AP biz desk gives guidance on handling SEC's compensation changes

Below is a memo from the Associated Press business desk on how it plans to handle reporting of executive compensation in the wake of changes made by the SEC in how compensation is reported.

Yes, proxy season is almost upon us. Note at the bottom that the AP is also offering to send its guide on executive compensation to any business desks that asks.

“The Associated Press, after consultations with executive pay consulting firms and accounting experts, has developed its own formula for interpreting the expanded disclosures U.S. public companies must make starting this year about what they pay their top executives. Our goal is to be consistent from company to company in how we add up the numbers. But since our total compensation results may differ from what other news organizations report, this advisory is intended to explain to you our methodology and how we arrived at our conclusions.

“Much of what we will use will be found in the newly expanded ‘Summary Compensation Table’ of proxies that companies whose fiscal years end on Dec. 15, 2006, or later, file with the Securities and Exchange Commission. But we will NOT be citing the total figure provided in that table. As compensation consultants describe it, that total is roughly equivalent to the company’s total accounting expense for executives’ compensation for the fiscal year. That, of course, is important to shareholders who are always watching how compensation cuts into earnings. But we will not use that total summary figure for AP stories because it doesn’t really tell us what was given to the executive in compensation during the last fiscal year.

“Instead, we will pull from the summary table how much executives made in salary, bonus, incentives and perks. Then we will add any above-market returns the company provided on pay that executives chose to receive later (deferred compensation). Finally, we will pull from another table the value of stock options and awards granted during the last fiscal year. Our executive pay stories will include this sentence or a variation on it: ‘The Associated Press calculations of total pay include executives’ salary, bonus, incentives, perks, above-market returns on deferred compensation and the estimated value of stock options and awards granted during the year.’

“To calculate whether companies’ provided above-market returns on deferred compensation, we will consult footnotes below the summary table linked to a column called ‘Change in Pension Value and Non-qualified Deferred Compensation.’ This would provide details on any returns the company has locked itself into giving an executive on compensation he or she has set aside. For example, a company that promises a 10 percent or 15 percent compounded rate of return for deferred comp funds it is holding for an executive, when market rates are at 5 percent, is providing something extra that has monetary value.

“Regarding stock options, it’s important to keep in mind that they are treated differently in virtually every table in proxy statements. Other news organizations may report on the values of the stock and option awards on the Summary Compensation Table. But here’s why we won’t: They aren’t a true representation of the dollar value of increased wealth given to the executive in that year. Instead, they represent the accounting charge that the company must take for the value of stock awards that VESTED during that year.

“For the AP’s valuation for stock options and awards, we will use numbers from the final column in the table called Grants of Plan-based Awards, which details the terms of the equity incentive plans (performance-based stock grants) as well as other stock options and restricted stock granted to executives. It gives the grant date fair value of stock and option awards made during the year — and in our judgment is the best figure to be used in calculating total compensation.

“Under the new proxy rules, companies are only required to tally total compensation for the past year, which will make it more difficult in 2007 to gauge year-over-year changes in compensation. We will note in our stories that since we are using a new formula this year, they may not represent an apples-to-apples comparison to the totals from the previous year’s proxy. Next year, the task will be easier because two year’s worth of figures will be required. And starting in 2009, and all subsequent years, three years of data will be required.

“Separate from the pay total, we may report on how many shares came under executives’ control in a given year. Those figures, which can represent millions of dollars of wealth, come from the Option Exercises and Stock Awards table. Adding the columns ‘Value Realized on Exercise’ and ‘Value Realized on Vesting’ provides a dollar figure for stock options and restricted stock. We’re leaving this out of the AP calculation of total pay because the timing of exercises are often based on personal financial planning decisions by executives (they get to decide when they want to exercise options, which usually carries a tax consequence) and the vestings are a consequence of awards or options granted in previous years.

We have produced a more-detailed executive pay guide for use by AP reporters and editors. Members can obtain a PDF version of this document by e-mailing chawkins(at)ap.org. And if you have any questions about our formula and our stories, please contact Deputy Business Editor Chuck Hawkins at the e-mail address above.

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