What did Jerald Fishman, president and chief executive officer of Analog Devices, earn last year? A table in the Norwood, Mass., semiconductor maker's recent proxy statement shows $2.35 million in salary, bonus, and "other" compensation. But if you dig through the fine print and crunch some numbers, you'll see that the $2.35 million is just part of a total package worth as much as $12.7 million, depending on the method you use to compute it.
Compensation specialists say pay packages for top executives and the rules for disclosing them are so complex that even they have a hard time figuring them out. Coming up with a total price tag means assigning a number to every benefit and sorting out what portion of a stock option grant belongs in this year's paycheck, vs. last year's or next year's.
That's why the Securities & Exchange Commission recently proposed sweeping changes to the disclosure of executive compensation. Among other things, regulators want companies to do the math for investors and publish total compensation — including some items that now escape disclosure — for the CEO, chief financial officer, and three other highest-paid executives. If adopted, the changes are likely to show up in proxy statements this time next year. But some firms, including Analog, Avaya, and Pfizer, have already improved their disclosures, says Mark Borges, principal at Mercer Human Resource Consulting. While Analog doesn't include all the details the SEC wants, its proxy gives an idea of what to expect.
Current disclosure rules are partly to blame for the difficulty of calculating CEO pay. Loopholes allow some forms of compensation to be partly or entirely concealed. Companies also routinely bury in fine print summaries of agreements that put them on the hook for fat golden parachutes and retirement plans. While shareholders must be told these agreements exist, they needn't be told their estimated value, although they can add up to millions of dollars. For example, Delves Group estimates that MBNA owed CEO Bruce Hammonds $102 million after it was acquired by Bank of America. If the SEC gets its way, companies will have to estimate potential payouts in the proxy.
So how much did Analog's Fishman earn in 2005? Download the company's proxy statement at or (find form "DEF14A"). Flip past the sections on nominees to the board of directors and director pay to the "Summary Compensation Table" (table 1, in a section on executive compensation). Here, you'll find the salary, bonus, and stock option awards Analog handed its top executives, including Fishman, over the past three years.
Because U.S. tax law doesn't allow companies to deduct more than $1 million of an executive's salary, most firms keep it below that threshold, says Dennis Beresford, an accounting professor at the University of Georgia. Fishman's salary — $930,935 a year — is no exception.
In contrast, when it comes to bonuses and other forms of performance-related pay, there's no limit on what companies can deduct. As a result, CEOs often pocket the big money on these awards. Larry Mizel, CEO of home builder M.D.C. Holdings, earned a 2005 bonus of $20.5 million. That far outstrips the $1 million average for 2004, the most recent figure available from the Corporate Library. Fishman's take: $414,445.
In the next column of the compensation table, you'll see that Fishman received $1,003,632 in "Other Annual Compensation" in 2005. According to the footnotes, this was an interest payment. Why did Analog pay its CEO interest? Because like many top executives, Fishman participates in a plan that allows him to defer his pay to postpone taxes. In a separate table, Analog voluntarily discloses that at the start of its fiscal 2005, Fishman's deferred compensation account had reached $134.5 million. Because Analog had use of that money, it paid Fishman interest. The CEO recently withdrew the entire account balance.
Still, the $1,003,632 that's listed here is only a small portion of the $8.74 million in interest the footnote says Fishman actually received in 2005. Why the gap? Currently, companies only have to count as compensation the interest they pay that's above a "market rate" — calculated by taking 120% of the AFR, or applicable federal rate the Internal Revenue Service publishes monthly. Because Analog paid its CEO an average of 6.48% while the market rate was 5.57%, the interest payment that resulted from the 0.91% difference is all that's in the Summary Compensation Table. The rest, or the $7.74 million in interest paid at the market rate, remains out of the tally -- although this will change, too, if the SEC's proposals prevail. "Under current disclosure rules, interest on deferred compensation for most plans is not disclosed," says Diane Doubleday, global leader of Mercer's executive remuneration service segment.
You'll also find perks under "Other Annual Compensation." When companies hand out perks worth more than $50,000 or 10% of salary and bonus, they're required to disclose the entire amount. The SEC plans to lower this threshold to $10,000, but some firms already divulge everything, says Doubleday. Analog lists no perks for Fishman in 2005.
The compensation table also discloses stock option awards. In 2005, Analog gave Fishman options to buy 400,000 shares. To ascertain the value of that grant, go to table 2, where companies are required to disclose either a grant's "fair value" or its potential payout under two scenarios, a 5% and a 10% annual rise in the stock price. Since the 5% and 10% projections tell you nothing about the current value of the stock option award, Beresford ignores them and calculates an approximate fair value instead. He scans the most recent annual report for the footnote on "stock-based compensation." There, Analog publishes a fair value for its employee stock options of $10.85 a share in 2005. To calculate the fair value of Fishman's options grant, simply multiply this $10.85 per share by the 400,000 options in his package. The result, $4.34 million, is very close to the fair value of $4.33 million that Analog voluntarily discloses in a separate table.
How much of that $4.3 million should you include in Fishman's 2005 paycheck? Since the grant spans five years, it's reasonable to include only one-fifth, or $866,000. Do the same exercise with past options grants, counting only the portion of each that vests in 2005, says John LaBarca, senior analyst at the Center for Financial Research & Analysis in Rockville, Md. The total estimate, $10.3 million, brings Fishman's pay package to $12.7 million (not including the $7.7 million of interest missing from the table). Paul Hodgson, senior research associate at the Corporate Library, takes a simpler approach. When calculating annual pay, he disregards options grants and factors in the "value realized" from exercising options instead. In a table, Analog reveals that Fishman netted $2.85 million this way in 2005. Whatever method you use, be consistent. And count grants or exercises, but not both.
The last column of Analog's Summary Table reveals that Fishman earned $65,165 in "All Other Compensation" in 2005. This is the company's matching contribution to his retirement savings.
The fine print also indicates that Fishman is entitled to a golden parachute if he leaves or is forced out within two years of a takeover or merger. Analog voluntarily reveals that as of Jan. 1, 2006, Fishman would have received $9.6 million. If the SEC gets its way, firms will be required to publish such estimates starting next year. For now, though, most proxies merely describe how much bonus and salary a CEO stands to receive in severance. Up to three times the most recent salary and bonus is common. But the biggest payouts often come from provisions such as accelerated vesting of stock options and reimbursement for a 20% excise tax on parachutes with more than three years of compensation. While you'll find details in a "change in control" agreement attached to the 10-K or in an 8-K filed in the year the agreement was signed, you're unlikely to get enough information to value the package.