The NASPP Blog

Realizable pay has quickly emerged as a hot topic for this proxy season. In today’s blog, I offer a few thoughts on realizable pay as it relates to stock compensation.

Why Realizable Pay?

Realizable pay has emerged as a method for evaluating whether executive pay aligns with company performance.  It’s an alternative to comparing company performance to total pay as disclosed in the Summary Compensation Table.  For equity awards, pay is disclosed in the SCT at grant and is based on the grant date fair value. Arguably, the pay disclosed in this table is for future performance, not current performance.  Also, the grant date fair value is not necessarily a predictor of how much compensation execs will actually receive under the arrangement.

Realizable pay, however, is based not on grant date fair value but on the current value of the company’s stock.  Thus, where equity awards are a significant component of executive pay, realizable pay can make for a more compelling story for shareholders:  high levels of realizable pay are likely the result of an elevated stock price, which in turn probably means that the company is performing well. On the other hand, poorly performing companies have lower stock prices, resulting in underwater stock options and low levels of realizable pay.

What Is Realizable Pay?

Realizable pay is not a mandated disclosure, so there is no standard definition for it. Generally, it can be expected to include cash compensation paid during the year, plus the intrinsic value of options and awards held by the executive.  But, of course, it’s more complicated than that. 

• Which awards/options?  Awards typically vest and pay out in three to four years, but options can be outstanding for up to ten years.  The standard that is emerging seems to be to include only options and awards granted within a specified period (e.g., three years).  The idea is that the grants that are generating the company’s current performance are the ones made in recent years; grants made earlier generated performance in an earlier time frame. 
• Vested and Unvested? Technically, executives can really only realize the value of options and awards that are vested.  Most companies, however, seem to include both vested and unvested options and awards in realizable pay. 
• Performance Awards? Where execs hold performance awards, a decision also need to be made as to whether to include these awards at threshold, target, or maximum.  These awards could also be included at the level at which they are currently expected to pay out, but companies may be uncomfortable with this approach as it potentially signals management’s expectations as to future company performance. 

When Is Realizable Pay Not Realizable?

When ISS calculates it, of course.  ISS includes the current Black-Scholes value of options in realizable pay, rather than just their intrinsic value (see “Proxy Advisor Policies for 2013,” November 27, 2012).  The Black-Scholes value is generally always going to be higher than the intrinsic value (think fast:  ten points if you can name two situations where the Black-Scholes value would not be significantly higher than intrinsic value), so this has the effect of increasing the pressure to outperform peers. 

– Barbara