Page 168 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

154 The Complete Guide to Executive Compensation

information reporting the pay of the CEO and the next four highest-paid officers. In late
1992 the SEC laid down new executive compensation disclosure rules.
The proxy must include detailed compensation for persons who served as CEO during the
year (regardless of employment at year-end) as well as the next four most highly compensated
executive officers, plus up to at least two other such officers who would have been listed if still
employed at year-end. Requirements are set forth on how to report annual and long-term
compensation, as well as perquisites and potential retirement amounts.
Generally, actual compensation has to be specific by individual for the year completed
and the two prior fiscal years, as shown in Table 4-30. Definition highlights are as follows:
salary is amount earned or credited, bonus is amount earned, other awards include
perquisites, and restricted stock reflects value at time of grant whereas only the number of
shares for those covered by options/SARs need to be disclosed. The long-term incentive plan
(LTIP) shows value earned, while “all other” covers anything not reported elsewhere but
credited or accrued to the executive.

Name/ Other Restricted Options Payment All
Year Title Salary Bonus Awards Stock SAR LTIP Other

xxxx xxxx/xx xxxx xxx xxx xxx xxx xxx xxx
xxxx xxxx/xx xxxx xxx xxx xx xx xx xxx

xxxx xxxx/xx xxx xx xx xxx xx xxx xx
Table 4-30. Summary compensation table, past year and two prior

A detailed table is also required for the top five, detailing stock options and SARs granted
during the year. Among other requirements, this includes number of shares and share price.
Potential realizable value is also required, using either the Black-Scholes option pricing
formula or 5 percent and 10 percent compared annual growth over the term period.
In addition to the table detailing grant activity described above, another one requires the
reporting of shares exercised with value realized by the top five executives; the number and
value of unexercised options/SARs must be shown separately for exercisable vs. nonexercisable.
A fourth table (if applicable) is required to list again for the top five executives any other
long-term grants made during the reporting period. This includes stating the number of
shares (or other measurable amounts if granted in dollar-denominated units), the perform-
ance period, and three levels of payout: threshold (minimum other than zero), target, and
maximum. An explanation of the performance required to generate payments is also required.
The SEC also decided that since shareholder value is one way the investor can see a
correlation with executive pay, a stock performance graph is also required. This entails a
graphic presentation for the five most recent years of the company’s stock performance,
a broad-based market index (if listed in Standard and Poor’s 500, that index must be used),
and an appropriate peer group, with each reflecting market capitalization weighted stock
values plus reinvestment of dividends.
In addition to the compensation tables and performance graph, a report from the com-
pensation committee explaining the executive pay principle in general and, specifically, how
the CEO’s pay was determined must be included—namely, the specific relationship between