Reading Between The Lines In Annual Proxy Statements

Upper Saddle River, N.J. - May 11, 2005 - Now that a large number of the 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 the attention on Corporate Governance and how to improve the 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 the intent of learning if the compensation is reflective of the recent trends towards "pay-for-performance". In reality, does the compensation accurately reflect the company's financial performance? And does it make sense? We also are interested in learning how companies are reacting to the recent and anticipated changes in tax, accounting rules, and related legislation and the 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 the 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, the 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 the tax deductibility of compensation payments to (Top Management) under Section 162(m) of the Internal Revenue Code and the 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 the programs are in compliance with the Internal Revenue Code §162(m); however, and it is a big HOWEVER, they may not qualify for exemption under the 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 the shareholder's interest, since a non-deductible expense reduces the company's profitability.

"(Top Management) pay is compared to (Key Sales Management) pay to ensure appropriate internal relationships are achieved."

While internal equity and hierarchical relationships are important in this company's situation, Key Sales Management consists of some very highly compensated sales types that may actually push up the Top Management pay, if the company tries to maintain internal equity. The reality is that top salespeople/producers can make huge amounts, but it is based on their individual performance achievement, and therefore it may be more than the amount that would be paid to corporate officers. Trying to maintain an artificial differential may therefore not be warranted, nor in the best interests of the shareholders.

"(The CEO) participates in several defined benefit pension plans, including some unfunded executive plans?.The amount estimated?.is?.not subject to deductions for Social Security or other offset amounts."

Most large companies have some form of Supplemental Executive Retirement Program (SERP), which provides non-qualified retirement benefits that are over and above those allowed by government regulations. The standard in designing these plans, which are typically very generous and have a time rather than performance commitment, is that other company-sponsored retirement programs, 401(k) matches, and Social Security would offset the benefits that are provided. Although in the scheme of things, the lack of an offset to these extra benefits may not be a large cost, it is still a hidden extra benefit that should be quantified and disclosed.

"As described above, in contrast to compensation in prior fiscal years, we did not ascribe a value to (the CEO's) restricted stock units based on a 25% discount from fair market value of the common stock to compensate for the vesting characteristics and transfer restrictions on the restricted stock units."

At first read, this seems to make sense, but after multiple readings, we still aren't sure what this means; have the restricted shares been discounted or not? This is an example of ambiguous and confusing language, which companies should work to avoid.

The bottom line is that while many companies are becoming better and more open at responding to regulatory and shareholder demands within their public disclosures, more work is necessary to have complete transparency. In the meantime, let the reader be wary.

Compensation Resources, Inc. provides compensation and human resource consulting to mid-size and Fortune 500 clients as well as public, private, family-owned and emerging companies. CRI specializes in Executive Compensation, Salary Administration, Performance Management, Sales Compensation, and expert witness services. Our reference library boasts over 4,800 surveys.

---

Google News Updated : Thu, 24 Jul 2008 18:51:58 GMT Ford Has $8.7 Billion Loss, Shifts Away From Trucks (Update4) - Bloomberg Ford Has $8.7 Billion Loss, Shifts Away From Trucks (Update4) Bloomberg - 44 minutes ago By Bill Koenig July 24 (Bloomberg) -- Ford Motor Co., the world's third- biggest automaker, posted a record quarterly loss of $8.7 billion and accelerated a conversion to fuel-efficient vehicles to wean itself from money-losing trucks. Ford's Worst Quarter Ever BusinessWeek Ford Posts Loss of $8.7 Billion on Asset Woes New York Times Forbes - CNNMoney.com - Reuters - Los Angeles Times all 1,181 news articles Publ.Date : Thu, 24 Jul 2008 18:07:48 GMT Would UN Security Council Postpone Any Prosecution of Sudanese Leader? - Voice of America Voice of America Would UN Security Council Postpone Any Prosecution of Sudanese Leader? Voice of America - 1 hour ago By Joe De Capua As the International Criminal Court (ICC) considers whether to issue arrest warrants for Sudanese President al-Bashir, some are calling on the UN Security Council to block the action. Sudan's Beshir pledges peace as he leaves Darfur AFP Jordan's lower house opposes charges against Sudanese president Xinhua Hindu - Los Angeles Times - istockAnalyst.com - AllAfrica.com all 1,823 news articles Publ.Date : Thu, 24 Jul 2008 17:30:10 GMT Health Buzz: A $500 million Antismoking Campaign and Other Health News - U.S. News & World Report BBC News Health Buzz: A $500 million Antismoking Campaign and Other Health News U.S. News & World Report - 3 hours ago Billionaires Bill Gates and New York City Mayor Michael R. Bloomberg announced yesterday that they'll contribute a combined $500 million to a worldwide antismoking campaign, the New York Times reports. Video: Gates, Bloomberg Pool Riches to Fight Smoking AssociatedPress The $500 million war on smoking Minneapolis Star Tribune Reuters - Newsday - Economist - California Healthline all 639 news articles Publ.Date : Thu, 24 Jul 2008 15:43:30 GMT FOX News Poll: No Bounce for Obama From Overseas Trip - FOXNews ABC News FOX News Poll: No Bounce for Obama From Overseas Trip FOXNews - 27 minutes ago By Dana Blanton The significant news coverage Barack Obama is receiving on his foreign trip has not translated into a bounce in his numbers, a just-released FOX News poll shows. Wanted: 2 million poll workers for November The Associated Press Comment by Leonard Steinhorn Prof, School of Communication, American University New York Times - CNN - United Press International - PolitickerCA all 689 news articles Publ.Date : Thu, 24 Jul 2008 18:24:50 GMT Swimmer’s Positive Test Puts Olympic Berth Doubt - New York Times New York Times Swimmer’s Positive Test Puts Olympic Berth Doubt New York Times - 30 minutes ago By KAREN CROUSE The swimmer Jessica Hardy has not been penalized for a doping offense despite published reports that she tested positive for a banned substance. Video: Source:Hardy Tests Positive for Banned Substance AssociatedPress Sequence doesn't make Sense Los Angeles Times Gay Wired - Palo Alto Online - The Wenatchee World Online - The Associated Press all 750 news articles Publ.Date : Thu, 24 Jul 2008 18:21:30 GMT Arizona reports first West Nile death of 2008 - Bizjournals.com TheMedGuru Arizona reports first West Nile death of 2008 Bizjournals.com - 1 hour ago Arizona has reported its first death from the West Nile virus this year. It also is the first West Nile death in the US this year. First bird in Nassau tests positive for West Nile Newsday Fighting West Nile Alexandria Gazette Packet KTAR.com - AZFamily - FOXBusiness - Boston Globe all 231 news articles Publ.Date : Thu, 24 Jul 2008 17:45:00 GMT South Texas begins cleanup after Hurricane Dolly - The Associated Press Calgary Herald South Texas begins cleanup after Hurricane Dolly The Associated Press - 30 minutes ago HARLINGEN, Texas (AP) - Residents across south Texas slogged through knee-deep muddy waters, tiptoed around downed power lines and dug through debris Thursday, but were thankful that Hurricane Dolly didn't pack the wallop they had feared. Video: Tropical Storm Dolly Causes Flood Worries AssociatedPress Dolly weakens, pushes inland USA Today East Valley Tribune - AHN - KIII TV3 - KVIA all 7,399 news articles Publ.Date : Thu, 24 Jul 2008 18:21:14 GMT Amazon RSS Feeds Clickbank Datafeed

PARLOT::Ebooks, Scripts, Websites, and more...

Adsense websites

Learn How to Lose and Risk Management

One of the leading traders on Chicago Mercantile Exchange, because... Read More

Useful Tips on Investing

Here are some useful tips on investing. When you make... Read More

Time is Money and We Are Running Out of Both!

One of the fundamental principles of finance is the concept... Read More

Creating a Financial Future - Putting Your Plan Into Action Part 1

This column has previously discussed "picturing the future that we... Read More

Asset Location ? Increase Investing Returns & Reduce Your Taxes

Location ? Once the holy grail only for real estate... Read More

How to Choose the Right Share Class

You'll want to opt for the no-load or institutional share... Read More

Success Trading: Yet More Basic Terminology for New Traders

In this day and age of online brokers for virtually... Read More

The Arrow-Debreu Contingent Claims Model of Investment

Throughout the discussion of speculation and stability, we emphasized that... Read More

The 8 Biggest Mistakes When Designing Portfolios - and How To Avoid Them

Are you as good an investor as you think? Do... Read More

Makin The Sauce

Let's face it, you're on a roll. After getting down... Read More

Retirement is Never Urgent Until

If you're like many people, your retirement savings have not... Read More

Which IRA Is Best For You?

An Ira is one of the greatest ways to save... Read More

Property Investment Just Got Exciting

There is an area in Brazil that has lower crime... Read More

Basic Options Terms

Options are good investing and speculative instruments. But options terminology... Read More

Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest... Read More

Overbought/Oversold

Has your broker ever told you that a stock is... Read More

July 2005: Hurricane Forecasts for Weather Traders

Tropical Storm Arlene formed as a tropical depression on June... Read More

Keeping It Interesting

Some lines from a movie never leave your mind; I... Read More

Trading Systems

A trading system consists of a set of rules for... Read More

Love The Thrill of Risk? Invest in an Annuity!

With the stock market in steep decline, people are looking... Read More

Can Your Annuity Do This?

Many people buy annuities according to their agent's recommendations. However,... Read More

How to Analyze the Veracity of Investment Newsletters

When trying to analyze whether a promotional ad for an... Read More

Investing In or Owning Drug Lab Properties

Clean Up (includes the insides and the outside of a... Read More

Press Release Scams and Successes: Reading Between the Lines

Press releases are a means through which companies can keep... Read More

CYA

You all know what CYA stands for. Of course, Cover... Read More