The Advisors' Blog

– Broc Romanek

Here’s a rebuttal from a member to the blog that I excerpted from on Friday: About this new study about how to calculate “total compensation” for purposes of the Summary Compensation Table, not only are the authors misstating what goes into the SCT – but that even is of little consequence to their analysis. The grant date value of awards issued during the year (not vested) are reported in the Summary Compensation Table. What these these authors are saying is realized compensation (W-2 pay) is far more valuable than SCT pay:

– For example, they reference data from 2014, which indicated S&P 500 company CEOs’ SCT pay averaged $19.3 million, while average realized compensation was $34.3 million.

– The authors conclude that pay is seriously underreported – and the SEC is aiding and abetting this understatement.

The problem with the paper’s analysis is that realized equity gains are based on awards granted several years ago – and comparing gains realized in the current year to awards granted during the year is largely irrelevant & very misleading (to quote Mark Twain: “there are lies, damn lies and then there are statistics”):

– A careful statistician would have examined the grant date value of the specific awards from prior years and compared it to the actual value of the award; in that way, they would be truly matching grant date and realized values of the same award.

– A likely distortion in their analysis is gains realized in the current year might include several years of prior awards (for example 2-3 years of stock options exercised in a single year), thus one year’s pay reported in the SCT is being compared to multiple years’ awards reported in the gain realized table.

– Stock price performance could have soared since the awards were granted, thus realized values are far more valuable than anticipated ( as are shareholders’ gains); why do the authors believe this is a bad outcome?

– Executives who hold onto stock options until expiration (rather than exercise at vest) are likely to report the largest realized gains; arguably, the gains realized after vesting are investment rather than compensation decisions, and should not be included in the authors’ analysis of grant date versus realized pay.

The SEC’s proposing release on pay-for-performance includes a table that attempts to address the lack of disclosure of realized pay, as equity awards will be reported as they vest – but this wouldn’t completely address the authors’ concerns as they are using the value of options when exercised, not when vested.