What the Headline Should Read & How Additional Disclosure Has Created Confusion

Every spring at around this time, when the last of the companies with a 12/31 FYE have published their proxy statements, the Wall Street Journal provides an extensive analysis of CEO compensation. Here’s what the headline should have been this year, “Despite Sharp Decline in Stock Price CEO Pay Only Declined Minimally.” Instead, the headline blared, “CEO Pay Packages Fell Sharply in 2022, the First Decline in a Decade.” The reason for the distorted headline? The article focuses primarily, and the headline entirely, on the new disclosure of “actually paid” compensation which I described in this blog post.

I read the recent article as someone who knew exactly what was being talked about, who had followed the rule-making and the disclosure, and even with that background there were still parts I had to read a few times to grasp. Some of them I flat out disagreed with. I don’t blame the writers or the editors; more the SEC and the compensation consultants that led us to this confusing disclosure. But I think it is important to communicate as clearly as possible. And since I am not limited by word-count restrictions, I want to quote a few specific examples to highlight my concern.

“A pay package initially valued at about $7 million for Regeneron Pharmaceuticals chief Leonard Schleifer was worth nearly $100 million at the end of the year.”

This is not accurate. The two figures don’t work as a direct comparison. I’ve said before that compensation is not like comparing apples to oranges, it is often like comparing one fruit salad to another. In this case one of the fruit salads is what shareholders are voting on this year: what is disclosed in the summary compensation table. The summary compensation table reports how much pay was awarded in a single year, and it does place a value on the equity awarded at grant date. That wasn’t so much an “initial” value, just a time point estimate that only covered equity granted this year. The second fruit salad uses the number in the new column that the Wall Street Journal accurately described elsewhere in the article as “tabulating the gains and losses in the stock awards.” The figure does not simply evaluate this year’s awards, but all awards that have not yet been cashed out. A more accurate description here would be that Schleifer received pay for 2022 estimated as worth $7 million, but that given the increasing value of stock awards the total value of his packages was closer to $100 million. (A third version could include the value of equity held directly, and we can alter both the components and the quantity of the components to do any number of compensation analyses.

“At 46 companies the CEOs ended with at least double what boards planned to pay them for the year.”

I’m reluctant to take the side of board members, but this does them a disservice. The board planned only on the summary compensation figure. Hopefully when they made decisions about that figure they considered outstanding awards (although some companies explicitly don’t – see this blog on Ameriprise Financial.) In any case, the CEO did not “end” with the amount marked as “actually paid.” That figure is the value of the awards on a specific date, but the value of those equity shares isn’t realized until options are exercised or stock is sold.

The idea of more disclosure is good, and it can provide important context. For many years,  as the S&P 500 went galloping upward, the summary compensation table has been a vast understatement. But disclosure can also create additional clouds of confusion.

And now back to the headline. Because so much of the pay is based on equity value, using the new figure is something of a tautology: about two thirds of CEOs lost value in their equity because about two thirds of companies saw stock price declines.

The appropriate number for compensation comparisons is also included in the article: “Overall, the median pay package for S&P 500 CEOs declined to $14.5 million in 2022, down from a record $14.7 million the previous year.” This figure, focused on summary compensation disclosure which is the measure used for years (thus allowing for a better comparison), shows a decline of $200,000, or 1.3 percent. It is not possible to tell from the article exactly how this tracks decline in price, but here’s the Journal’s summary. “Performance also declined in 2022, with about two-thirds of companies recording negative shareholder returns, with a median negative 9.2%.”

Thus, we see that another headline could have been “Decline in Stock Performance Several Times Larger than Decline in Pay for most CEOs.”