Executive Compensation is a System

The federal securities laws require clear, concise and understandable disclosure about compensation paid to CEOs, CFOs and certain other high-ranking executive officers of public companies. Several types of documents that a company files with the Commission include information about the company's executive compensation policies and practices. You can locate information about executive pay in: (1) the company's annual proxy statement; (2) the company's annual report on Form 10-K; (3) registration statements filed by the company to register securities for sale to the public; and (4) the company’s current report on Form 8-K.

The easiest place to look up information on executive pay is probably the annual proxy statement. Annual reports on Form 10-K and registration statements might simply refer you to the information in the annual proxy statement, rather than presenting the information directly. Click here for information on how to locate a company's annual proxy statement on the SEC's website.

In the annual proxy statement, a company must disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer and the three other most highly compensated executive officers A company also must disclose the criteria used in reaching executive compensation decisions and the degree of the relationship between the company's executive compensation practices and corporate performance. This information can be found in several separate disclosure items.

The Summary Compensation Table is the cornerstone of the SEC's required disclosure on executive compensation. The Summary Compensation Table provides, in a single location, a comprehensive overview of a company's executive pay practices. It sets out the total compensation paid to the company's chief executive officer, chief financial officer and three other most highly compensated executive officers for the past three fiscal years. The Summary Compensation Table is then followed by other tables and disclosure containing more specific information on the components of compensation for the last completed fiscal year. This disclosure includes, among other things, information about grants of stock options and stock appreciation rights; long-term incentive plan awards; pension plans; and employment contracts and related arrangements. In addition, the Compensation Discussion and Analysis (“CD&A”) section explains all material elements of the company’s executive compensation programs.

NOTE: The decision by a company regarding the amount and type of compensation to give an executive officer is a business decision and is not within the jurisdiction of the Commission. Rather, the Commission's jurisdiction extends to disclosure - making sure that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. In this regard, the federal securities laws require disclosure of the amount and type of compensation paid to the company's CEO and other highly-compensated executive officers.


Means of compensation

There are five basic tools to compensation (or reward) in US organizations. These are: base salary, short-term incentives, long-term incentives (LTIP), employee benefits and perquisites. In a typical modern US corporation, the CEO and other top executives are paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, the Sales Director's performance related bonus may be based on incremental revenue growth turnover; a CEO's could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary. Executives may also be compensated with a mixture of cash and shares of the company which are almost always subject to vesting restrictions (a long-term incentive). To be considered a long-term incentive the measurement period must be in excess of one year (3-5 years is common). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example a highly paid CEO would get 1 million in cash, and 1 million in company shares (and share buy options used).

Perquisites ("perks")

Other components of an executive compensation package may include such perks as generous retirement plans, health insurance, a chauffeured limousine, an executive jet, interest free loans for the purchase of housing, etc.

Fortune 500 compensation

During 2003, about half of Fortune 500 CEO compensation was in cash pay and bonuses, and the other half in vested restricted stock, and gains from exercised stock options according to Forbes magazine ([1]). Forbes magazine counted the 500 CEOs compensation to $3.3 billion during 2003 (which makes $6.6 million a piece). Notice that this figure includes gains from stock call options used; the options may have been rewarded many years before the option to buy is used.

Forbes categories of compensation

The categories that Forbes use are (1) salary (cash), (2) bonus (cash), (3) other (market value of restricted stock received), and (4) stock gains from option exercise (the gains being the difference between the price paid for the stock when the option was exercised and that days market price of the stock). If you see someone "making" $100 million or $200 million during the year, chances are 90% of that is coming from options (earned during many years) being exercised.

Typical compensation

The typical salary in the top of the list is $1 million - $3 million (Immelt). The typical top cash bonus is $10 million - $15 million (Henry R. Silverman). The highest stock bonus is $20 million (Fuld). The highest option exercise have been in the range of $100 million - $200 million (Reuben Mark).

Stock options

Supporters of stock options say they align the interests of CEOs to those of shareholders, since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense (non-cash), which impacts a company's income statement and makes the distribution of options more transparent to shareholders. Critics of stock options charge that they are granted excessively and that they invite management abuses such as the options backdating of such grants. Stock options also pose a conflict of interest in which a CEO can artificially raise the stock price to cash in stock options at the expense of the company's long-term health, although this is problem for any type of incentive compensation that goes unmonitored by directors. Indeed, "reload" stock options allow executives to exercise options and then replace them in part (and sometimes in whole), essentially selling the company stock short (i.e., profiting from the stock's decline). For various reasons, including the accounting charge, concerns about dilution and negative publicity related to stock options, companies have reduced the size of grants to executives.

Restricted stock

Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. As the size of stock option grants have been reduced, the number of companies granting restricted stock either with stock options or instead of, has increased. Restricted stock has its detractors, too, as it has value even when the stock price falls. As alternative to straight time vested restricted stock, companies have been adding performance type features to their grants. These grant, which could be called performance shares, do not vest or are not granted until these conditions are met. These performance conditions could be earnings per share or internal financial targets.

Tax issues

Salary is taxable to an individual at a high individual rate. If part of that income can be converted to capital gain, for example by granting stock options to executives, a more advantageous tax treatment may be obtained.

Criticism

There are many controversies about executive compensation: Charges that CEOs are overpaid

It all comes down to leadership counts. Like top sports franchises will pay big dollars for good players so will corporations. The alternative is that the profitable executives will go to their competition or create a startup that could challenge existing stockholders. If the stockholders want their billions or millions they will give up a percentage to hire a good coach or leader of their enterprise. The stockholders with an executive get more than just a manager that baby sits their investment. They get the connections and networking the executive have with others that creates opportunities in the business the stockholders would not ordinarily have access to. If the CEO or executive have great relationship with county leaders or bring in the relationship to larger customers this can mean huge returns for the stockholders. Many times a single leader can make the difference if a company exists or does not, if it makes billions or millions. If the stockholders choose poorly or gamble on leadership they can loose their business or get marginal or negative growth.

The popular newsreels say people believe that CEOs are paid too much for the services they provide, while others believe that a good CEO can have a positive effect on the company's performance and, therefore, that high compensation is needed to attract the best talent. Some argue that since the CEO's pay is set by the board of directors, with the CEO determining the selection, tenure, and committee assignments of directors and most often selecting the compensation consultants as well, an unhealthy conflict of interest occurs and prevents effective price competition (see http://www.theyrule.net). In Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Harvard Business School professor Rakesh Khurana documents the problem of excessive CEO compensation, showing that the return on investment from these pay packages is very poor compared to other outlays of corporate resources. These questions and controversies are not different than the ones major league sports teams, how much do I have to pay for top talent to get into the playoffs. The simple reality is that most ball players like CEO's don't get the huge pay, only the top few percent. Yes, there is some super star envy out there as in any industry!

Judging which CEO's are overpaid is can be simplistically put to a very complex issue judgment. It seems more an issue on a quandary on bad choices stockholders have made in choosing their leadership. Lets face it, if you hire someone and they make you 10 times what they are worth ethically, should you do it? Business will be business. Many articles sugar coat bad returns on CEO's that are picked as an issue focusing on high CEO pay rather than ROI (Return on investment). They survey the executives who received the most overall money in a particular year even though the vast majority of that might be from selling stock or exercising options that were obtained over many years and were never sold before (unlike other CEOs who might regularly sell stock or exercise options). In addition many indirect corporate perquisites are possibly not included in these figures. Stock options for example, allow the CEO to buy the stock at a certain value later down the road. If the CEO makes his company do well the going price down the road can be much higher and the CEO could buy shares for his option price. If this hurdle looks sufficient many critics are assuaged, but there is an additional, more hidden factor that the options may be "repriced", that is the hurdled lowered halfway through the game. The bottom line eventually a CEO will be paid what they are worth to the company or be replaced by someone who costs less.

Defenders of high executive pay say that the global war for talent and the rise of private equity firms can explain much of the increase in executive pay. For example, while in conservative Japan a senior executive has few alternatives to his current employer, in the United States it is acceptable and even admirable for a senior executive to jump to a competitor, to a private equity firm, or to a private equity portfolio company. Portfolio company executives take a pay cut but are routinely granted stock options for ownership of ten percent of the portfolio company, contingent on a successful tenure. Rather than signaling a conspiracy, defenders argue, the increase in executive pay is a mere byproduct of supply and demand for executive talent. However, U.S. executives make substantially more than their European and Asian counterparts.

One thing to remember, executive compensation is a free market mechanism. As long as there is someone willing to pay more for an outstandingly good ethical executive, that has a track record of multiplying whatever company he works for stockholder revenues by a factor of 100, his compensation package will go up greatly every year compared to an executive that only keeps the status quo. Stockholders want profit (Return On Investment) therefore they will pay someone well to get lots of it if they can afford it. This is the basics of business as we humanly understand it: resources go to where they are most needed, if leadership is a key component, so be it. Those that don't value leadership, and try to carve a new reality that leadership is not important and that anyone can do it, have failed miserably historically so far.

Critics

The issue of executive compensation at American companies has been harshly criticized by columnist and Pulitzer Prize winner Gretchen Morgenson in her Market Watch column for the Sunday "Money & Business" section of the New York Times newspaper. Unions have been very vocal in their opposition to high executive compensation. The AFL-CIO sponsors a website called Executive Paywatch which allows users to compare their salaries to the CEOs of the companies where they work. Shareholders, often members of the Council of Institutional Investors or the Interfaith Center on Corporate Responsibility have often filed shareholder resolutions in protest. 21 such resolutions were filed in 2003. About a dozen were voted on in 2007, with two coming very close to passing (at Verizon, a recount is currently going on). The US Congress is currently debating mandating shareholder approval of executive pay packages at publicly traded US companies.

APR 19, 2007 Final Nonqualified Deferred Compensation (409A) Regulations -- Focus on Separation Pay Plans On April 10, 2007, Treasury released final regulations under Internal Revenue Code (IRC) Section 409A. In this article, we'll focus on the rules as they pertain to separation pay plans.

APR 18, 2007 Final Nonqualified Deferred Compensation (409A) Regulations -- Focus on SERPs On April 10, 2007, Treasury released final regulations under Internal Revenue Code (IRC) Section 409A, relating to the taxation of nonqualified deferred compensation. In this article we focus on the application of these new rules to retirement plans.

Mar 13, 2007 Proxy Disclosure of Performance-Based Equity Awards The SEC released a change in the proxy disclosure rules -disclosure of the compensation cost for equity awards will be over the requisite service period using FAS 123R compensation cost for the fiscal year. Here we examine the implications of this change.

Feb 20, 2007 Senate Finance Committee Passes More Restrictions on Deferred Compensation On January 17, the Senate Finance Committee passed the Small Business and Work Opportunity Act of 2007 (SBWOTA). Here we examine the components of the bill dealing with nonqualified deferred compensation and excessive employee renumeration.

Feb 14, 2007 IRS Releases Announcement 2007-18 On February 8, the Internal Revenue Service (IRS) released Announcement 2007-18. In this article we will review the langauge of the announcement, along with examining the implications of it.

Jan 18, 2007 Treasury Issues Updated 409A Guidance The Treasury Department recently issued updated guidance on withholding and wage reporting requirements for 2005 and 2006 under Internal Revenue Code Section 409A. Here we look at this guidance and explain its implications.

Jan 17, 2007 SEC Changes Proxy Disclosure of Equity Compensation Here, we explore the implications of the alteration made by the SEC in its proxy disclosure rules. Disclosure of compensation cost of equity awards will now be over the requisite service period using FAS 123R compensation cost for the fiscal year.

Orange County is a county in Southern California, United States. Its county seat is Santa Ana. According to the 2000 Census, its population was 2,846,289, making it the second most populous county in the state of California, and the fifth most populous in the United States. The state of California estimates its population as of 2007 to be 3,098,121 people, dropping its rank to third, behind San Diego County. Thirty-four incorporated cities are located in Orange County; the newest is Aliso Viejo.

Unlike many other large centers of population in the United States, Orange County uses its county name as its source of identification whereas other places in the country are identified by the large city that is closest to them. This is because there is no defined center to Orange County like there is in other areas which have one distinct large city. Five Orange County cities have populations exceeding 170,000 while no cities in the county have populations surpassing 360,000. Seven of these cities are among the 200 largest cities in the United States.

Orange County is also famous as a tourist destination, as the county is home to such attractions as Disneyland and Knott's Berry Farm, as well as sandy beaches for swimming and surfing, yacht harbors for sailing and pleasure boating, and extensive area devoted to parks and open space for golf, tennis, hiking, kayaking, cycling, skateboarding, and other outdoor recreation. It is at the center of Southern California's Tech Coast, with Irvine being the primary business hub.

The average price of a home in Orange County is $541,000. Orange County is the home of a vast number of major industries and service organizations. As an integral part of the second largest market in America, this highly diversified region has become a Mecca for talented individuals in virtually every field imaginable. Indeed the colorful pageant of human history continues to unfold here; for perhaps in no other place on earth is there an environment more conducive to innovative thinking, creativity and growth than this exciting, sun bathed valley stretching between the mountains and the sea in Orange County.

Orange County was Created March 11 1889, from part of Los Angeles County, and, according to tradition, so named because of the flourishing orange culture. Orange, however, was and is a commonplace name in the United States, used originally in honor of the Prince of Orange, son-in-law of King George II of England.

Incorporated: March 11, 1889 Legislative Districts: * Congressional: 38th-40th, 42nd & 43 * California Senate: 31st-33rd, 35th & 37 * California Assembly: 58th, 64th, 67th, 69th, 72nd & 74 County Seat: Santa Ana County Information: Robert E. Thomas Hall of Administration 10 Civic Center Plaza, 3rd Floor, Santa Ana 92701 Telephone: (714)834-2345 Fax: (714)834-3098 County Government Website: http://www.oc.ca.gov

The State of California is a state located in the western Pacific region of the United States and was the 31st admitted to the Union. It is the most populous state of the United States. It is bordered by Oregon to the north, Nevada to the east, and Arizona to the southeast in the United States, as well as Baja California in Mexico to the south. California's capital city is Sacramento, with the four largest cities being Los Angeles, San Diego, San Jose, and San Francisco. California is known for its diverse climate and geography, as well as ethnically diverse population. The state has 58 counties.

Before becoming a part of the United States, Alta California was colonized by the Spanish Empire in 1769. After Mexican independence in 1821, Alta California remained as part of Mexico until 1846, when it was the independent California Republic for one brief week. Following the conclusion of the Mexican-American war of 1848, California was annexed by the United States and was admitted to the Union as the thirty-first state on September 9, 1850.

California is the third largest state by area in the US; its size gives it a diverse geography, which ranges from sandy and rocky beaches of the Pacific coast, to the rugged snowcapped Sierra Nevada mountains in the east, to desert areas in the southeast and the forests of the northwest. The center portion of the state is dominated by the Central Valley, one of the most productive agricultural areas in the world and the largest of any US state. The Sierra Nevada mountains contain Yosemite Valley, famous for its glacially-carved domes, and Sequoia National Park, home to the giant sequoia trees, the largest living organisms on Earth. The state is home to Mount Whitney, the highest point in the contiguous United States,[2] as well as the second lowest and hottest place in the Western Hemisphere, Death Valley. Many of the trees located in the California White Mountains are the oldest in the world; one Bristlecone pine has an age of 4,700 years.

The California Gold Rush began in 1848, dramatically changing California to accommodate an influx of population and an economic boom. The early 20th century was marked by Los Angeles becoming the center of the entertainment industry, in addition to the growth of a large tourism sector in the state. Along with California's prosperous agricultural industry, other industries include aerospace, petroleum, and computer and information technology. California ranks among the top ten largest economies in the world, and were it a separate country, it would be 34th amongst the most populous countries, just behind Poland, as well as the 6th World's largest economy.

California borders the Pacific Ocean, Oregon, Nevada, Arizona, and the Mexican state of Baja California. With an area of 160,000 mi² (411,000 km²) it is the third largest state in the United States in size, after Alaska and Texas.

California's geography is rich, complex, and varied. In the middle of the state lies the California Central Valley, bounded by the coastal mountain ranges in the west, the Sierra Nevada to the east, the Cascade Range in the north and the Tehachapi Mountains in the south. The Central Valley is California's agricultural heartland and grows approximately one-third of the nation's food.[5] Divided in two by the Sacramento-San Joaquin River Delta, the northern portion, the Sacramento Valley serves as the watershed of the Sacramento River, while the southern portion, the San Joaquin Valley is the watershed for the San Joaquin River; both areas derive its name from the rivers that transit them. With dredging, the Sacramento and the San Joaquin Rivers have remained sufficiently deep that several inland cities are seaports. The Sacramento-San Joaquin Bay Delta serves as a critical water supply hub for the state. Water is routed through an extensive network of canals and pumps out of the delta, that traverse nearly the length of the state, including the Central Valley Project, and the State Water Project. Water from the Sacramento-San Joaquin Bay Delta provides drinking water for nearly 23 million people, almost two-thirds of the state's population, and provides water to farmers on the west side of the San Joaquin Valley. The Channel Islands are located off the southern coast.

The Sierra Nevada (Spanish for "snowy range") include the highest peak in the contiguous forty-eight states, Mount Whitney, at 14,505 ft (4,421 m), Yosemite National Park, and the deep freshwater lake, Lake Tahoe, the largest lake in the state by volume. To the east of the Sierra Nevada are Owens Valley and Mono Lake, an essential migratory bird habitat. In the western part of the state is Clear Lake, the largest freshwater lake by area entirely in California. Though Lake Tahoe is larger, it is divided by the California/Nevada border. The Sierra Nevada falls to Arctic temperatures in winter and has several dozen small glaciers, including Palisade Glacier, the southernmost glacier in the United States.

About 35% of the state's total surface area is covered by forests, and California's diversity of pine species is unmatched by any other state. California contains more forestland than any other state except Alaska. In the south is a large inland salt lake, the Salton Sea. Deserts in California make up about 25% of the total surface area. The south-central desert is called the Mojave; to the northeast of the Mojave lies Death Valley, which contains the lowest, hottest point in North America, Badwater Flat. The distance from the lowest point of Death Valley to the peak of Mount Whitney is less than 200 miles (322 km). Indeed, almost all of southeastern California is arid, hot desert, with routine extreme high temperatures during the summer.

Along the California coast are several major metropolitan areas, including Greater Los Angeles, the San Francisco Bay Area, and San Diego.

By 2007, California's population has reached 37,700,000, making it the most populated state, and is the 13th fastest-growing state. This includes a natural increase since the last census of 1,909,368 people (that is 3,375,297 births minus 1,465,929 deaths) and an increase due to net migration of 774,198 people into the state. Immigration from outside the United States resulted in a net increase of 1,724,790 people, and migration within the country produced a net decrease of 950,592.[10] According to the Sacramento News & Review, California's population will increase to 50 million people by 2025.[11]

California is the second most populous state in the Western Hemisphere, exceeded only by São Paulo State, Brazil. More than 12 percent of US citizens live in California and its population is greater than that of all but 34 countries of the world. California has eight of the top 50 US cities in terms of population. Los Angeles is the nation's second-largest city with a population of 3,849,378 people, followed by San Diego (8th), San Jose (10th), San Francisco (14th), Long Beach (34th), Fresno (36th), Sacramento (37th) and Oakland (44th). Los Angeles County has held the title of most populous county for decades, and is more populous than 42 US states. The center of population of California is at the town of Buttonwillow in Kern County.

As of 2005, The gross state product (GSP) is about $1.62 trillion, the largest in the United States. California is responsible for 13% of the United States gross domestic product (GDP). As of 2005, California's GDP is larger than all but seven countries in the world (and all but eight countries by Purchasing Power Parity).

California is also the home of several significant economic regions, such as Hollywood (entertainment), the California Central Valley (agriculture), the Silicon Valley and Tech Coast (computers and high tech), and wine producing regions, such as the Napa Valley, Sonoma Valley and Southern California's Santa Barbara and Paso Robles areas.

The predominant industry, more than twice as large as the next, is agriculture, (including fruit, vegetables, dairy, and wine). This is followed by aerospace; entertainment, primarily television by dollar volume, although many movies are still made in California; music production and recording studios; light manufacturing, including computer hardware and software; and the mining of borax. Oil drilling has played a significant role in the development of the state.

Per capita personal income was $38,956 as of 2006, ranking 11th in the nation.[24] Per capita income varies widely by geographic region and profession. The Central Valley is the most impoverished, with migrant farm workers making less than minimum wage. Recently, the San Joaquin Valley was characterized as one of the most economically depressed regions in the US, on par with the region of Appalachia.[25]

Many coastal cities include some of the wealthiest per-capita areas in the US The high-technology sectors in Northern California, specifically Silicon Valley, in Santa Clara and San Mateo counties, are currently emerging from economic downturn caused by the dot.com bust, which caused the loss of over 250,000 jobs in Northern California alone. As of spring 2005, economic growth has resumed in California at 4.3%.[26]

California levies a 9.3% maximum variable rate income tax, with 6 tax brackets. It collects about $40 billion per year in income taxes. California's combined state, county and local sales tax rate is from 7.25 to 8.75%.[27] The rate varies throughout the state at the local level. In all, it collects about $28 billion in sales taxes per year. All real property is taxable annually, the tax based on the property's fair market value at the time of purchase. This tax does not increase based on a rise in real property values (see Proposition 13). California collects $33 billion in property taxes per year.

The state of California has 478 incorporated cities and towns, of which 456 are cities and 22 are towns. Under California law, the terms "city" and "town" are explicitly interchangeable; the name of an incorporated municipality in the state can either by "City of (Name)" or "Town of (Name)." Please find the list below:

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

R

S

T

U

V

W

Y

The majority of these cities and towns are within one of five metropolitan areas. Sixty-eight percent of California's population lives in its three largest metropolitan areas, Greater Los Angeles, the San Francisco Bay Area and the Riverside-San Bernardino Area also know as the Inland Empire. Although smaller, the other two large population centers are the San Diego and the Sacramento metro areas. California is home to the largest county in the contiguous United States by area, San Bernardino County.