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New Proxies Spotlight Execs' Pay

April 12, 1993|KATHY M. KRISTOF

If you invest in individual stocks, you're likely to notice some significant changes in this year's proxy statements.

Proxies, which are annual reports of pay and shareholder proposals, were revamped to comply with new Securities and Exchange Commission regulations that grew out of investor furor over exorbitant executive pay packages.

Most proxies issued after January, 1993, must include new prose and charts that make company salary information far simpler to comprehend. In addition, if shareholders want to object to executive pay plans, those objections must now be included in the proxy. In previous years, managers could reject shareholder proposals that asked to limit executive pay on the notion that they "interfered with the company's day-to-day activities."

For someone with a nosy bent, the new proxies are paradise. They not only say how much money company managers earned this year, last year and the year before, but they try to tell you whether managers deserved their wages.

And some believe that the new disclosures will do more than just satisfy your curiosity. They may help improve company performance. They certainly should give shareholders a better read on when it's time to buy--or dump--a company's shares, industry experts say.

"The premise behind the new disclosure is that process drives substance," says Ralph Whitworth, director of the United Shareholders Assn. in Washington. "By holding (a company's board of directors') feet to the fire and by giving shareholders information they can use to compare pay policies with actual practices, it is going to empower shareholders with the information they need to conduct activism or decide on their investment."

Adds Gary Hourihan, president of Strategic Compensation Associates in Los Angeles: "If people start focusing more on strategic compensation, it will influence (corporate) behavior in a positive way. There will definitely be a favorable fallout response."

Not everyone agrees, of course.

"These changes are relatively insignificant to shareholders because they will not change corporate performance," maintains Joel Stern, managing partner of Stern Stewart & Co. in New York. All the new disclosures will do is embarrass some managers who are clearly taking home more than they earned, he said.

Just how do the new proxies differ from the old? Mainly in four areas. There are three new charts and one newly required explanation.

The explanation is from the board of directors' compensation committee, and it's designed to tell you why the company paid managers what it paid. Ideally, this statement sets out a clear, objective policy that delineates how much cash and stock an executive will get if certain performance standards are met. It should also say how the board arrived at those numbers.

In reality, however, many boards don't have objective standards, so these statements can be relatively obtuse, says Hourihan. Consultants expect regulators to require more detailed information in the future.

The charts are the fun part. The first chart is an expanded version of the executive compensation table of yore. But instead of simply noting the current year's cash payments (as was previously the case), it gives three years of salary, bonus and "long-term" compensation history. There's also an "other" column that lists the value of company-paid perks, such as use of company cars, boats, planes and vacation homes.

Although it's not calculated for you, the earnings history makes it simple for shareholders to determine what kind of raises--or pay cuts--their executives are taking.

That chart should be considered in concert with another new requirement: the graph of five-year total shareholder returns. Here companies are required to plot the performance of their shares against the performance of a broad market index, such as the Standard & Poor's 500, as well as to a smaller index of their peers.

It's a clear picture of how well shareholders of that company have fared. And when held side-by-side with the compensation chart, it may reveal whether shareholders, or managers, are faring the best.

The final chart is also brand-new. It tells you how many stock options were granted to top executives during the year and what those options are worth. (Stock options are rights to buy a company's shares at some point in the future at a set price. When the options are exercised, the executive reports a gain, which is the difference between what he paid for the stock--thanks to the option--and what the company's shares are worth in open-market trading.)

There are two basic ways companies value the options in the new proxies. One is called the Black-Sholes method, which takes a number of factors into account--including stock price volatility and the duration of the option--to tell you what those options are worth today.

It is essentially the price that a reasonable person would pay for the same rights if they were buying them on the open market on the date they were granted.

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