Transcript Slide 1

What Does It Mean for an Executive
To “Make” $1 Million?
Professor David F. Larcker
Allan McCall
Brian Tayan
Corporate Governance Research Program
Stanford Graduate School of Business
Adapted from the Closer Look Series, available at: http://www.gsb.stanford.edu/cgrp/research/closer_look.html.
Copyright © 2012 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. For
permissions, contact: [email protected].
Compensation at Citigroup

When Vikram Pandit became CEO of Citigroup in 2008, the
New York Times dubbed him the “quarter-billion dollar man.”
- Received $165 million from sale of Old Lane hedge fund to
Citigroup (proceeds reinvested)
- Promised $40 million compensation contract (primarily
equity)

Despite the headlines, however, Pandit never received this
money.
- Investment in hedge fund worth only a fraction when sold
- Equity grants worth only $4 million when vested
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Compensation at Citigroup
Citigroup (C) Stock Price History - 2008 to 2010
$35
$30
$25
$20
$15
$10
$5
$Jan-08
Jul-08
2009
Jul-09
Jan-10
Jul-10
Earned Compensation
Reported Compensation
2008
Jan-09
2010
2008
2009
Realized Compensation
2010
2008
2009
2010
Salary
958,333
125,001
1
958,333
125,001
1
958,333
125,001
1
Bonus
0
0
0
0
0
0
0
0
0
Stock
28,830,000
0
0
1,961,250
1,132,504
1,346,903
119,500
125,239
130,798
8,432,911
0
0
0
0
0
0
0
16,193
3,750
0
16,193
3,750
0
16,193
3,750
0
38,237,437
128,751
1
2,935,776
1,261,255
1,346,904
1,094,026
253,990
130,799
Options
Other
Total
Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Compensation Reporting

CEO compensation figures are not always what they seem.

Reported compensation figures include a mix of cash and noncash incentives, payable in one or multiple years, and are
subject to accruals, estimates, and restrictions.

As a result, the ultimate value of compensation is often quite
different from its expected value.

The SEC standardizes reporting requirements. However, even
these comingle forward- and backward-looking amounts, and
fixed and contingent payments.
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Measuring CEO Compensation
There are three general ways to measure compensation:
1.
Expected. Total value promised to executive. Because not
all compensation is received in the year it is awarded, some
elements must be estimated. The precision of these
estimates will depend on performance and market-related
sensitivities.
2.
Earned. Total value that an executive “earns the right to
keep.” In most cases, the amount earned in a year is
derived from compensation granted over multiple years.
3.
Realized. Total value that an executive converts to cash in a
given year. Realized compensation is also often derived
from grants awarded over multiple years.
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Measuring CEO Compensation
Elements of Executive Compensation
Compensation
Element
Expected
Earned
Realized
SEC Proxy
Salary
Target amount
Actual amount
Earned, Realized
Cash Bonus
Target amount
Actual amount (between the minimum
and maximum amount)
Earned, Realized
Restricted Stock
Fair value on grant
date (stock price)
Fair value on
vesting date
Value realized
upon sale
Expected
Stock Options
Fair value on grant
date (BlackScholes)
Fair value on
vesting date
Value realized
upon sale
Expected
Non-Equity Plans
Pension
Target amount
Actual amount (lump sum)
Actuarial amount
Other Benefits
Actual amount in
retirement
Actual amount
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Earned, Realized
Expected, Earned
Expected, Earned,
Realized
Example: Harley-Davidson
Keith Wandell, CEO of Harley-Davidson (2010)
Expected
Salary
Cash Bonus
$
Earned
975,000
$
Realized
975,037
$
SEC Proxy
975,037
975,037
0
0
0
0
Stock Awards
1,381,199
0
0
1,381,199
Option Awards
1,636,681
698,906
0
1,636,681
Non-Equity Plans
2,600,357
2,340,090
2,340,090
2,340,090
0
0
0
0
83,490
83,490
67,289
83,490
$ 6,676,727
$ 4,097,523
$ 3,382,416
6,416,498
Pension
Other Benefits
Total
Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Measuring CEO Compensation
These distinctions are important because each figure conveys
different information.

Expected compensation is a forward-looking view of reward
opportunities available to an executive. The size and mix of
expected compensation provide insight into the incentives
offered to management.

Earned and realized compensation are backward-looking
views of the rewards that an executive actually received for
his or her efforts. These values can be used to assess payfor-performance.

Incentives and pay-for-performance are both very
important, but their calculations are not the same.
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Challenges in Assessing Compensation
The information to properly evaluate the incentive value of
compensation and pay-for-performance is not readily available
to shareholders.
1.
Summary compensation figures in the annual proxy combine
expected, earned, and realized amounts.
2.
Proxy advisory firms compare changes in reported
compensation to previous total share price performance,
making a false comparison.
3.
Journalists do not consistently distinguish between earned
and expected amounts.
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Challenges in Assessing Compensation

A recent article reported that Viacom CEO Philippe Dauman
received a pay increase of 150 percent.

One analyst commented, “This is spectacular money but where
are the spectacular results?”

Earned compensation figures, however, were not the same as
those reported.
Philippe Dauman, CEO of Viacom(2009-2010)
Reported (2009)
Salary
Stock Awards
Option Awards
Non-Equity Plans
Pension
Other
Total
$
2,500,000
Reported (2010)
$
2,625,000
Earned (2009)
$
2,500,000
Earned (2010)
$
2,625,000
12,688,932
41,833,309
1,869,227
5,919,015
5,999,997
28,620,000
0
1,599,827
12,540,000
11,250,000
12,540,000
11,250,000
37,911
45,793
37,911
45,793
243,150
141,206
243,150
141,206
$ 34,009,990
$ 84,515,308
$ 17,190,288
$ 21,580,841
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Why This Matters

Executive compensation figures are frequently cited by the
press and third-party observers. However, these sources
rarely distinguish between expected and earned pay.
- What does it actually mean when we read that a CEO
“made” $1 million?

Earned compensation often differs significantly from expected
pay, based on individual performance.
- Why don’t companies voluntarily disclose these amounts
so stakeholders can assess incentives and pay-forperformance?

For a more detailed discussion, read the Closer Look at:
http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Summary Statistics: Total CEO Compensation
Mean Compensation (2010)
Decile
Highest
Lowest
Market Cap
(in millions)
SEC Proxy
Institutional
Shareholder
Services
Expected
Value
Earned
Value
$ 39,982
$ 14,130,597
$ 17,595,544
$ 13,181,418
$ 12,018,347
7,132
7,904,858
9,911,257
7,380,223
7,034,703
3,375
6,037,811
7,781,580
5,879,114
5,229,651
2,079
4,646,368
5,760,233
4,547,047
3,910,954
1,326
3,872,349
4,833,941
3,888,635
3,377,383
863
2,877,698
3,642,764
2,862,030
2,444,539
585
2,520,118
3,038,112
2,512,779
2,124,444
378
1,988,675
2,563,376
2,126,550
1,768,966
246
1,516,684
1,836,673
1,570,411
1,282,740
143
1,160,671
1,405,679
1,238,572
1,029,749
Sample includes 2,471 companies with fiscal years ending between June 2010 and January 2011.
Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
Summary Statistics: Total CEO Compensation
Median Compensation (2010)
Decile
Highest
Lowest
Market Cap
(in millions)
SEC Proxy
Institutional
Shareholder
Services
Expected
Value
Earned
Value
$ 22,522
$ 12,220,817
$ 15,312,751
$ 11,210,876
$ 9,218,322
6,895
6,932,325
8,878,721
6,763,005
5,696,422
3,257
5,245,581
6,669,452
4,837,471
3,799,896
2,061
4,046,318
5,006,225
3,942,680
3,046,327
1,312
3,093,924
4,024,939
3,159,052
2,437,328
853
2,360,580
3,129,763
2,328,114
1,873,891
574
2,074,024
2,574,915
2,073,491
1,700,898
372
1,415,159
1,894,097
1,577,976
1,200,413
241
1,190,955
1,411,867
1,226,952
976,996
149
858,204
1,045,605
865,041
794,706
Sample includes 2,471 companies with fiscal years ending between June 2010 and January 2011.
Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp
References

Eric Dash. All Told, the Price Tag for Citigroup’s New Chief is $216 Million. The New York
Times. March 14, 2008.

Citigroup. Forms DEF-14A and Forms 4. SEC. 2008-2010.

Harley-Davidson. Forms DEF-14A and Forms 4. SEC. 2010-2011.

Graham Bowley. Pay Doubles for Leaders at Viacom. The New York Times. January 22, 2011.

Viacom. Forms DEF-14A. SEC. 2007-2011.

Equilar Compensation Data.
Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrp