The Advisors' Blog

– Liz Dunshee

As lawyers, we might think that our painstakingly-detailed proxy disclosure is straightforward. But many feel that the required “grant-date fair value” reporting of performance awards obscures what CEOs actually earn – which has led to controversy over pay structures & amounts.

In response to this perceived information gap, activist fund ValueAct Capital created a framework to evaluate “realizable pay” scenarios. This article from the Stanford Business School & ValueAct examines the methodology. Here’s an excerpt:

Taken together, this framework provides a foundation for analyzing the scale and structure of CEO pay. It provides a rigorous and systematic method for evaluating critical issues,
such as the:

– Degree to which pay is “guaranteed” or “at-risk”;
– Degree to which payouts are driven by operating versus stock price performance;
– Sensitivity of CEO compensation to stock-price returns;
– Importance and rigor of performance metrics;
– Potential risk embedded in the CEO pay package.

Compare this to the static target grant-date fair value framework, which highlights only a single question: Is the target value of the CEO pay package larger or smaller than peers?

Based on the data they looked at, the authors conclude that the outputs of ValueAct’s analysis are very different from those disclosed in proxy statements. I’d love to know if you have seen companies that calculate & report compensation according to this type of formula.