Executive Pay List Reflects Revised Rules

It's not surprising that the CEO of Wal-Mart Stores Inc., the largest company on the planet, was the most highly paid corporate executive in Arkansas last fiscal year with total compensation of $19.4 million.

What's surprising is how much more Michael T. Duke made the previous year - more than twice as much, in fact, as was initially reported.

(Click here to see the list of public company executive compensation. Click here to to purchase a spreadsheet version.)

Revisions to executive compensation figures originally released in 2009 were common in the proxy statements issued this year by publicly traded companies in Arkansas and elsewhere, thanks to the Securities & Exchange Commission's incremental efforts to make compensation reporting more uniform and transparent.

Whether the new requirements actually improve management is a different question, but they clearly do give investors information they didn't have before.

For the purposes of Arkansas Business' annual executive compensation list, most of the revisions concern the valuation of stock options and restricted stock. This is because - as of Feb. 28, just in time for proxy season for most public companies - the SEC required companies to report equity awards as compensation based on their fair market value on the date they were granted rather than as their cost to the company.

It may sound like a small change, and in many cases, it was. But in Duke's case, it was the difference between $13.26 million and $29.42 million. The proxy statement Wal-Mart issued in April 2009 said Duke, who had spent the fiscal year that ended Jan. 31, 2009, as vice chairman, earned $12.24 million and realized another $1.02 million by exercising stock options. But the proxy issued in April of this year revised his stock and options line for fiscal year that ended in 2008 from just over $7.5 million to a whopping $23.7 million.

Similarly, we now know that Wal-Mart Vice Chairman Eduardo Castro-Wright (No. 3) earned $19.7 million in the fiscal year that ended in 2009, not the $11.1 million that was previously reported. But Thomas Schoewe (No. 7) earned $7.9 million that year, not the $10.2 million reported in the 2009 proxy.

The same stock awards line item in Wal-Mart's 2010 proxy statement sent a new name on Arkansas Business' annual list of executive compensation to the No. 2 spot. Brian C. Cornell, formerly CEO of Michael's Stores Inc., was hired as executive vice president to run the Sam's Club division on April 3, 2009, and given $10.57 million worth of stock on that date. Combined with the $668,498 in salary that he earned between April and the end of the fiscal year, a performance incentive of $1.33 million and other compensation that included $1.72 million in relocation expenses (part of which offset a loss on the sale of his home), Cornell's total compensation topped $14.3 million for the fiscal year that ended Jan. 31.

Compensation Philosophies
Arkansas Business' annual list of public company executives ranked by pay uses a simple formula for arriving at total compensation: All compensation reported in the annual proxy plus the actual value realized from the exercise of stock options during the year.

Since the accounting scandals of the early 2000s, investor groups have been vocalizing concerns about executive compensation packages that may or may not align the managers' interests with those of rank-and-file shareholders. The presumption, for instance, that stock options - the right to buy shares of stock at a set price - would inspire executives to manage a company in such a way as to increase the share price for all stockholders was put to the test in the Enron era, when it became clear that some executives would cook the books to get the same result.

Options are still in favor at many companies, although relatively few were exercised by Arkansas executives during the stock market slump of 2009. But they are not as popular as they used to be, and some compensation consultants feel granting restricted stock is just as problematic.

Arkansas Business requested interviews concerning compensation philosophies with more than a dozen members of various corporate compensation committees; not one agreed to comment by press time.

"Some of the changes are driven less by philosophy and more by tax and accounting rules," said Paul Hodgson, senior research associate for The Corporate Library of Portland, Maine, a for-profit corporate governance research firm.

"The big move at the moment away from stock options and to restricted stock is driven by the new accounting rules that recognize that granting stock options costs money and that that cost should be reflected on the balance sheet."

Restricted stock awards - gifts of shares that the executive receives on a timetable set by the corporate board of directors - have long been included in the compensation disclosures and treated as corporate expenses. Options, which executives can buy and immediately sell when the market price exceeds the set exercise price, were previously reported but were not included in the total compensation figure or treated as a corporate expense.

"Now the playing field is even," Hodgson said, and companies have drifted toward the less complicated accounting of stock awards.

Windstream Corp. of Little Rock, for instance, has not granted any stock options since it was spun off from Alltel Corp. in 2006. ("Windstream does not grant stock options and had no exercises for executive officers in 2009," the company reported in a footnote to its proxy.) The Windstream board of directors' compensation committee "prefers equity incentives over cash and has used it exclusively in lieu of cash as the method of providing long-term compensation incentives," according to the committee's annual report in the proxy.

Windstream's compensation committee is made up of William A. Montgomery, Samuel E. Beall III and Dennis E. Foster. (See table for the members of all Arkansas public company compensation committees and the fees they are paid for their service as directors.)

Hodgson isn't wild about options and even less fond of "giveaway" stock awards as a way to align an executive's interests with those of his company's investors. "In my opinion," he said, "neither does a very good job."

That was especially true in 2009, he said, and The Corporate Library issued a detailed report complaining about large stock awards made when stock prices were in a trough.

"If executives were awarded stock options in January, February, March of last year, when prices were at a 10-year low, then the prices immediately started to go up. And that had nothing to do with the executives; it was just the market rebounding."

Those executives, he said, made millions on the rebound, while most shareholders -especially long-term investors who bought in before the market crashed in late 2008 - still have paper losses.

And he doesn't think the timing was coincidental.

"Either the consequence of this was not fully understood, or it was understood and ignored," Hodgson said.

Even in much better years than 2009, Hodgson said, stock price is a poor indicator of management prowess.

"Between 60 and 80 percent of any stock change is due to the market rather than due to how well any company is run," he said. "There is a link, but it's not a direct enough link to tie compensation to it."

Instead, The Corporate Library recommends tying compensation, including stock awards and bonuses, to "performance standards" other than market price. Appropriate performance standards would "depend on what the directors are trying to get the management to do," he said.

"It might be some strategic measures; it could be about product development; it could be about market share. It really depends on the state of the company to determine whether the management is doing a good job or not."

The management of a young company might be rewarded for increasing revenue, while a mature company might need managers who are motivated to develop new products or diversify into new markets.

The List
Arkansas Business' list of executive compensation draws from the most recent proxy statements released by public companies headquartered in Arkansas and out-of-state companies that have "named executive officers" in Arkansas. NEOs are the CEO and CFO of the company plus the three other most highly compensated executives, although some smaller companies have fewer than five NEOs and some companies disclosed more than five because of new hires and departures during the fiscal year.

For 2009, the only out-of-state company with an NEO in Arkansas was IberiaBank Corp. of Lafayette, La., and its only Arkansas-based NEO, Senior EVP Michael J. Brown, moved back to Louisiana this month.

The list comprises 99 names, including several who retired, resigned or were terminated during the 2009 fiscal year. All of them are NEOs except two members of the Dillard family, Denise Mahaffy (No. 62 on the list) and William Dillard III (No. 69), whose compensation as vice presidents of Dillard's Inc. were disclosed in the proxy because of their relationship to other officers and directors.

The compensation information for NEOs of America's Car-Mart Inc. of Bentonville dates back to the fiscal year that ended on April 30, 2009. Car-Mart plans to release its 2010 proxy before the end of August, according to CFO Jeffrey Williams (No. 58).