Wednesday, March 12, 2008

Executive Pay: What is Not Said

"You have to listen to not only what is being said, but what is not said -- which is often more important than what they say." — Kofi Annan

There may be daily updates on this issue because I am reading, daily, misreporting of executive pay. This time, it's the Washington Post and it's about what was not said.

Capital One Chief Was Paid $17 Million in 2007
Capital One, the McLean credit card issuer, awarded chairman and chief executive Richard D. Fairbank a pay package it said was worth $17 million last year, almost entirely stock options. That compares with a package worth $18 million in 2006, the company said. Fairbank last year exercised stock options at a gain of $54.8 million, the company said. That sounds heroic, a CEO just getting paid from gains received by shareholders.

They got the "awarded" part right. Of course the $17 million number is likely a significant understatement of the value of those options but that has been in this blog before and will be again, but not right now.

The problem here is what was not said. It is true that he had a gain of $54.8 million on options. But as the media continues to miss the significant change in executive equity compensation packages, this reporter missed a little $18.3 million vesting event on restricted shares, understating pay by about 25%.

Now, there is another complexity here. A footnote indicates that:

"Values reported for Stock Awards are related to the vesting of Mr. Fairbank’s performance shares on March 31, 2007, delivery of which are deferred until the end of Mr. Fairbank’s employment with the Company. Therefore, Mr. Fairbank neither acquired any shares nor realized any value from such shares in 2007." Not true. If someone gives me $18 million in stock but I've told them to just hang onto it until I retire, it is difficult for me to argue that I didn't "realize any value" from that. That is a tax technicality.

This further highlights not only the complexity of executive pay but the need to understand both the tabular disclosures and the voluminous footnotes. And the accounting, the tax, and the other technical nuances.

What was not said here is important: When Capital One's stock price was flat for two or three years their interest turned to giving executives free shares of restricted stock. Now that the stock has lost half its value, how attractive those stock options look again so the executives can participate in the rebound. Flat price, guaranteed pay. Low price, guaranteed participation in the rebound. (See previous posts on Washington Mutual for the popularity of this approach.)

That's the real story, Washington Post. With your reputation for investigative journalism, how about spending a little more time on the shenanigans going on in the financial services industry right now. We are seeing various combinations of fraud, failure, and folly and even the least serious of those is an important corporate governance issue. Directors are paid to prevent folly, and not be a part of it.

1 comment:

John said...

I read your article and thought I would send this along.

http://www.optionsforemployees.com/articles/article.php?id=147


It shows how much these CEO have been getting