Learn Investing Secrets

With this in mind, we have been reading various recent filings, which when analyzed, still leaves some doubt if the companies are being as open and straight forward as we have all hoped for. We find it quite a stretch to see how that is in the shareholder's interest, since a non-deductible expense reduces the company's profitability.

'(Top Management) pay is compared to (Key Sales Management) pay to ensure appropriate internal relationships are achieved.'

While internal equity and hierarchical relationships are important in this company's situation, Key Sales Management consists of some very highly compensated sales types that may actually push up the Top Management pay, if the company tries to maintain internal equity.

Upper Saddle River, N.J. - May 11, 2005 - Now that a large number of the proxy statements for public companies with fiscal years ending December 31, 2004 have been issued, those of us that scrutinize them for a living, as well as those that have invested in those companies, have an opportunity to analyze their executive pay packages in detail. With all of the assiduity on Corporate Governance and how to improve the level of transparency and insure that a strong relationship exists among pay and performance, these statements provide for interesting reading.

Many comb through these filings with the intent of learning if the compensation is reflective of the recent trends towards “pay-for-performance”. In reality, does the compensation right reflect the company’s financial performance? And does it make sense? We also are interested in learning how companies are reacting to the recent and changes in tax, automatic electronic navigation rules, and related legislation and the extent to which those changes are painful executive compensation design.

With this in mind, we have been reading various recent filings, which when analyzed, still leaves some doubt if the companies are somebody as open and straight forward as we have all hoped for. Unfortunately, there is still a tendency for companies to use ambiguous, unclear language. In some instances, the linkage to performance is still questionable. The key is to read what has been presented in a very Scotch way, taking into consideration what is said, and in some instances, what is not said. Some examples from a recent proxy issued by a large bring provide evidence of why it is important to read and interpret them very carefully:

“Our policy is to maximize the tax deductibility of compensation payments to (Top Management) under Section 162(m) of the Internal Revenue Code and the regulations thereunder (Section 162(m)). Our shareholders have standard our incentive plans designed and administered to qualify compensation awarded thereunder as “performance-based”. We may, however, warrant payments to (Top Management) that may not be fully deductible if we conceive such payments are in our shareholders’ interests.”

This means that the programs are in compliance with the Internal Revenue Code §162(m); however, and it is a big HOWEVER, they may not qualify for exemption under the one million dollar cap, and therefore would not be deductible for tax purposes. We find it quite a stretch to see how that is in the shareholder’s interest, since a non-deductible expense reduces the company’s profitability.

“(Top Management) pay is compared to (Key Sales Management) pay to ensure favourable internal relationships are achieved.”

While internal equity and hierarchical relationships are important in this company’s situation, Key Sales Management consists of some very highly compensated sales types that may push up the Top Management pay, if the organization tries to maintain internal equity. The reality is that top salespeople/producers can make huge amounts, but it is based on their individual performance achievement, and therefore it may be more than the strength that would be paid to corporate officers. Trying to maintain an pseudo differential may therefore not be warranted, nor in the best interests of the shareholders.

“(The CEO) participates in several defined give a hand pension plans, including some unfunded executive plans….The tally estimated….is….not subject to deductions for Social Security or other offset amounts.”

Most large companies have some form of Supplemental Executive Retirement Program (SERP), which provides non-qualified retirement benefits that are over and up those granted by government regulations. The standard in designing these plans, which are typically very generous and have a time rather than performance commitment, is that other company-sponsored retirement programs, 401(k) matches, and Social Security would offset the benefits that are provided. again in the scheme of things, the lack of an offset to these extra benefits may not be a large cost, it is still a hidden extra better that should be quantified and disclosed.

“As described above, in contrast to compensation in prior fiscal years, we did not fix a value to (the CEO’s) restricted stock units based on a 25% discount from fair market value of the regular stock to offset for the vesting endowment and transfer restrictions on the restricted stock units.”

At first read, this seems to make sense, but ex post facto multiple readings, we still aren’t sure what this means; have the restricted shares been discounted or not? This is an example of intricate and confusing language, which companies should work to avoid.

The at bottom line is that while many companies are suiting petty gambler and more open at responding to regulatory and shareholder demands within their public disclosures, more work is necessary to have complete transparency. In the meantime, let the reader be wary.

More Articles: