Reading "Between The Lines" In Annual Proxy Statements

Upper Saddle River, NJ - May 11, 2005 - Now that a large number of the proxy statements for public companies with fiscal years ending issued, those of us who investigate them for a lifetime, as well as those that have invested in on December 31, 2004 companies, have a chance to analyze. their remuneration packages in detail With all the attention on corporate governance and how to improve the level of transparency and to ensure that there is a strong relationship between pay and performance, these explanations for interesting reading.

Many comb through these filings with the intent of learning as the fee is reflective of recent trends toward "pay-for-performance". In reality, accurately reflect the offsetting financial performance of the company? And does it make sense? We are also interested in learning how companies respond to the recent and expected changes in tax, accounting rules, and related legislation and the extent to which these changes affect executive compensation design.

With this in mind, we have read in several recent cases, which when analyzed, still leaves some doubt whether the companies are as open and straightforward as we all hoped. Unfortunately, there is still a tendency for companies to use. Ambiguous, unclear language In some cases, the link to the performance is still questionable. The key is to read what has been presented in great care taking into account what has been said and in some cases, which is not being said. Some examples of recent proxy issued by a large company can demonstrate why it is important to read and interpret carefully:

"Our policy is to the tax deductibility of compensation payments to (Top Management) under Article 162 (m) of the Internal Revenue Code and the regulations thereunder (Section 162 (m)) to maximize. Our shareholders have approved our incentive plans designed and managed to qualify compensation awarded thereunder as "performance-based." However, we must allow payments to (Top Management) that may not be fully deductible if we believe that such payments are in the interests of our shareholders. "

This means that the programs are consistent with the Internal Revenue Code § 162 (m), however, and it is a big BUT, they can not qualify for exemption under the one million dollar cap, and therefore would not tax deductible. We think it is a lot to see how it is in the interest of the shareholder, as a non-deductible expenses reduces the profitability of the company.

"(Top Management) wage is compared with (Key Sales Management) pay to ensure appropriate internal ratios are achieved."

While the internal equity and hierarchical relationships are important in the situation of this company, Key Sales Management consists of some very highly compensated sales types that can actually push up the Top Management wage, if the company tries to maintain internally. Equity The reality is that top sellers / manufacturers can make large quantities, but it is based on their individual performance achievement, and so it may be more than the amount that would be paid to corporate officers are. Trying to maintain an artificial differential can not be justified, even in the best interest of the shareholders.

"(The CEO) participates in a number of defined benefit plans, including some unfunded executive plans .... The amount .... is .... not less social security or other compensatory payments."

Most large companies have some form of additional Executive Retirement Program (SERP), non-qualified pension benefits offered by the government regulations over and above those allowed. The standard in the design of these plans, which are typically very generous and have a time instead of performance commitment is that other company-sponsored retirement programs, 401 (k) matches, and Social Security benefits would be provided compensation. Although in the scheme of things, the lack of compensation for these additional benefits can be a big expense, it is still a hidden benefit that should be quantified and disclosed.

"As described above, unlike compensation in prior fiscal years, we did not ascribe a value to compensate for the accrual period features (the CEO) restricted stock units based on a discount of 25% of the market value of the ordinary shares and the transfer restrictions on the restricted stock units. "

At first reading, this seems to make sense, but after several readings, we're still not sure what this means, the restricted shares discounted or not? This is an example of ambiguous and confusing language that companies should work to avoid.

The bottom line is that while many companies are becoming more and more open to respond to regulatory and shareholder requirements in their public disclosures, more work is needed to have full transparency. In the meantime, let the reader be wary.

Compensation Resources, Inc. provides compensation and human resources consulting to medium and Fortune 500 clients such as public, private, family-owned and emerging companies. CRI specializes in Executive Compensation, Payroll, Performance Management, Sales Compensation, and expert witness services. Our reference library has over 4800 surveys.