Equity Valuation Terminology in Executive Compensation
Equity Valuation Terminology in Executive Compensation By Malak Kazan, CECP, GPHR, GRP, Completed Level 1 of CEP program through CEPI at Santa Clara University Senior Associate INTRODUCTION With various accounting standards and ongoing regulatory changes, several terms have become prevalent for explaining the value of the equity component within executive compensation. The most common terms are fair market value, fair value, and intrinsic value. More recently, the terms realized pay and realizable pay have been introduced to explain the actual or highly probable compensation income that an executive derives from the equity components as part of their total compensation over a specific performance measurement period. In this white paper, we establish a framework for these equity valuation terms within appropriate contexts relative to publicly traded corporations’ executive compensation plans, where valuations are more readily ascertainable. We will assume “vanilla” equity plans (i.e., those with time-based vesting). Tax implications of equity compensation programs (although significant) are not within the scope of this paper.
FAIR MARKET VALUE Fair market value (FMV) refers to the quoted market price of the company stock. Most companies will grant equity awards “equal to” or “greater than” the FMV. Given the baseline definition of FMV, it is used as an input to calculate other valuations. In the case of stock awards, which have simpler calculations, the FMV is actually the only input. For newly granted awards, the specific date that the FMV is anchored to will be defined in a company’s equity plan document and can be chosen by any one of the following methods: • Last selling price for the stock on the date immediately before or after the grant. • Last quoted price for the stock on the date immediately before or after the grant. • Average selling price (i.e., arithmetic mean of the high and low price during a specified period). To the right is an example of a standard definition of FMV from the Stock Option Plan for Delaware-based corporation NetApp, Inc.
Fair Market Value
Realizable Pay
Realized Pay
Equity Value
Intrinsic Value
Fair Value
O. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
Copyright© 2013 ERI Economic Research Institute | 8575 164th Ave NE, Suite 100, Redmond, WA 98052 (800) 627-3697 | [email protected] | www.erieri.com
1
Equity Valuation Terms INTRINSIC VALUE After FMV, from a timing and foundational terminology perspective, the concept of intrinsic value should be reviewed. The financial definition of intrinsic value is the value represented by the excess of the FMV over the amount the employee is required to pay for acquiring the equity instrument as part of the employer plan. This intrinsic value standard was introduced in 1972 as Accounting Principles Board (APB) Opinion 25 – Accounting for Stock Issued to Employees. The underlying driver of APB 25 was, primarily, option awards. Regulatory bodies noticed the upside compensation that executives were earning and the fact that there were no standards to have these equity compensation transactions reflected in financial statements. With APB 25, for the first time, companies were required to calculate the intrinsic value as of the grant date to reflect the compensation expense of the award. For option awards, a reportable intrinsic
Table 1.
Option Awards In-the-money
Grant Size
value under this standard was triggered if the option award was “in-the-money” (i.e., discounted) at grant. Otherwise, if the award was granted “at-the-money,” the intrinsic value would be zero at grant date, and no expense would be reported by the corporation. In terms of stock awards, they would have an intrinsic value equal to the FMV. If an employee had to pay a nominal cost, it would be netted out of the FMV to determine the stock award intrinsic value. Given that stock awards were not as prevalent at the time that APB 25 was put into effect, and that most companies issued at-the-money options, requiring companies to calculate the intrinsic value generally had no impact on companies’ financial statements. Let’s start with a baseline calculation for intrinsic value upon which we will build subsequent examples. Table 1 is an example with four scenarios illustrating how the intrinsic value as of grant date can be determined: option awards discounted and equal to FMV; stock awards with and without a cost to employee.
Stock Awards
At-the-money
80,000
80,000
20,000
20,000
FMV
$75
$75
$75
$75
Exercise Price
$60
$75
n/a
n/a
Cost to Employee
n/a
n/a
$25
$0
$1.2M $15 X 80,000
0
$1.0M $50 X 20,000
$1.5M $75 X 20,000
Intrinsic Value
FAIR VALUE Fair value of the equity award is an accounting definition that complies with the Securities Exchange Commission (SEC) requirements for equity compensation disclosures in Summary Compensation Tables (SCT). The concept of fair value was first introduced in 1995 as Financial Accounting Standard (FAS) 123 – Accounting for Stock-Based Compensation. At the time, this standard could be voluntarily adopted by companies, allowing them to continue reporting intrinsic value under APB 25 or switch to fair value. Most companies opted to continue with intrinsic value disclosure; thus, FAS 123 had little effect on financial statements in the first ten years of use. In 2005, however, fair value became a mandatory standard and was issued as FAS 123(r), which later was renamed in 2009 as Accounting Standard Codifications (ASC) Topic 718, providing more detailed guidance. Determining the fair value of option awards requires the use of option pricing models (see Executive Compensation: Valuing Equity Compensation) and will generally result in the option value being 20% to 60% of the stock FMV. For stock awards, the fair value is equal to the stock FMV, even under this standard (i.e., same as APB 25, intrinsic value). Given the financial reporting impact of the fair value methods for each award type, companies that issue stock awards will generally make smaller grants relative to option awards, and those executive employees with low risk tolerance tend to prefer stock awards. Let’s take a look at Table 2, which shows two scenarios illustrating Grant Date Fair Value of options
granted “at-the-money” and restricted stock with no cost to the employee. Note the significant variance of the options awards when comparing the intrinsic value from the baseline example for options with same the characteristics. Grant Date
Table 2. *Option Awards Grant Size
Stock Awards 80,000
20,000
FMV
$75
$75
Exercise Price
$75
n/a
Cost to Employee
n/a
$0
100% in 3 yrs
100% in 3 yrs
$2.4M or $30 X 80,000
$1.5M or $75 X 20,000
$0
$1.5M or $75 X 20,000
$2.4M
$0
Cliff Vesting Fair Value Intrinsic value Variance
*Assumes calculated Black Scholes value of $30/share 2 Copyright© 2013 ERI Economic Research Institute
Equity Valuation Terms Compensation decisions for Messrs. Sherin, Neal, Rice and Denniston reflect their strong contributions to the company’s overall performance and that of their respective businesses or functions. Total compensation for these named executives was also significantly affected by the change in pension value and LTPA payouts covering all three years of the 2010-2012 REALIZED PAY & REALIZABLE PAY performance period. sec total compensation withFrank annualized ltPA payout. GE grants LTPAs to named only once three or more Since Say-On-Pay (i.e., Dodd executive compensaRealized payexecutives is generally the every compensation that an execuyears, in contrast to many that have grant such awards annually. pursuant to SEC rules, LTPA payouts tion rules issued in 2011), twocompanies new terms come to the tive Nevertheless, received and is reported on their W-2 asarecompensation in full fordisclosures 2012 in the “Non-Equity Incentive Plan Comp.” “SEC Total” columns in the Summary Compensation Table. forefrontreported as voluntary in proxies to support pay- and income. After researching companies that reported realized To reflect that LTPA payouts reward performance for realizable each of the years thetheir performance period,we wedecided have added the “SEC General Elecfor-performance transparency: realized pay and payinin latest proxy, to highlight Total With LTPA Payout” to thedisclosures, right of the table below to show SEC total compensation with the LTPA payout pay. Because of Annualized the voluntary naturecolumn of these tric (GE) disclosures on this topic because they explain how reported annualized basis. currently, there on areanno standard definitions that can allow for the realized pay was derived mostly from information in the cross-company comparison, unless you reverse engineer the tables already disclosed in the proxy. Below are excerpts from realized pay differs from reported total compensation. Total compensation, as reported in the Summary Compensation Table calculation and normalize the values. Publicly traded corpo- GE’s Notice of 2013 Annual Meeting and Proxy Statement, and calculated under SEC rules, includes several items that are driven by accounting and actuarial assumptions. Accordingly, it rations are voluntarily disclosing some variation of the real disclosing realized compensation and the specifics of how it is not necessarily reflective of the compensation our named executives actually realized in 2012. To supplement that disclosure pay value (e.g., realized or realizable) in their annual filings was calculated. we have added the “W-2 Realized Comp.” column to the right of the table below to compare our named executives’ 2012 as well as their company-specific definitions. compensation as determined under SEC rules with W-2 income for 2012, which is the compensation our named executives actually received in 2012.
2012 summary compensation and realized compensation
Name and Principal Position
Salary
Stock Bonus Awards
Option Awards
Change in Pension Value and Nonqualified Non-Equity Deferred Incentive Comp. Plan Comp. Earnings
All Other Comp.
SEC Total
SEC Total Without Change in Pension Value
SEC Total With Annualized LTPA Payout
W-2 Realized Comp.
Jeffrey R. Immelt Chairman of the Board and CEO
$3,300,000 $4,500,000
$0 $
0 $12,080,250
$5,351,595 $ 574,507
$25,806,352
$20,592,769
$17,752,852
$7,907,751
Keith S. Sherin Vice Chairman and CFO
$1,850,000 $3,500,000
$0 $
0 $ 8,595,563
$5,953,692 $ 258,110
$20,157,365
$14,302,883
$14,426,990
$6,574,575
Michael A. Neal Vice Chairman
$2,100,000 $3,800,000
$0 $
0 $ 9,137,625
$7,821,436 $ 343,922
$23,202,983
$15,497,598
$17,111,233
$6,927,241
John G. Rice Vice Chairman
$2,200,000 $3,800,000
$0 $
0 $ 9,447,375
$7,524,925 $2,075,677
$25,047,977
$17,678,431
$18,749,727
$8,484,728
AdditiOnAl infOrmAtiOn
$1,575,000 $2,650,000 $0 Brackett B. OtHEr infOrmAtiOn
$3,040,000 $ 6,659,625 $1,909,377 $ 461,890 $16,295,892 $14,401,341 $11,856,142 $6,736,113 Denniston III SVP, General Explanation of non-GAAp financial measures Counsel and Information on how GE calculates ENI for GE Capital, Industrial CFOA, Industrial ROTC, operating EPS and Industrial segment Secretary
organic revenue growth, as presented on pages iii and 21 through 26, is disclosed on GE’s proxy website (see “Helpful Resources” on and on pages 78 compensation to 83 of GE’s Annual Report on Form 10-K forsee thethe year ended December 31, 2012, as filed Forpage more55) information on total as calculated under SEC rules, narrative and notes accompanying thewith the SEC. 2012 Summary Compensation Table on page 32. For more information regarding amounts reported in the “W-2 Realized Comp.” column, see “2012 Realized Compensation” on page 31. For a reconciliation of realized compensation and total compensation as reconciliation of realizedofcompensation tableTable to Summary compensation shown above, see “Reconciliation Realized Compensation to Summary Compensation Table”table on page 53. The amounts The amounts reported in the 2012 Realized Compensation Table on page 31 reflect income for the years asSummary reported on reported as realized compensation differ substantially from the amounts reported as total compensation in shown the 2012 the named executives’ W-2 These amounts differ substantially from the amounts reported as total compensation in the Compensation Table and areForms. not a substitute for those amounts. 2012 Summary Compensation Table on page 32 required under SEC rules and are not a substitute for the amounts reported in that table. For 2012, realized compensation represents: (1) total compensation, as determined under applicable SEC rules, minus (2) the aggregate grant date fair value of equity awards (as reflected in the Option Award column), minus (3) the year-over-year change in pension value and nonqualified deferred compensation earnings (as reflected in the Change in Pension Value and Nonqualified Deferred Comp. Earnings column), minus (4) contributions to the S&SP and medical premiums that are deducted from income on a pretax basis, minus (5) the difference between the cost attributable to personal use of aircraft as calculated under SEC rules versus tax rules, minus (6) the company’s S&SP match (as reflected in the 2012 All Other Compensation Table on page 33), plus (7) the value realized from the vesting of RSUs before payment of any applicable withholding taxes and brokerage commissions (as reflected in the 2012 Option Exercises and Stock Vested Table on page 37), including the value realized from the payment of any dividend equivalents, plus (8) travel costs attributable to the named executives’ guests where there is no aggregate incremental cost to the company under SEC rules but there is imputed income for tax purposes. In addition, realized compensation reflects any bonus and LTPA actually paid in the year shown, whereas total compensation under SEC rules reflects any bonus and LTPA earned for the year shown. For realized compensation purposes, most other benefits (as disclosed in the 2012 Other Benefits Table on page 33) are accounted for on a tax year of November through October, whereas these benefits are accounted for on a calendar-year basis under SEC rules. For more information on total compensation as calculated under SEC rules, see the narrative and notes accompanying the 2012 Summary Compensation Table on page 32. iv
Section 16(a) Beneficial GE 2013 Proxy Statement
Ownership reporting compliance
3 Section 16(a) of the Exchange Act requires GE’s directors and executive officers, and persons who beneficially own more than Copyright© ERI Economic Research 10% of our common stock, to file initial reports of ownership and reports of changes in ownership of our2013 common stock and our Institute other equity securities with the SEC. As a practical matter, GE assists its directors and officers by monitoring transactions and
Equity Valuation Terms
Realizable pay is similar to realized pay except that it has an incremental value that includes unexerciseable in-the-money option awards and unvested stock awards. There are two schools of thought in terms of how this incremental value is calculated: 1) continue reporting the grant date fair value pro-rated for the unexercised or unvested portion of the award, or 2) determine the intrinsic value at the end of a performance measurement period. Applying the second approach can align with other compensation components reported in the SCT when the same fiscal year end is used versus the grant date. Building on the earlier examples, Table 3 depicts realizable pay with both FMV appreciation and depreciation.
Table 3.
In the context of pay for performance, we see in this example that, when FMV appreciates, the executive can realize more compensation income from the equity instruments than the accounting value reported on grant date. Similarly, when FMV depreciates, the executive will realize less compensation income. As a business practitioner, trueing up performance results against the target expectations is an intuitive standard, and the introduction of real pay value allows for this in the context of executive compensation. We can expect more information and best practices on this topic to evolve in the near future.
Year 2 Equity Appreciation Option Awards
Grant Size FMV
Year 2 Equity Depreciation
Stock Awards
Option Awards
Stock Awards
80,000
20,000
80,000
20,000
$110
$110
$50
$50
Exercise Price
$75
n/a
$75
n/a
Cost to Employee
n/a
$0
n/a
$0
3-year Cliff Vest
0%
0%
0%
0%
Realizable Equity Pay
$2.8M or $35 X 80,000
$2.2M $110 X 20,000
$0
$1.0M or $50 X 20,000
*Grant Date Fair Value
$2.4M or $$30 X 80,000
$1.5M or $75 X 20,000
$2.4M or $$30 X 80,000
$1.5M or $75 X 20,000
Variance
$400K
$700K
-$2.4M
-$500K
*Assumes a calculated Black Scholes value of $30/share
A significant portion of executive compensation packages are comprised of equity awards. Depending on the context of the discussion, the audience, and scenario specifics, the value of option awards and stock awards will vary. Understanding the fundamentals of these calculations is invaluable to the business practitioner directly or indirectly involved in executive compensation. For more information regarding executive compensation analytic tools and solutions, please visit www.erieri.com.
References: General Electric. (2013, April 24). Notice of 2013 Annual Meeting and Proxy Statement. Retrieved from http://www.tscviewer.com/Ge/iversion/NoticeOf2013AnnualMeetingAndProxyStatement_i1 NetApp, Inc. (2011, July 14). Stock Option Plan. Retrieved from http://contracts.onecle.com/netapp/stock-option-plan-1999-2011-07-24.shtml
4 Copyright© 2013 ERI Economic Research Institute
FAIR MARKET VALUE Fair market value (FMV) refers to the quoted market price of the company stock. Most companies will grant equity awards “equal to” or “greater than” the FMV. Given the baseline definition of FMV, it is used as an input to calculate other valuations. In the case of stock awards, which have simpler calculations, the FMV is actually the only input. For newly granted awards, the specific date that the FMV is anchored to will be defined in a company’s equity plan document and can be chosen by any one of the following methods: • Last selling price for the stock on the date immediately before or after the grant. • Last quoted price for the stock on the date immediately before or after the grant. • Average selling price (i.e., arithmetic mean of the high and low price during a specified period). To the right is an example of a standard definition of FMV from the Stock Option Plan for Delaware-based corporation NetApp, Inc.
Fair Market Value
Realizable Pay
Realized Pay
Equity Value
Intrinsic Value
Fair Value
O. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
Copyright© 2013 ERI Economic Research Institute | 8575 164th Ave NE, Suite 100, Redmond, WA 98052 (800) 627-3697 | [email protected] | www.erieri.com
1
Equity Valuation Terms INTRINSIC VALUE After FMV, from a timing and foundational terminology perspective, the concept of intrinsic value should be reviewed. The financial definition of intrinsic value is the value represented by the excess of the FMV over the amount the employee is required to pay for acquiring the equity instrument as part of the employer plan. This intrinsic value standard was introduced in 1972 as Accounting Principles Board (APB) Opinion 25 – Accounting for Stock Issued to Employees. The underlying driver of APB 25 was, primarily, option awards. Regulatory bodies noticed the upside compensation that executives were earning and the fact that there were no standards to have these equity compensation transactions reflected in financial statements. With APB 25, for the first time, companies were required to calculate the intrinsic value as of the grant date to reflect the compensation expense of the award. For option awards, a reportable intrinsic
Table 1.
Option Awards In-the-money
Grant Size
value under this standard was triggered if the option award was “in-the-money” (i.e., discounted) at grant. Otherwise, if the award was granted “at-the-money,” the intrinsic value would be zero at grant date, and no expense would be reported by the corporation. In terms of stock awards, they would have an intrinsic value equal to the FMV. If an employee had to pay a nominal cost, it would be netted out of the FMV to determine the stock award intrinsic value. Given that stock awards were not as prevalent at the time that APB 25 was put into effect, and that most companies issued at-the-money options, requiring companies to calculate the intrinsic value generally had no impact on companies’ financial statements. Let’s start with a baseline calculation for intrinsic value upon which we will build subsequent examples. Table 1 is an example with four scenarios illustrating how the intrinsic value as of grant date can be determined: option awards discounted and equal to FMV; stock awards with and without a cost to employee.
Stock Awards
At-the-money
80,000
80,000
20,000
20,000
FMV
$75
$75
$75
$75
Exercise Price
$60
$75
n/a
n/a
Cost to Employee
n/a
n/a
$25
$0
$1.2M $15 X 80,000
0
$1.0M $50 X 20,000
$1.5M $75 X 20,000
Intrinsic Value
FAIR VALUE Fair value of the equity award is an accounting definition that complies with the Securities Exchange Commission (SEC) requirements for equity compensation disclosures in Summary Compensation Tables (SCT). The concept of fair value was first introduced in 1995 as Financial Accounting Standard (FAS) 123 – Accounting for Stock-Based Compensation. At the time, this standard could be voluntarily adopted by companies, allowing them to continue reporting intrinsic value under APB 25 or switch to fair value. Most companies opted to continue with intrinsic value disclosure; thus, FAS 123 had little effect on financial statements in the first ten years of use. In 2005, however, fair value became a mandatory standard and was issued as FAS 123(r), which later was renamed in 2009 as Accounting Standard Codifications (ASC) Topic 718, providing more detailed guidance. Determining the fair value of option awards requires the use of option pricing models (see Executive Compensation: Valuing Equity Compensation) and will generally result in the option value being 20% to 60% of the stock FMV. For stock awards, the fair value is equal to the stock FMV, even under this standard (i.e., same as APB 25, intrinsic value). Given the financial reporting impact of the fair value methods for each award type, companies that issue stock awards will generally make smaller grants relative to option awards, and those executive employees with low risk tolerance tend to prefer stock awards. Let’s take a look at Table 2, which shows two scenarios illustrating Grant Date Fair Value of options
granted “at-the-money” and restricted stock with no cost to the employee. Note the significant variance of the options awards when comparing the intrinsic value from the baseline example for options with same the characteristics. Grant Date
Table 2. *Option Awards Grant Size
Stock Awards 80,000
20,000
FMV
$75
$75
Exercise Price
$75
n/a
Cost to Employee
n/a
$0
100% in 3 yrs
100% in 3 yrs
$2.4M or $30 X 80,000
$1.5M or $75 X 20,000
$0
$1.5M or $75 X 20,000
$2.4M
$0
Cliff Vesting Fair Value Intrinsic value Variance
*Assumes calculated Black Scholes value of $30/share 2 Copyright© 2013 ERI Economic Research Institute
Equity Valuation Terms Compensation decisions for Messrs. Sherin, Neal, Rice and Denniston reflect their strong contributions to the company’s overall performance and that of their respective businesses or functions. Total compensation for these named executives was also significantly affected by the change in pension value and LTPA payouts covering all three years of the 2010-2012 REALIZED PAY & REALIZABLE PAY performance period. sec total compensation withFrank annualized ltPA payout. GE grants LTPAs to named only once three or more Since Say-On-Pay (i.e., Dodd executive compensaRealized payexecutives is generally the every compensation that an execuyears, in contrast to many that have grant such awards annually. pursuant to SEC rules, LTPA payouts tion rules issued in 2011), twocompanies new terms come to the tive Nevertheless, received and is reported on their W-2 asarecompensation in full fordisclosures 2012 in the “Non-Equity Incentive Plan Comp.” “SEC Total” columns in the Summary Compensation Table. forefrontreported as voluntary in proxies to support pay- and income. After researching companies that reported realized To reflect that LTPA payouts reward performance for realizable each of the years thetheir performance period,we wedecided have added the “SEC General Elecfor-performance transparency: realized pay and payinin latest proxy, to highlight Total With LTPA Payout” to thedisclosures, right of the table below to show SEC total compensation with the LTPA payout pay. Because of Annualized the voluntary naturecolumn of these tric (GE) disclosures on this topic because they explain how reported annualized basis. currently, there on areanno standard definitions that can allow for the realized pay was derived mostly from information in the cross-company comparison, unless you reverse engineer the tables already disclosed in the proxy. Below are excerpts from realized pay differs from reported total compensation. Total compensation, as reported in the Summary Compensation Table calculation and normalize the values. Publicly traded corpo- GE’s Notice of 2013 Annual Meeting and Proxy Statement, and calculated under SEC rules, includes several items that are driven by accounting and actuarial assumptions. Accordingly, it rations are voluntarily disclosing some variation of the real disclosing realized compensation and the specifics of how it is not necessarily reflective of the compensation our named executives actually realized in 2012. To supplement that disclosure pay value (e.g., realized or realizable) in their annual filings was calculated. we have added the “W-2 Realized Comp.” column to the right of the table below to compare our named executives’ 2012 as well as their company-specific definitions. compensation as determined under SEC rules with W-2 income for 2012, which is the compensation our named executives actually received in 2012.
2012 summary compensation and realized compensation
Name and Principal Position
Salary
Stock Bonus Awards
Option Awards
Change in Pension Value and Nonqualified Non-Equity Deferred Incentive Comp. Plan Comp. Earnings
All Other Comp.
SEC Total
SEC Total Without Change in Pension Value
SEC Total With Annualized LTPA Payout
W-2 Realized Comp.
Jeffrey R. Immelt Chairman of the Board and CEO
$3,300,000 $4,500,000
$0 $
0 $12,080,250
$5,351,595 $ 574,507
$25,806,352
$20,592,769
$17,752,852
$7,907,751
Keith S. Sherin Vice Chairman and CFO
$1,850,000 $3,500,000
$0 $
0 $ 8,595,563
$5,953,692 $ 258,110
$20,157,365
$14,302,883
$14,426,990
$6,574,575
Michael A. Neal Vice Chairman
$2,100,000 $3,800,000
$0 $
0 $ 9,137,625
$7,821,436 $ 343,922
$23,202,983
$15,497,598
$17,111,233
$6,927,241
John G. Rice Vice Chairman
$2,200,000 $3,800,000
$0 $
0 $ 9,447,375
$7,524,925 $2,075,677
$25,047,977
$17,678,431
$18,749,727
$8,484,728
AdditiOnAl infOrmAtiOn
$1,575,000 $2,650,000 $0 Brackett B. OtHEr infOrmAtiOn
$3,040,000 $ 6,659,625 $1,909,377 $ 461,890 $16,295,892 $14,401,341 $11,856,142 $6,736,113 Denniston III SVP, General Explanation of non-GAAp financial measures Counsel and Information on how GE calculates ENI for GE Capital, Industrial CFOA, Industrial ROTC, operating EPS and Industrial segment Secretary
organic revenue growth, as presented on pages iii and 21 through 26, is disclosed on GE’s proxy website (see “Helpful Resources” on and on pages 78 compensation to 83 of GE’s Annual Report on Form 10-K forsee thethe year ended December 31, 2012, as filed Forpage more55) information on total as calculated under SEC rules, narrative and notes accompanying thewith the SEC. 2012 Summary Compensation Table on page 32. For more information regarding amounts reported in the “W-2 Realized Comp.” column, see “2012 Realized Compensation” on page 31. For a reconciliation of realized compensation and total compensation as reconciliation of realizedofcompensation tableTable to Summary compensation shown above, see “Reconciliation Realized Compensation to Summary Compensation Table”table on page 53. The amounts The amounts reported in the 2012 Realized Compensation Table on page 31 reflect income for the years asSummary reported on reported as realized compensation differ substantially from the amounts reported as total compensation in shown the 2012 the named executives’ W-2 These amounts differ substantially from the amounts reported as total compensation in the Compensation Table and areForms. not a substitute for those amounts. 2012 Summary Compensation Table on page 32 required under SEC rules and are not a substitute for the amounts reported in that table. For 2012, realized compensation represents: (1) total compensation, as determined under applicable SEC rules, minus (2) the aggregate grant date fair value of equity awards (as reflected in the Option Award column), minus (3) the year-over-year change in pension value and nonqualified deferred compensation earnings (as reflected in the Change in Pension Value and Nonqualified Deferred Comp. Earnings column), minus (4) contributions to the S&SP and medical premiums that are deducted from income on a pretax basis, minus (5) the difference between the cost attributable to personal use of aircraft as calculated under SEC rules versus tax rules, minus (6) the company’s S&SP match (as reflected in the 2012 All Other Compensation Table on page 33), plus (7) the value realized from the vesting of RSUs before payment of any applicable withholding taxes and brokerage commissions (as reflected in the 2012 Option Exercises and Stock Vested Table on page 37), including the value realized from the payment of any dividend equivalents, plus (8) travel costs attributable to the named executives’ guests where there is no aggregate incremental cost to the company under SEC rules but there is imputed income for tax purposes. In addition, realized compensation reflects any bonus and LTPA actually paid in the year shown, whereas total compensation under SEC rules reflects any bonus and LTPA earned for the year shown. For realized compensation purposes, most other benefits (as disclosed in the 2012 Other Benefits Table on page 33) are accounted for on a tax year of November through October, whereas these benefits are accounted for on a calendar-year basis under SEC rules. For more information on total compensation as calculated under SEC rules, see the narrative and notes accompanying the 2012 Summary Compensation Table on page 32. iv
Section 16(a) Beneficial GE 2013 Proxy Statement
Ownership reporting compliance
3 Section 16(a) of the Exchange Act requires GE’s directors and executive officers, and persons who beneficially own more than Copyright© ERI Economic Research 10% of our common stock, to file initial reports of ownership and reports of changes in ownership of our2013 common stock and our Institute other equity securities with the SEC. As a practical matter, GE assists its directors and officers by monitoring transactions and
Equity Valuation Terms
Realizable pay is similar to realized pay except that it has an incremental value that includes unexerciseable in-the-money option awards and unvested stock awards. There are two schools of thought in terms of how this incremental value is calculated: 1) continue reporting the grant date fair value pro-rated for the unexercised or unvested portion of the award, or 2) determine the intrinsic value at the end of a performance measurement period. Applying the second approach can align with other compensation components reported in the SCT when the same fiscal year end is used versus the grant date. Building on the earlier examples, Table 3 depicts realizable pay with both FMV appreciation and depreciation.
Table 3.
In the context of pay for performance, we see in this example that, when FMV appreciates, the executive can realize more compensation income from the equity instruments than the accounting value reported on grant date. Similarly, when FMV depreciates, the executive will realize less compensation income. As a business practitioner, trueing up performance results against the target expectations is an intuitive standard, and the introduction of real pay value allows for this in the context of executive compensation. We can expect more information and best practices on this topic to evolve in the near future.
Year 2 Equity Appreciation Option Awards
Grant Size FMV
Year 2 Equity Depreciation
Stock Awards
Option Awards
Stock Awards
80,000
20,000
80,000
20,000
$110
$110
$50
$50
Exercise Price
$75
n/a
$75
n/a
Cost to Employee
n/a
$0
n/a
$0
3-year Cliff Vest
0%
0%
0%
0%
Realizable Equity Pay
$2.8M or $35 X 80,000
$2.2M $110 X 20,000
$0
$1.0M or $50 X 20,000
*Grant Date Fair Value
$2.4M or $$30 X 80,000
$1.5M or $75 X 20,000
$2.4M or $$30 X 80,000
$1.5M or $75 X 20,000
Variance
$400K
$700K
-$2.4M
-$500K
*Assumes a calculated Black Scholes value of $30/share
A significant portion of executive compensation packages are comprised of equity awards. Depending on the context of the discussion, the audience, and scenario specifics, the value of option awards and stock awards will vary. Understanding the fundamentals of these calculations is invaluable to the business practitioner directly or indirectly involved in executive compensation. For more information regarding executive compensation analytic tools and solutions, please visit www.erieri.com.
References: General Electric. (2013, April 24). Notice of 2013 Annual Meeting and Proxy Statement. Retrieved from http://www.tscviewer.com/Ge/iversion/NoticeOf2013AnnualMeetingAndProxyStatement_i1 NetApp, Inc. (2011, July 14). Stock Option Plan. Retrieved from http://contracts.onecle.com/netapp/stock-option-plan-1999-2011-07-24.shtml
4 Copyright© 2013 ERI Economic Research Institute
