This third and final installment of where to start with SEC filings is about compensation in the “Proxy” or DEF14A statement.
The Proxy statement is particularly useful between the hours of 10:00 p.m and 6:00 a.m., when insomnia is most likely to strike. Rest assured, this filing will bore you right to sleep, but please use caution if you decide to use its superpower to your advantage: I have heard anecdotally that it can bore a person “to death.”
Although reading through an entire DEF14A statement might be mortally risky, it’s possible to safely find and make some sense of compensation information for the top executives of the company. According to the SEC, these executives include “CEOs, CFOs and certain other high-ranking executive officers.”
Any time I research an executive of a publicly traded company, the first thing I look at regarding compensation is the Summary Compensation Table.
You can scroll through the DEF14A filing to find the table, but this is a bit tedious so I recommend using the “Find” function in your web browser or pdf reader. (Just hit “Ctrl+F” and search for “Compensation Table”)
The summary table is pretty comprehensive: it includes all forms of compensation for each executive, including base salary, bonuses, various stock and stock-related awards, and change in pension value. The specifics may vary from company to company, but these are the typical categories covered.
It may be tempting to look all the way to the far right of the table to see the total (those big numbers are exciting!) but the nuances are important. Some of the components are actual money paid to the executive, while others are stock and options that were awarded to them (but to which they may not have access or over which they may not have complete control).
The components that comprise actual money paid to the executive include the salary and bonus. In this specific example, the bonus is represented in the column titled “Non-equity Incentive Plan Compensation.”
Why don’t they just list this as the cash bonus? A glib answer is that lawyers need to make their money somehow, but the slightly more helpful answer is that the bonus includes more than just a cash award. The cash portion is referred to as “non-equity,” and the other components are typically equity based, made up of things like stock and options. (Explained in the next section)
The salary figure in the table is relatively straightforward: the company pays the executive the yearly salary amount as long as they remain employed. The bonus, on the other hand, is not guaranteed. It is contingent on the executive achieving certain goals. These goals are specified elsewhere in the DEF14A statement, and if your insomnia is acting up, you can go read them. What is reported in the compensation table is the amount the executive received over the past year.
STOCK AND OPTIONS
The pieces of the total compensation package that make up the equity-based share include stock awards and option awards. It’s common for these to make up a significant portion of the total compensation, and looking at Mr. Harmening in the current example, 55% of his compensation was equity-based in 2022.
If you are trying to make sense of an executive’s financial picture, knowing this particular detail is really important for a couple of reasons:
- The equity portion of the compensation package is not readily available to the executive. They have to sell the shares or exercise the options in order to benefit from them.
- Even if the executive was inclined to sell shares or exercise options, they most likely could not, due to explicit restrictions (some companies impose minimum shareholding requirements for their execs) or because it would just be bad business (investors can get rattled when insiders sell off shares, causing stock prices to fall).
THE OTHER STUFF
The compensation table includes two additional columns: “Change in Pension Value and Nonqualified Deferred Compensation Earning” and “All Other Compensation.” The former simply reflects how much pensions and other similar retirement vehicles increased or decreased in value, while the latter describes miscellaneous other forms of compensation that need to be disclosed. For the sake of simplicity here, I won’t dig into these further, but the footnotes are always a great source of additional context or explanation.
In spite of how daunting the DEF14A filing may appear at first glance, researchers can quickly and easily glean some helpful information from the compensation table. This is particularly true with a basic understanding of the components of total compensation. The complexity is seemingly endless, but you can still pull out a few gems of information and look pretty smart in the process! (And, if you’re careful, avoid falling asleep…)