Pro Forma Compensation: Useful Insight or Window Dressing?

by David Larcker, Brian Tayan, Youfei Xiao
Citation
Title:
Pro Forma Compensation: Useful Insight or Window Dressing?
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Year: 
2015
Publication: 
Stanford Closer Look Series
Volume: 
50
Issue: 
July 28, 2015
Start Page: 
1
End Page: 
11
Publisher: 
Copyright © 2015 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.
Language: 
English
URL: 
http://www.gsb.stanford.edu/faculty-research/centers-initiatives/cgri/research/closer-look
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No License (All right reserved)
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Abstract:

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.

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