People sometimes discuss executive pay, and almost never in a positive light, with absolute disbelief of the perceived excess in compensation packages worth tens (or hundreds) of millions of dollars, the apparent disconnect from the relatively meager wages of many (many!) others at the same company, or just plain greed gone too far.
Indeed, often when a company enters troubled waters, the executives are quickly met with torches and pitchforks demanding accountability for their compensation practices.
This naturally leads to questions:
- How much does an executive officer earn at a publicly traded company?
- And who decides?
- Also is it a giant check paid once a year? An hourly wage? A swimming pool filled with gold coins?
- Where can we find some facts?
We can answer those questions! We’ll just recruit the help of the United States Securities and Exchange Commission
Founded in 1934, largely as response to the 1929 stock market crash, the stated mission of the SEC is:
“…to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public's trust.”
Today the SEC primarily acts to counter market manipulation, whether arising through fraud or other unethical practices. To this end, publicly-traded companies are required to make their financial results publicly available on a regular basis. This is a 10-K Annual Report and we call it an “Annual Report” or simply a “10-K” which is the SEC filing type.
After the 10-K financial results, another most scrutinized SEC filing is the proxy statement, filed under SEC code DEF 14A. It tells shareholders the time and date of the next company Annual Meeting, where they can vote their shares on any number of proposals (including for who sits on the Board of Directors). It’s called a “proxy” because the mail-in card allows shareholders to vote by proxy instead of attending the meeting in person.
The proxy document itself, however, is quite long and has great information on executive pay. The general layout is something like:
- Section 1 — Board of Directors
- Section 2 — Compensation Discussion & Analysis
- Section 3 — Compensation Tables
- Section 4 — other shareholder proposals
Sections 2 and 3, the CD&A and the Comp Tables, are where we’ll find detailed pay information for the company’s top 5 executives.
Comp Tables
The most quantitative parts of a proxy are the Comp Tables:
- Summary Compensation Table
- Grants of Plan-Based Awards
- Outstanding Equity Awards at Fiscal Year End
- Options Exercised and Stock Vested
- Potential Payments on Termination or Change in Control (maybe)
We’ll reference the Skyworks Solutions (SWKS) March 2021 proxy statement and show examples of the tables above. If you’d like to view a different company, please visit the SEC EDGAR website and search for one of your choice! The sections are largely the same for most companies.
Summary Compensation Table
On page 44 of the proxy we find the Summary Compensation Table (SCT):
These are values actually paid to the CEO, CFO, and three other Named Executive Officers (or NEOs). The main contributors to exec pay are Salary, Bonus (“Non-Equity IPC”), and Stock awards. There’s actually much deliberate uncertainty around the value of stock awards, which we’ll discuss below in the GPBA table.
The SCT usually requires 3 years of pay history, unless the executive was previously not a named officer (see footnote 5 for Karilee A. Durham). We can see that Bonus payouts (the “NEIPC” column) for 2020 were roughly 3x the size as previous years. Stock awards were also higher than previous years, although not with such multiple as the Bonus. And Salaries increased as well, but that’s likely a standard 5%-7% increase or so.
We can also infer the typical weight of each component. At Skyworks Solutions, top Salaries may vary between $400K and $1M for a given NEO, Bonus payouts might range from 50% to 300% of salary, and Stock awards will range in the millions.
Grants of Plan-Based Awards
The Grants of Plan-Based Awards (GPBA) table is on page 45:
There’s a lot to unpack here so let’s take a closer look at the awards for CEO Liam K. Griffin. The first line shows his potential range of payouts under the annual Bonus program. The “Target” Bonus is $1,646,400 but it can range as low as $823,200 (50%) or as high as $3,292,800 (200%). The actual Bonus that was paid is recorded above in the SCT (FYI they all got max payout).
Skip to the third line and find 40,718 “All Other Stock” awards. These are Restricted Stock Units (RSUs) and the “Restricted” part means they don’t actually belong to the CEO yet. These RSUs vest over time, 25% every year, meaning every year he receives 10,179 shares of common stock. This is designed to encourage retention: the longer he stays employed by the company, the more shares of stock he’ll be paid. Since the company set the award value at $4M, that’s a cool $1M per year in stock.
Lines 2 and 4 are stock awards with a potential range of payouts. These have different names like performance shares, performance RSUs (PRSUs), performance share units (PSUs), performance share award (PSA), et cetera. They most commonly have a 3-year performance period, where one or several 3-year goals are set and nothing is paid until the end of the period. Skyworks has both a 3-yr PSA award (Line 2) and a 1-yr PSA award (Line 4) which is unusual but not uncommon.
Note: the total value of all stock awards is targeted at roughly $17 million, as confirmed by the SCT, but it can range as low as $11M or as high as $37M. And most of these awards can be forfeited for poor performance.
Outstanding Equity Awards at Fiscal Year End
Because stock awards vest over multiple years, and because NEOs generally receive awards every year, there are overlapping awards from previous years that have not yet vested. This table on page 47 shows you how many unvested awards each executive still has left outstanding:
This is a good table to review if you feel like getting angry at a particular executive. But otherwise it’s nothing that couldn’t be reconstructed from the last few years of SCT and GPBA data, plus a little elbow grease.
Option Exercises and Stock Vested
The last table showed us how stock remains unvested. The natural corollary is to ask how much stock vested that year? The table on page 49 answers that:
The additional wrinkle here is Stock Option exercises, which is another way an executive might earn shares of stock. Their use is sporadic among large public companies, however, and beyond the scope of this exploration so we’ll leave that for another day.
Compensation Discussion and Analysis
Now that we know the values paid to all NEOs at Skyworks, we’re not any closer to knowing why they were paid so much and in such proportions. For that we turn to page 31 and find the Compensation Discussion and Analysis section, also called the CD&A.
The CD&A tell you how Skyworks benchmarked their Exec pay practices. In particular, they looked at the proxies of certain “peer” companies and added their own discretion:
There’s usually a lot of language in the CD&A. The company will explain how and why they set Salaries, in partnership with an external consultant and with reference to the peer group.
They will explain in great detail the Bonus program on pages 34–36, including the potential range of payouts and their performance metrics:
Stock Awards are discussed on pages 36 through 40, including the total mix and rationale of stock awards:
And the long-term performance metrics for PSAs:
The CD&A also goes on to describe the company’s severance practices, the ratio of CEO pay divided by the median employee’s pay (“CEO pay ratio”), executive requirements to own a certain amount of stock, and other information.
Summary
In this article we learned to look through a company’s proxy statement to determine their Executive pay practices for the top 5 Named Executive Officers. That includes a review of compensation tables to extract Salary, Bonus, and Stock Award information for the most recent fiscal year and other values spanning previous or multiple years.
Executive pay is a sensitive topic, subject to intense scrutiny and regulation in addition to competitive pressures. I sincerely hope you will use the resources made freely available by the SEC and others to learn more about the subject, and you will be an informed participant whenever the discussion is raised.
