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Executive Compensation Disclosure

When deciding whether or not to invest in a company (or whether to remain an investor in said company), be sure to find out more about the company's executive compensation structure. Specifically, you should find out how much compensation the company's executives (e.g. CEO, CFO, etc) are receiving. You should also find out the components that make up such compensation (e.g. salary, bonuses, options, appreciation rights, etc.).

Importance of Executive Compensation

What should you look for and why should you check a company's executive compensation structure?

Amount of compensation: If you are an investor in a company, you'd have ownership interest. Naturally, you'd want to know whether the company's executives are over-compensated. This could mean that profits you should have been receiving are being channeled to executives' salaries, instead.

Existing investors may also get a change to have a say on their executives' pay. In this case, you should know your company's current executive compensation practices. This is the only way you can vote wisely.

If you are thinking of investing in a company, the company's executive compensation structure should clue you in on its long-term investment value. You could compute how much of the company's operating costs are going to executive compensation, and thus decide whether the company has lean operations or not.

Components of executive compensation: Whether you're an existing investor or a would-be investor, you'd want to assess how your executives are being compensated for their services. Are their compensation tied up to their performance? Is it related to company performance?

Naturally, existing and would-be investors want their executives' compensation to be commensurate to their performance.  This way, they'd be really earning their keep.

Both existing investors and would-be investors would also probably prefer it when executive compensation is tied up to company performance. Someone whose compensation varies with the company's performance is generally assumed to have greater motivation to do an excellent job than someone whose compensation is unrelated to company performance.

Annual Proxy for Information on Executive Compensation

SEC rules require executive compensation disclosure from all public companies, and there are several sources of information on a company's executive compensation practices. However, the company's annual proxy is still the best source of information on executive compensation.

Where to find a company's annual proxy: To download a copy of a company's most recent annual proxy, visit the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.

What to look for in an annual proxy: Once you have a copy of a company's annual proxy, go to the Summary Compensation Table section. Use this, together with the Compensation Discussion and Analysis section to assess a company's executive compensation practices.

The Summary Compensation Table: The Summary Compensation Table will give you the following information:

  • the names of the 5 highest paid executives in the company (always includes the Chief Executive Officer and the Chief Financial Officer)
  • the amount of compensation received by the CEO, the CFO and 3 other of the companies' most highly compensated executives in the last 3 fiscal years
  • each year's total compensation broken down according to components such as the following:
    • salary
    • stock awards
    • option awards
    • compensation from non-equity incentive plan
    • deferred compensation earnings
    • change in pension value
    • all other compensation
  • footnotes that give details on the summary compensation table's entries (as needed)
  • disclosure on the company's total compensation and annual change
  • disclosure on how the company computes compensation expense on equity awards, stock options and the other applicable components of executive compensation

The Compensation Discussion and Analysis: The Compensation Discussion and Analysis section of a company's annual proxy provides more information on the company's compensation practices. The following are some of the information you'll find here:

  • who determines, revises and reviews executive compensation and its components (a company's Board of Directors usually has a Compensation Committee to do these things)
  • how executive compensation is decided (details on whether there is an outside adviser, consultation with other parties and other procedural matters)

Other Sources of Executive Compensation Information

Aside from a company's proxy statement, the following company filings should also give you information on a company's executive pay practices:

  • Annual report (Form 10-K)
  • Current report (Form 8-K)
  • Securities registration statements for a public offering
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