- Businesses may be misleading investors in the way they report executive compensation structured as performance-vested stock awards (PVSA), a University of Missouri study finds.
- The compensation method is intended to motivate performance by tying compensation to stock performance, but because the amount executives receive is typically reported as a target, not the actual amount, investors aren't always getting a clear picture of the company's financials.
- Many executives receive more than half their pay structured in this way, making accurate reporting a key consideration, says Assistant Professor Andrea Pawliczek, the study's author.
PVSAs are essentially cash bonuses in the form of stock awards. "The companies tell the CEOs, ‘I’m going to pay you in stock, but the number of shares you get is going to be based on how well you perform,'" says Pawliczek. "By doing this, the company is combining the two forms of performance-based pay — cash bonuses and stock awards — that have been most prevalent in the last 20 to 30 years."
Companies typically provide target PVSA amounts in accounting reports, but, on average, executives make 15% more than the amount reported.
The study focuses on CEO pay. Other executives receive incentive-based pay as well, and how the pay is reported is typically the responsibility of the CFO.
The disconnect between the two amounts could be a mistake, said Pawliczek, but companies have an incentive to report the lower number. Many investors use CEO pay to evaluate the company, and some investors use the pay data point to predict the decision-making behaviors of the CEO.
"Pay matters," Pawliczek said. "Many investors believe that how much and how a CEO is paid has a direct impact on day-to-day operations. Depending on how an investor interprets that, it could have significant consequences for their money."
Companies issue separate disclosures that include how much the CEO made in actual dollars, but the information is typically in the fine print and is presented using different data and terminology, depending on the company. Not everyone has the skill or time to dig out the amount.
"If I told one of my junior accounting students to find a particular piece of data, they’d struggle to find it," she said.
Pawliczek recommends companies use, or regulators require, enhanced disclosures.
"In the accounting field, disclosure is very important," she said. "People can’t make good decisions without the right information. When things get more complex, as executive compensation has, clear communication becomes extremely important."
The study, "Performance-Vesting Share Award Outcomes and CEO Incentives," appeared in The Accounting Review, published by the American Accounting Association.