- What Does It Mean for an Executive To Make $1 Million? (PDF)
By Professor, David F. Larcker, Allan L. McCall, Stanford GSB Phd candidate in accounting, and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business
December 14, 2011
- Companion PowerPoint presentation for use in teaching: What Does It Mean for an Executive To “Make” $1 Million? (PowerPoint)
The press and other third-party observers frequently discuss executive compensation. However, executive compensation figures are not always what they seem. Executive pay packages contain a diverse mix of cash and non-cash incentives, payable in one or multiple years and subject to accruals, estimates, and restrictions that often render their ultimate value quite different from their expected value. Even total compensation figures disclosed in the annual proxy comingle forward- and backward-looking amounts as well as fixed and contingent payments that make it difficult for investors to understand what compensation has been promised to executives and what they eventually earn.
We untangle the mess and examine three basic methods for calculating compensation: expected value, earned value, and realized value.
We discuss the applicability of each, illustrating concepts with real examples and summary statistics.
Why don’t companies voluntarily disclose these figures so stakeholders can better evaluate incentives and pay for performance?
Read the attached Closer Look and let us know what you think!
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