other value from these awards. These performance restricted stock grants are, however, under SEC rules required to be reported as compensation even though the performance restricted stock never vested and no value was delivered to the recipient.
The company was sure to mention three times in three sentences that no pay resulted from this pay disclosure. It is clear that he did not get paid that $2.9 million.
The writer wondered whether this is a new problem that stems from the change in SEC disclosure rules and I told him it is far from a new problem and one with roots going back to the 25+ year debate about accounting for equity-based compensation awards – remember the anti-FAS123 argument (pre-1995) that expensing stock options could result in a company recognizing an expense when no pay was ever delivered to the employee. Mr. X’s employer has revived that opposition by highlighting to investors that the pay numbers may not be pay numbers at all but are just hijacked accounting expense figures masquerading as pay.
Performance equity awards may require only a year or two or three to confirm that the reported numbers will yield or did yield zero pay, however, unlike stock options which could take up to ten years for the same realization.
In a proxy season that produced a $22.5 million dollar variation in one CEO’s reported pay among various business publications, the “vaporware” aspects of some performance-based equity plans – combined with similar plans in some companies paying at the maximum with investors accusing companies of sandbagging goals – will raise more questions about performance equity plans as a solution to the CEO pay-for-performance issue.
Join Elizabeth Dodge of Stock & Option Solutions and me for the NASPP’s “Practical Guide to Performance-Based Awards” pre-conference program on Monday, September 20th (immediately preceding the NASPP’s National Conference) in Chicago.