Tallying Up Total Compensation

  1. What is a "Tally Sheet"?
  2. Key Tally Sheet Questions that Compensation Committees Should Be Asking
  3. Disclosure About Tallies
  4. Sample Tally Sheets
  5. Practice Pointers
  6. Memos/Articles

  1. What is a "Tally Sheet"?

    As first noted in the May-June 2004 issue of The Corporate Counsel, when considering any aspect of a CEO’s (or other senior executive’s) compensation, the compensation committee should start with a tally sheet that lists each component of the CEO’s compensation and tallies it all up. The concept is so basic, but the practice was not widespread until we wrote about it.  Now, we are pleased that most compensation consultants are recommending that their clients use tally sheets and this practice indeed has caught on with most companies.

    Of late, we are becoming concerned about potential misuse of tally sheets. The problem seems to be arising at consulting firms that are so used to the "survey" way of life that they just view this as another opportunity to provide survey comparisons showing what others have done. The problem with this is that tally sheets are supposed to help uncover and fix (if necessary) past mistakes and unintended amounts, not to memorialize them. As Fred Cook so ably pointed out in his speech at the Stanford Directors College a few years ago, surveys have been a major factor in causing excessive compensation. And now, if we are not careful, some consultants will latch onto providing tally sheet "surveys" as another source of business that will undermine the purpose of the tally sheet and further escalate compensation.

  2. Key Tally Sheet Questions that Compensation Committees Should Be Asking

    How comprehensive and up-to-date is the "tally" provided to the Compensation Committee regarding the cash-based and equity-based compensation, deferred compensation, retirement plan benefits, and other benefits/perks of the executive officers? How detailed does it need to be? In the wake of recent developments, a number of Compensation Committees have reevaluated, or are in the process of re-evaluating, the level and scope of data needed for purposes of their reviews, and the nature and depth of the overall review process that they use. In this regard, a variety of questions can arise regarding the scope of the "tally" to be provided regarding current compensation, including:

    • Should the cash compensation portion of that "tally" provide, for each executive in question, a recent history of prior base salary increases and of prior target and actual bonus payouts?
    • In addition to identifying the current spread values of all outstanding vested options/SARs and all unvested options/SARs, and summarizing the total values realized on any recent option/SAR exercises (data similar to that shown in proxy statement tables), should the stock option / SAR portion of that "tally", for each executive in question:  project the potential future spread values of any unvested options/SARs as of their scheduled vesting dates (based, e.g., on realistic representative future price points); and summarize the net shares (if any) retained on recent stock option / SAR exercises (e.g., on exercises over the trailing 2-3 years)?
    • In addition to quantifying and valuing any unvested awards still outstanding as of the review date, should the restricted stock / RSU grant portion of that "tally" also summarize, for each executive in question, the values on the vesting date of any such awards that had previously vested over, e.g., the last 2-3 years, and the net shares (if any) retained with respect to such vested shares or units after the payment of any taxes?
    • In addition to projecting the size of the next LTIP payout (if feasible), does that "tally" also include a full status update on all LTIP cycles in progress in terms of the target, maximum and likely payouts for such cycles, as well as a recap of recent LTIP payouts?
    • Does the "tally" include an update on the extent of executive officer compliance with any applicable stock ownership guidelines and/or grant-by-grant net share retention requirements taking into account any stock options exercised, any restricted stock awards vesting, and any RSU or LTIP awards paid out in the last x months/years?
    • Does the "tally" include a summary of any current accrued tax-qualified and nonqualified supplemental (SERP) defined benefit plan benefits, any current accrued tax-qualified and non-qualified supplemental defined contribution plan account balances, and any other accrued deferred compensation (principal and earnings)? What kind of future accrual/payout projections (if any) are provided?
    • Does the "tally" include data showing, by individual, by category and/or on an overall basis, how the executive compensation packages in question compare to those of peer company executives, taking into account relative financial, stock price and strategic performance at the company vs. among the peers?

    For example, we have noted some early efforts that have overlooked (or misunderstood) how to address and factor in:

    • annual pre-tax interest on previously deferred compensation (including returns on hypothetical investments),
    • dividends on growing restricted stock accumulations,
    • accumulated gains from past stock options and restricted stock grants,
    • the true value of perks, and
    • SERPs and other potential retirement and severance payouts (including the true value of projected post-retirement perks and ongoing benefits).

    In addition, directors need to be able to assess why (and when) each component of the CEO’s total compensation became part of the package and whether—now that all the components are presented in one place—some aspects may now be redundant or no longer appropriate.

  3. Disclosure about Tallies

    Not only should compensation committees be conducting tallies of possible payouts, but this information should also be disclosed in proxy statements. In the first year under the SEC's new compensation rules, several hundred companies disclosed that they use tally sheets. In its recently updated executive compensation policy, the Council of Institutional Investors requests that "Each year, the compensation committee should review performance of individuals in the oversight group and approve any bonus, severance, equity-based award or extraordinary payment made to them. The committee should understand all components of executive compensation and annually review total compensation potentially payable to the oversight group under all possible scenarios, including death/disability, retirement, voluntary termination, termination with and without cause and changes of control. The committee should also ensure that the structure of pay at different levels (CEO and others in the oversight group, other executives and non-executive employees) is fair and appropriate in the context of broader company policies and goals and fully justified and explained."

  4. Sample Tally Sheets
  5. Practice Pointers Regarding Tallying Up Compensation
  6. Memos/Articles Regarding Tallying Up Compensation