1. What Does It Mean for an Executive To “Make” $1 Million? Professor David F. Larcker Allan McCall Brian Tayan Corporate Governance Research Program Stanford Graduate School of Business Adapted from the Closer Look Series, available at: http://www.gsb.stanford.edu/cgrp/research/closer_look.html.http://www.gsb.stanford.edu/cgrp/research/closer_look.html Copyright © 2012 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. For permissions, contact: corpgovernance@gsb.stanford.edu.

2. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp  When Vikram Pandit became CEO of Citigroup in 2008, the New York Times dubbed him the “quarter-billion dollar man.” - Received $165 million from sale of Old Lane hedge fund to Citigroup (proceeds reinvested) - Promised $40 million compensation contract (primarily equity)  Despite the headlines, however, Pandit never received this money. - Investment in hedge fund worth only a fraction when sold - Equity grants worth only $4 million when vested Compensation at Citigroup

3. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp Compensation at Citigroup 200820092010200820092010200820092010 Salary958,333125,0011958,333125,0011958,333125,0011 Bonus000000000 Stock28,830,000001,961,2501,132,5041,346,903119,500125,239130,798 Options8,432,9110000000 Other16,1933,750016,1933,750016,1933,7500 Total38,237,437128,75112,935,7761,261,2551,346,9041,094,026253,990130,799 Reported Compensation Earned Compensation Realized Compensation Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf

4. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp  CEO compensation figures are not always what they seem.  Reported compensation figures include a mix of cash and non- cash incentives, payable in one or multiple years, and are subject to accruals, estimates, and restrictions.  As a result, the ultimate value of compensation is often quite different from its expected value.  The SEC standardizes reporting requirements. However, even these comingle forward- and backward-looking amounts, and fixed and contingent payments. Compensation Reporting

5. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp There are three general ways to measure compensation: 1. Expected. Total value promised to executive. Because not all compensation is received in the year it is awarded, some elements must be estimated. The precision of these estimates will depend on performance and market-related sensitivities. 2. Earned. Total value that an executive “earns the right to keep.” In most cases, the amount earned in a year is derived from compensation granted over multiple years. 3. Realized. Total value that an executive converts to cash in a given year. Realized compensation is also often derived from grants awarded over multiple years. Measuring CEO Compensation

6. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp Measuring CEO Compensation Compensation Element ExpectedEarnedRealizedSEC Proxy SalaryTarget amountActual amountEarned, Realized Cash BonusTarget amount Actual amount (between the minimum and maximum amount) Earned, Realized Restricted Stock Fair value on grant date (stock price) Fair value on vesting date Value realized upon sale Expected Stock Options Fair value on grant date (Black- Scholes) Fair value on vesting date Value realized upon sale Expected Non-Equity PlansTarget amountActual amount (lump sum)Earned, Realized PensionActuarial amount Actual amount in retirement Expected, Earned Other BenefitsActual amount Expected, Earned, Realized Elements of Executive Compensation

7. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp Example: Harley-Davidson ExpectedEarnedRealizedSEC Proxy Salary$ 975,000$ 975,037 975,037 Cash Bonus0000 Stock Awards1,381,19900 Option Awards1,636,681698,90601,636,681 Non-Equity Plans2,600,3572,340,090 Pension0000 Other Benefits83,490 67,28983,490 Total $ 6,676,727$ 4,097,523$ 3,382,4166,416,498 Keith Wandell, CEO of Harley-Davidson (2010) Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf

8. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp These distinctions are important because each figure conveys different information.  Expected compensation is a forward-looking view of reward opportunities available to an executive. The size and mix of expected compensation provide insight into the incentives offered to management.  Earned and realized compensation are backward-looking views of the rewards that an executive actually received for his or her efforts. These values can be used to assess pay- for-performance.  Incentives and pay-for-performance are both very important, but their calculations are not the same. Measuring CEO Compensation

9. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp The information to properly evaluate the incentive value of compensation and pay-for-performance is not readily available to shareholders. 1. Summary compensation figures in the annual proxy combine expected, earned, and realized amounts. 2. Proxy advisory firms compare changes in reported compensation to previous total share price performance, making a false comparison. 3. Journalists do not consistently distinguish between earned and expected amounts. Challenges in Assessing Compensation

10. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp  A recent article reported that Viacom CEO Philippe Dauman received a pay increase of 150 percent.  One analyst commented, “This is spectacular money but where are the spectacular results?”  Earned compensation figures, however, were not the same as those reported. Challenges in Assessing Compensation Reported (2009)Reported (2010)Earned (2009)Earned (2010) Salary$ 2,500,000$ 2,625,000$ 2,500,000$ 2,625,000 Stock Awards12,688,93241,833,3091,869,2275,919,015 Option Awards5,999,99728,620,00001,599,827 Non-Equity Plans12,540,00011,250,00012,540,00011,250,000 Pension37,91145,79337,91145,793 Other243,150141,206243,150141,206 Total $ 34,009,990 $ 84,515,308 $ 17,190,288$ 21,580,841 Philippe Dauman, CEO of Viacom(2009-2010)

11. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp  Executive compensation figures are frequently cited by the press and third-party observers. However, these sources rarely distinguish between expected and earned pay. - What does it actually mean when we read that a CEO “made” $1 million?  Earned compensation often differs significantly from expected pay, based on individual performance. - Why don’t companies voluntarily disclose these amounts so stakeholders can assess incentives and pay-for- performance?  For a more detailed discussion, read the Closer Look at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf Why This Matters

12. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp Summary Statistics: Total CEO Compensation Decile Market Cap (in millions) SEC Proxy Institutional Shareholder Services Expected Value Earned Value Highest$ 39,982$ 14,130,597$ 17,595,544$ 13,181,418$ 12,018,347 7,1327,904,8589,911,2577,380,2237,034,703 3,3756,037,8117,781,5805,879,1145,229,651 2,0794,646,3685,760,2334,547,0473,910,954 1,3263,872,3494,833,9413,888,6353,377,383 8632,877,6983,642,7642,862,0302,444,539 5852,520,1183,038,1122,512,7792,124,444 3781,988,6752,563,3762,126,5501,768,966 2461,516,6841,836,6731,570,4111,282,740 Lowest1431,160,6711,405,6791,238,5721,029,749 Mean Compensation (2010) Sample includes 2,471 companies with fiscal years ending between June 2010 and January 2011. Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf

13. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp Summary Statistics: Total CEO Compensation Decile Market Cap (in millions) SEC Proxy Institutional Shareholder Services Expected Value Earned Value Highest$ 22,522$ 12,220,817$ 15,312,751$ 11,210,876$ 9,218,322 6,8956,932,3258,878,7216,763,0055,696,422 3,2575,245,5816,669,4524,837,4713,799,896 2,0614,046,3185,006,2253,942,6803,046,327 1,3123,093,9244,024,9393,159,0522,437,328 8532,360,5803,129,7632,328,1141,873,891 5742,074,0242,574,9152,073,4911,700,898 3721,415,1591,894,0971,577,9761,200,413 2411,190,9551,411,8671,226,952976,996 Lowest149858,2041,045,605865,041794,706 Median Compensation (2010) Sample includes 2,471 companies with fiscal years ending between June 2010 and January 2011. Methodology available at: http://www.gsb.stanford.edu/cgrp/research/documents/CGRP22-MeasuringPay.pdf

14. Stanford Graduate School of Business, Corporate Governance Research Program, http://www.gsb.stanford.edu/cgrphttp://www.gsb.stanford.edu/cgrp References  Eric Dash. All Told, the Price Tag for Citigroup’s New Chief is $216 Million. The New York Times. March 14, 2008.  Citigroup. Forms DEF-14A and Forms 4. SEC. 2008-2010.  Harley-Davidson. Forms DEF-14A and Forms 4. SEC. 2010-2011.  Graham Bowley. Pay Doubles for Leaders at Viacom. The New York Times. January 22, 2011.  Viacom. Forms DEF-14A. SEC. 2007-2011.  Equilar Compensation Data.