Upper Saddle River, N.J. - May 11, 2005 - Now that a large number of proxy statements for public companies with fiscal years ending December 31, 2004 have been issued, those of us that scrutinize them for a living, as well as those that have invested in those companies, have an opportunity to analyze their executive pay packages in detail. With all of attention on Corporate Governance and how to improve level of transparency and insure that a strong relationship exists between pay and performance, these statements provide for interesting reading.
Many comb through these filings with intent of learning if compensation is reflective of recent trends towards “pay-for-performance”. In reality, does compensation accurately reflect company’s financial performance? And does it make sense? We also are interested in learning how companies are reacting to recent and anticipated changes in tax, accounting rules, and related legislation and extent to which those changes are affecting executive compensation design.
With this in mind, we have been reading various recent filings, which when analyzed, still leaves some doubt if companies are being as open and straight forward as we have all hoped for. Unfortunately, there is still a tendency for companies to use ambiguous, unclear language. In some instances, linkage to performance is still questionable. The key is to read what has been presented in a very careful way, taking into consideration what is said, and in some instances, what is not said. Some examples from a recent proxy issued by a large company provide evidence of why it is important to read and interpret them very carefully:
“Our policy is to maximize tax deductibility of compensation payments to (Top Management) under Section 162(m) of Internal Revenue Code and regulations thereunder (Section 162(m)). Our shareholders have approved our incentive plans designed and administered to qualify compensation awarded thereunder as “performance-based”. We may, however, authorize payments to (Top Management) that may not be fully deductible if we believe such payments are in our shareholders’ interests.”
This means that programs are in compliance with Internal Revenue Code §162(m); however, and it is a big HOWEVER, they may not qualify for exemption under one million dollar cap, and therefore would not be deductible for tax purposes. We find it quite a stretch to see how that is in shareholder’s interest, since a non-deductible expense reduces company’s profitability.