Markets/Finance Total pay Salary, cash bonus, stock awards, option awards, change in value of pension, perks such as security, club memberships, personal use of corporate jets Realized pay Salary, cash bonus, stock awards that vested, stock awards that the CEO qualified for based on performance, gains from stock options that were exercised
N EW !
Actual pay Salary, cash bonus, stock and options awards that vested during the year, change in pension value attributable to work during the past year, other perks and benefits
38
for an advanced degree,” then-SEC Chairman Christopher Cox said when it was introduced. Companies have bridled at the rule in the years since, according to Mark Borges, a principal at compensation consulting firm Compensia, arguing that total pay overstates what the CEO makes because it includes such things as stock options, whose value depends on the company meeting performance targets. So companies have taken to doing their own calculations and presenting them prominently in annual reports along with total pay. GE calls the $9.6 million figure “realized pay,” which reflects only the money the CEO earned during the year. “We use W-2 income as the measure of realized compensation because it is easy to understand and provides consistency from year to year,” GE said in an e-mailed statement. Coca-Cola also uses realized pay, although it calculates it differently. Coke reported that CEO Muhtar Kent realized $13.8 million in 2014, while under SEC rules his total pay was $25.2 million. “Our company designs our disclosure to provide both retail and institutional investors with the information they need in a way that is easy to understand,” Coke said in an e-mailed statement. Now the SEC is planning to introduce another benchmark, “actual pay,” which would strip out some long-term compensation, such as stock options that haven’t vested yet and changes in the value of the executive’s pension. Under the formula, Immelt’s 2014 pay would shrink by at least $24 million—but still be greater than his realized pay. Companies would continue to report total pay, right next to actual pay. And they’d be free to state realized pay or any other figure they come up with. Critics say the jumble of numbers will make it even harder to pin down what the CEO really earned. Shareholder reports are already packed with arcane yardsticks that only professionals
can grasp, says Daniel Alpert, managing partner at Westwood Capital in New York. McKesson’s 2015 compensation report runs 161 pages and provides nine charts that explain how the CEO and other top executives are paid. “Individual shareholders are not going to understand this type of analysis,” Alpert says. It’s a challenge even for professionals. The Florida Retirement System, which manages $163 billion in pension assets, uses four different models to make sense of the figures, says Michael McCauley, senior officer for investment programs and governance. “Comp is the most convoluted, most complicated” item in the proxy report, he says. Under rules in the 2010 Dodd-Frank Act, the SEC must add another metric to the mix: a ratio that indicates how many times more the CEO is paid than the average rank-and-file worker. The commission plans a vote on the requirement on Aug. 5. Because the ratio may be embarrassing, companies are expected to supplement the figure with more charts and graphs demonstrating that the CEO is worth every penny. —Dave Michaels The bottom line While GE says its CEO “realized” $9.6 million last year, under SEC rules his compensation totaled $37.2 million.
Fixed Income
Charter Schools Tap the Muni Bond Market
With enrollments rising, they find it easier to borrow to expand “Schools 5 or 10 years ago couldn’t get to the market”
The Children’s Aid Society sold municipal bonds on July 9 to raise money for its charter school, joining a record borrowing spree for such educational institutions across the U.S. The New York charity will use the
$40.7 million from the bond sale to build a six-story building to house its charter school in the South Bronx, says Chief Financial Officer Dan Lehman. “The best and most reliable path out of poverty for children is educational achievement,” he says. Charter schools have issued $1.2 billion of municipal bonds so far in 2015, according to data compiled by Bloomberg, and they are on pace to break last year’s record $1.9 billion. Muni bond sales by charter schools have more than doubled over the Rate of charter school bond defaults past four years, setting records since 1998 every year since 2012, according to a survey by Local Initiatives Support, a New York nonprofit that focuses on revitalizing neighborhoods. Federal rules allow nonprofits and private companies to sell taxexempt “public purpose” municipal bonds to raise money for projects that benefit the community. Charter schools, which are independently run and provide an alternative for parents of children in poorly performing districts, receive public funding based on how many students they serve. Enrollments across the country climbed to 2.9 million in the school year 2014-15, according to the National Alliance for Public Charter Schools, up from 350,000 in 1999-2000. “Schools 5 or 10 years ago couldn’t get to the market because they were too new,” says Wendy Berry, a financial adviser to charter schools and former Moody’s Investors Service analyst who wrote the Local Initiatives survey. Even so, the debt is among the riskiest in the $3.6 trillion muni market because schools can close if enrollment drops or they lose their charter for poor performance. Of 818 charter school bond offerings since 1998, 41 issuers have defaulted, a rate of 5 percent, according to the survey. The average default rate for nonhousing muni bonds rated by Standard & Poor’s since 1986 is 0.03 percent. To compensate for the risk, a 30-year charter school bond can yield as much as 5.6 percent, compared with 3.4 percent for AAA-rated muni bonds with the same maturity. Susan Courtney, head of the muni
5%
ILLUSTRATION BY 731
Numbers Game
