One big things I learned this week: April 6th 2014

I learned how to read the executive compensation in the proxy statement (DEF14A filing with the SEC).

The “Summary Compensation table” shows parts of the compensation, but as expected doesn’t delve into details. It has the following:

  • Executive salary: standard cash $ amount.
  • Bonus: signing bonus / retention bonus / ad hoc awards. This is NOT performance based. The performance-based bonus is found in the “Grant of Plan-Based Awards” table.
  • Stock awards: RSUs
  • Stock Option awards: Total value of option grants that vested during the fiscal year. Note the key qualified “vested”. If the awards vest over 4 years, this column is showing a fraction of the compensation paid. To get a fuller picture, on needs to see the “Grants of Plan-based Awards” table, and see the “Grant Date Fair- Value of Stock and Option Awards” column.
  • “Non-Equity Incentive Plan Compensation” table has the $ amount for the incentive-based awards. The details are shown in the “Grants of Plan-based Awards” table. This is often where the most action is.
  • On top of this, we have two tables “Pension Benefits” and “Non-Qualified Deferred Compensation” for which the total $ amounts are shown in the “Change in Pension Value and Non-Qualified Deferred Compensation Earnings” table.
  • Finally, we have what’s called “All other compensation” which are perks such as travel, club memberships, security etc.
  • The “Total” column should be ignored as it is an accounting entity, not the actual compensation paid to the executive in that year.

Notes to “Change in Pension Value and Non- qualified Deferred Compensation” should be looked at carefully, as it may promise an executive returns on his/her deferred compensations in excess of market returns. For example, a company may promise 10% annual growth in deferred compensation while the market is experiencing 5%.

The table “Outstanding Equity Awards at Fiscal Year End” will show the total stock holdings of the executive.

  • Here, within the “Options Awards” section, the “Exercisable” column will show the awards that have vested, but not exercised, and the “”Unexercisable” column shows the unvested stocks. After that we have an “Option Exercise Price” and the options are useful only if the stock is at a $ amount greater than the this price.
  • The Stock Awards section will show only the UNVESTED portion of the stock awards for an executive. Once the stocks vest, it is owned by the executive, and will be be shows in the Summary Table.

The “Pension Benefits” table will show what the company has promised the executive once (s)he retires.  This may also show any golden parachutes. There may not be a specific table for a severance package, but there may be text that explains the severance package, and the $ amounts could vary depending on the exact circumstance (change of control etc.).

<I will add more as I learn more>





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