Home > Compensation > Proforma or additional disclosure on Compensation (beyond what is mandatory)

Proforma or additional disclosure on Compensation (beyond what is mandatory)

In July 28th 2015, David F. Larcker, Brian Tayan, and Youfei xiao published an article on “Proforma Compensation. Useful insight or window dressing?”, as part of the Standford Closer Look Series, (1).

They argue every pro forma measure or disclosure may serve to mislead investors, or to better inform them about underlying and long-term trends, (and that can be said about financial or compensation information, for instance).


In the USA, compensation disclosure is regulated by the SEC, and is reported inside the proxy statement, in the Compensation Discussion & Analysis section. This happens also abroad. For instance, in Spain it is also regulated by law and the SEC equivalent, (the CNMV), and public companies need to have their Compensation report approved (non binding) by shareholders every year, and their Remuneration Policy every three years, (2).

These disclosures, (and in the USA case, the summary compensation figures in particular), are widely used to argue in favor and against compensation policies by journalists and other observers, and even when observers succeed in understanding the figures and their meaning, some unnoticed biases may happen.


For example, whereas in Target Pay the “incentive” strenght of the pay package can be observed, figures may though be misaligned from actual performance, as it includes certain risky components, (bonus or unvested elements whose value will only be determined after the performance period has passed), (3). And these risky components may represent a majority of total pay, so if the mandatory disclosure includes Target Pay, then a company could well think that it needs to include additional information.


As David F. Larcker, Brian Tayan, and Youfei xiao state, this is what has recently happened in the USA lately, partly as a result of the effect that disclosures may have in Say on Pay results. There is no regulation about this, so companies use different metrics:

  • Realized Pay includes the value of equity awards sold and/or vested in every given year, (even if they were granted years before). This value should in fact correlate better with performance metrics. As the authors state, the executive`s decision to execute or sell certain awards influences the value so determined.
  • Realizable Pay avoids this last problem, as it includes fair value for awards vested within the year, (sold or not). This metrics is not widely used though.


There is no particular apparent reason to use the Realizable Pay metric, (no Comp consultant preference, no Say on Pay result connection, …).

Regulators (and the SEC has already proposed something similar) might enhance the use of certain metrics in order for clarity to arise for the good of investors and observers, but the authors wonder if the final result would actually be more clarity or complexity; they also wonder if performance and realizable pay are so directly correlated as they appear tobe; will more regulation stop the need for additional disclosure?; what`s more, there is no unique “Realizable Pay” definition, (ISS and Glass Lewis use two different approaches).




  1. The article can be downloaded here: http://www.gsb.stanford.edu/faculty-research/publications/pro-forma-compensation-useful-insight-or-window-dressing
  2. See our posts referred to Santander,Iberdrola and other companies here:

3.  See our previous post on “Pay Definitions” here: https://joaquinbarquero.wordpress.com/2013/01/15/pay-for-performance-i-pay-definitions/

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