Executive pay disclosure rules

It looks like the SEC (The Securities & Exchange Commission, not the NCAA”s best conference) may push ahead with this plan to require “total cost” disclosures for public company executives. The idea here is that requiring public companies to declare a single, total compensation number for its executives will somehow keep executive pay in check.

First of all, some people argue that such high-profile disclosures will actually lead to higher executive pay, as each top executive – like each NBA player – will know how much his peers are making and therefore demand equal pay. And this would create an upward spiral of compensation.

There”s a lot of validity to that argument. Pro athletes and movie stars are prime examples of workers who push each other”s pay up by constant visibility into earnings. TCL will tell you how this also happens in the legal profession (at least here in Atlanta), where new associate pay packages for the top firms are public knowledge, and those disclosures create an upward pressure on pay.

But that”s not what I”m writing about here. For the record, however, I have no problem with anybody”s salary or earnings. And unless you can ever envision a time when you tell your employer “No thanks, I really don”t deserve that much money”, neither should you.

What irked me this evening is the AJC”s piece about the proposed SEC rules. I”ll quote their piece rather than linking to the site they run that requires you to register a fake email address before reading their articles.

Here”s the story lead, as written by notorious anti-business writer Marilyn Geewax:

In recent years, many large companies have angered shareholders by rewarding top executives with huge compensation packages, sometimes involving hundreds of millions of dollars for a year”s work.

Today, federal regulators are expected to approve measures intended to restrain compensation excesses.

The proposed rules would force publicly traded companies to more clearly disclose what riches are being bestowed upon the boss, including such goodies as personal trips in the corporate jet.

Note the language. “huge compensation packages”, “hundreds of millions of dollars for a year”s work”, “restrain compensation excesses”, “riches” being “bestowed”, “goodies”. The guts of the story involve a fairly straight-forward look at the issue, but the lead clearly sets the anti-”rich” tone for which the AJC is famous. The headline, at least in the online version, is “Stealth pay, perks may be over”. What, exactly, is “stealth” about every dollar of compensation being reported in public documents?

But that”s fine. We expect that from the AJC (which is owned, by the way, by two sisters tied for No. 12 on the list of richest Americans – worth a combined $25 billion – and who have never seen fit to allow their employees or others to own shares in the newspaper company). But what really got me was a bit later on in the story meant to demonstrate how hard figuring out executive pay can be:

Investor advocates point out, for example, that last year, Forbes magazine ranked Terry Semel, chief executive of Yahoo, as the country”s highest-paid executive, with annual compensation totaling $230.6 million for 2004. But many shareholders wouldn”t have been able to figure that out because the Yahoo proxy statement split up compensation information into separate listings for salary, bonus, stock options and other compensation.

It took me less than two minutes to find the Yahoo proxy and add up Semel”s compensation listed there ($600,000 salary, $1,920 in other compensation, $229,951,740.78 in option exercises). If “many shareholders wouldn”t have been able to figure that out”, then “many shareholders” have no business whatsoever owning stock.

But I guess that”s not easy enough. Yahoo”s proxy should start off with “TERRY SEMEL – $230 MILLION FUCKING DOLLARS!“.

Beyond the sorry statement these rules would make about the intelligence of American investors, getting investors to focus on a “headline” compensation number would take some of the context out of things like stock grants. From the time he came onboard in 2001 to the end of 2004, Semel helped create about $40 billion in market cap for Yahoo. The proxy devotes no less than 699 words to explaining exactly how the company came to award Semel the stock options – which, by the way, would be worthless if he didn”t do his job well – that resulted in his $230 million exercise in 2004:

The Compensation Committee believes that Mr. Semel”s leadership has contributed to the Company”s success in establishing its brand and creating shareholder value. There is also recognition that Mr. Semel”s unique skills, experience spanning the internet and media industries, and repeated past success make him an attractive candidate to competing organizations that believe they could leverage his compensation into significant shareholder returns. Consequently, the Compensation Committee took aggressive action in 2004 to retain Mr. Semel. This was done primarily through equity-based grants designed to position him in the top-quartile of major global-company CEOs, provided that the Company is in the top quartile of shareholder value creation and he remains employed as the Company”s CEO.

In determining Mr. Semel”s compensation, with the assistance and advice of the Independent Consultant, the Compensation Committee reviewed Mr. Semel”s compensation package in view of its philosophy described above and in comparison with the compensation packages of chief executive officers of selected Internet-related, technology and media companies. The Compensation Committee decided not to increase Mr. Semel”s base salary for 2005 despite finding it to be lower than that of comparable companies, consistent with the Committee”s philosophy of placing heavy emphasis on long-term incentive compensation.

In March 2004, the Compensation Committee addressed Mr. Semel”s 2003 performance. It awarded Mr. Semel a bonus nonstatutory stock option grant for 1,800,000 shares of common stock rather than a cash bonus for 2003 (the “Bonus Option”). The grant of the Bonus Option was based on the board”s positive assessment of Mr. Semel”s performance during 2003 and was also intended to provide an incentive for future performance. The Bonus Option was fully vested and exercisable as of the grant date. The Compensation Committee in March 2004 also granted Mr. Semel an annual review option to purchase 4,000,000 shares of the Company”s common stock, based upon, among other factors, the Compensation Committee”s positive assessment of Mr. Semel”s performance during 2003. The option becomes exercisable on the fourth anniversary of the date of grant, subject to acceleration on December 31, 2004 with regard to 2,000,000 of the covered shares, and on December 31, 2005 with regard to the remaining 2,000,000 covered shares if certain performance criteria regarding the Company”s adjusted earnings are satisfied during the prior-year periods. The Company satisfied the applicable performance criteria for performance through December 31, 2004, with the effect that Mr. Semel vested in 2,000,000 of the options as of that date.

In December 2004, the Compensation Committee addressed Mr. Semel”s 2004 performance. The Compensation Committee noted in particular the strengthening of the Company”s core businesses, including premium services and advertising; the completion of a number of strategic alliances and acquisitions both domestically and internationally, including 3721 Network Software Company Limited, Kelkoo, S.A. and MusicMatch Inc.; and the Company”s enhanced financial and stock performance. As part of such annual compensation review, the Compensation Committee granted Mr. Semel a fully vested option to purchase 1,200,000 shares of the Company”s common stock (rather than a cash bonus). Consistent with its provision of annual review grants to employees, the Compensation Committee also awarded Mr. Semel an annual review option grant to purchase 200,000 shares of the Company”s common stock, which grant vests over a four year period, with 25% of such shares becoming vested on the first anniversary of the date of grant and the remainder vesting ratably each quarter over the remaining three years.

As discussed above, in February 2005, the Compensation Committee determined to provide retention grants to certain of its key employees. The Compensation Committee granted Mr. Semel, as part of that program, a retention option to purchase 2,000,000 shares of the Company”s common stock and a retention grant of 250,000 restricted shares of the Company”s common stock. The option becomes exercisable on the fourth anniversary of the grant date, subject to acceleration with regard to 1,000,000 of the covered shares following December 31, 2005, and the remaining 1,000,000 covered shares following December 31, 2006, if certain performance criteria regarding the Company”s operating cash flow are satisfied during the prior-year periods. The restrictions on the restricted shares lapse in full on the third anniversary of the grant date, subject to pro rata accelerated vesting in the case of death.

There”s actually a reason why they granted him those stock options? Who knew? A lot fewer people if nobody had to look beyond a “headline” number, I”d bet.

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