Normally we’re saying this about the latest collapsed company, that we have typically been rating poorly for at least the last 24 months. This time, however, it’s about SEC disclosure regulations.
In this letter that I wrote on 27 March 2006, I indicated that companies should be disclosing realized compensation, not estimated future values for option and stock awards in the main compensation table.
This is what I said:
As far as the Summary Compensation Table is concerned, it would seem that the best way forward would be to have two such tables: one that indicates monies received in the year; and the other that discloses the target, future level of compensation aimed at by present grants and awards. In order to achieve this level of homogeneity, both the value of any restricted stock grant and the number of stock options awarded should be removed from the current and proposed Summary Compensation Table. The value of any restricted stock that has vested in the year should be included in the ‘earned compensation’ table – a very different value from the ‘grant date value’ of the total award. In the ‘future compensation’ table, the amortized annual value of any present restricted stock grant should be included. This has the added advantage of obviating the distortions to pay levels that occur because of the boom and bust effect of irregular stock grants.
In this way, all the ‘apples’ will be in one table, and all the ‘oranges’ will be in another. Even under the current arrangements, the summary compensation table is a mix of apples and oranges.
As readers know, this plea fell on deaf ears, with most commentators, companies, shareholders, consultants and, more importantly, the SEC disagreeing with us.
Now, in an article in last week’s Agenda Week, it seems like everyone has finally caught up with us, with a number of companies already presenting realized compensation tables, and other agencies and consultants realizing what a useful piece of data this is. However, there seems to be a lack of distinction between realized pay and realizable pay. The two are very different. Realized pay is vested stock, exercised options, bonuses paid out. Realizable pay is the value of outstanding equity that has not vested nor been exercised but is just sitting and waiting. It’s another useful piece of data, but realized pay it is not.