Pro Forma Compensation: Useful Insight or Window Dressing?

12 Pages Posted: 26 Jul 2015

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Youfei Xiao

Duke University - Fuqua School of Business

Date Written: July 28, 2015

Abstract

In recent years, companies have begun to voluntarily disclose alternative measures of CEO compensation. These figures differ — sometimes significantly — from those reported in the summary compensation tables of the annual proxy. The motivation to report this information, however, is not entirely clear. A company might disclose adjusted compensation because it believes this measure to be more informative about executive incentives than SEC-designated calculations. Alternatively, it might do so to make its compensation practices and payouts appear more favorable than under SEC rules.

We examine this practice in detail, and ask: Are alternative measures of compensation useful in assessing CEO compensation? Does their prevalence indicate shortcomings in SEC standards, or a desire to mislead investors? Are alternative pay calculations beneficial in helping investors understand the relationship between CEO pay and performance?

The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: pro forma compensation, realized and realizable pay, compensation disclosures, pay for performance disclosures, GAAP and non-GAAP earnings

JEL Classification: G34, J33, K22, L20, M52

Suggested Citation

Larcker, David F. and Tayan, Brian and Xiao, Youfei, Pro Forma Compensation: Useful Insight or Window Dressing? (July 28, 2015). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-50; Stanford University Graduate School of Business Research Paper No. 15-46. Available at SSRN: https://ssrn.com/abstract=2635753

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Youfei Xiao

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8026 (Phone)

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