The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has changed the landscape of executive compensation in the United States in favor of greater disclosure. Dodd-Frank requires publicly traded companies to disclose “information that shows the relationship between executive compensation actually paid and the financial performance of the [company].” 15 U.S.C. § 78n(i). Investors can discern what was actually paid to executives and the financial performance of the company in the proxy statement by looking to their company’s “Compensation Discussion and Analysis” and “Summary Compensation Table.”
The requirement for disclosure of pay and performance, coupled with the new ability for shareholders to have a “say on pay” has resulted in increased scrutiny from shareholders. The new “say on pay” regime has allowed shareholders to have a non-binding vote on executive compensation. Even though this vote is non-binding, Boards of Directors are paying attention to potential negative feedback from shareholders.
Because of “say on pay” voting, proxy advisory firms such as Glass Lewis and Institutional Shareholder Services have become more relevant. These firms advise investors whether to vote yes or no on a company’s executive compensation provisions. Because of this new scrutiny, companies are more likely to take actions to ensure they receive a recommended vote of “yes” from these proxy advisory firms. If executive compensation payments appear excessive, the likelihood of a shareholders being advised to vote against executive compensation plans increases.
Therefore, many companies have begun to precede the Summary Compensation table in the proxy report with a “Realized Pay” or “Realized Compensation” table. This additional disclosure reveals the compensation actually realized in the years shown by the named executives according to their W-2 forms. The rationale often given for the additional disclosure is that the numbers in the Summary Compensation table do not show exact figures, but instead show figures for the “fair value” of shares/options awarded. These fair values are based on accounting principles and models that estimate the potential worth of awards, instead of exact earned amounts. For example, the most recent proxy statement for Hewlett-Packard Company states that in 2011, Catherine Lesjak, R. Todd Bradley, and Vyomesh Joshi realized $2.8 million, $3.0 million, and $2.7 million, respectively. The Summary Compensation table states their 2011 compensation as $11.0 million, $10.7 million, and $9.8 million. These numbers are strikingly different. The realized pay table and the summary compensation table present different data; they are not perfect substitutes for one another. The Realized Pay table shows the money the executive took home in a given year. The Summary Compensation Table shows the salary, bonus, and the equity awards the company granted in a given year (not the equity awards that vested or were cashed-in in a given year).
We are still waiting for guidance from the Securities Exchange Commission on the definition of executive compensation “actually paid.” In the meantime, it is reasonable to expect companies to continue to move in the direction of disclosing realized pay.