Investors Support More Pay Disclosures, Seek Consistency, WSJ. Emily Chasan Senior Editor, 9/25/2012

http://blogs.wsj.com/cfo/2012/09/25/investors-support-more-pay-disclosures-seek-consistency/?mod=wsjpro_hps_cforeport

Institutional investors say the alternative compensation measures some companies are using to approximate take-home pay figures for their top executives help put pay packages into context, but are limited in their usefulness because they can't be compared between years and companies.

The "realized" and "realizable" pay disclosures offer an alternative to the summary compensation table required by the SEC. Companies complain the table can greatly overstate an executive's compensation because it includes the value of unvested grants of stock and stock options. To adjust for that, realized pay often includes stock that vested and the value of any options that were exercised during the year. Realizable compensation may include old stock or option grants that have vested but haven't been cashed in.

CFO Journal spoke to four large institutional investors about how they use the additional pay disclosures, and how they would like to see those measures develop further as more companies plan to incorporate them into their proxies next year.

Glenn Booraem, head of governance at $2 trillion investment manager Vanguard Group:

Vanguard says it uses realizable pay figures because they help it learn more about the "conditionality" of an executive's pay package.

"In many instances it's a meaningful supplement to the other compensation disclosures in that it reflects the reality of the plan's operation in the context of market events," Booraem said. "Up until now, the mandated disclosure was the summary compensation table which really reflects a point-in-time view of pay opportunity going forward. Many of the figures in the table - particularly those related to equity grants that may be subject to future vesting - are highly variable and contingent on future performance."

While he said the supplemental disclosures are useful "in absolute terms," he hopes they will become standardized. "One of the limitations thus far has been the ability to do apples-to-apples comparisons across companies - either because all companies aren't doing it, or all companies haven't adopted a specific methodology," Booraem said. "I think that would be helpful."

Jonathan Feigelson, general counsel and head of corporate governance at $481 billion retirement services provider TIAA-CREF:

The firm says it gets realized and realizable numbers from two data providers so it can make peer comparisons. Realized or realizable pay "is the only way to see if compensation is truly working," Feigelson said. "The summary compensation table [required by the SEC] is really only one way of estimating what the future might bestow on executives."

He said TIAA-CREF would like to see more standardization in how the numbers are being reported so that they can be better compared to the summary compensation table. "We are mindful that there is limited agreement on how to define the terms and more importunately calculate the numbers being reported," Feigelson said. "Valuing stock options is the biggest hurdle."

Anne Sheehan, director of corporate governance, and Aeisha Mastagni, investment officer, at the $154 billion California State Teachers' Retirement System (CalSTRS) :

"Additional disclosure about how compensation programs work, we think is beneficial," said Sheehan. She said realized and realizable figures are helpful in discussing compensation with companies. "When you see realizable or realized pay, you actually see how the program works in practice," Sheehan said. But we still look at it from a pay for performance perspective."

Mastagni said CalSTRS tends to prefer using realizable pay rather than an executive's actual yearly take-home pay, because it is more comparable across companies and ignores individual decisions executives may make to sell company stock. "We definitely use realizable pay to link to performance," Mastagni said, noting CalSTRS is most concerned about a company's compensation package when there is a disconnect between pay and performance in comparison to its peers. The fund uses data from providers that calculate their own measures of realizable pay so it can make those comparisons. "Companies are using this to show how the pay actually tracks the stock price, but the part that's missing from most of that is the comparison to peers, so that's what we get by doing it on our own."

Edward Durkin, director of the corporate affairs department of the $40 billion United Brotherhood of Carpenters pension fund:

The pension fund has been calculating realizable or realized pay figures for several years, generally for a select group of 100 companies or so annually. "We're encouraged to see companies disclosing it," Durkin said. "To really benchmark or identify how well the link between pay and performance is doing, you actually do need to see the pay that has been delivered as opposed to the present value numbers."

He said the additional disclosures can offer better insight into an executive's pay and that the government's required tables "can be deceiving" due to the inclusion of big option grants that may not be in the money. Durkin said he would like to see companies standardize their practices and "set principles on what they are illustrating and showing," so that the numbers can be more useful in a voting context.