Pro Forma Compensation: Useful Insight or Window Dressing?
12 Pages Posted: 26 Jul 2015
Date Written: July 28, 2015
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: Suggested Citation