Realized Pay - Explained
Reportable, Realizable, Realized Pay
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Table of ContentsWhat is Realized Pay?How is Realized Pay Determined? The Rules Proposed by SEC for Actual Pay DisclosureAcademic Research on Realized Pay
What is Realized Pay?
The pay reporting methods required for disclosure to public companies continues to be a debate, especially as companies, shareholders, regulators, and other advisors focus on pay for performance.
Traditionally, there are three ways to calculate and potentially disclose pay: realizable, reported, and realized pay. The different parts of the pay life-cycle are represented by components that comprise each pay methodology.
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How is Realized Pay Determined?
There are three types of pay disclosures.
- Reported Pay - Being the first stage in the cycle, this part relays what is initially granted, even though its not earned during the fiscal year. As required by the SEC, reported pay is to be disclosed in the SCT (summary compensation table) of annual proxies.
- Realizable Pay - This portion covers the center of the cycle, and it leverages on the pay opportunity prior to the exercise or vesting of equity to an executive after grant.
- Realized Pay - Also called actual pay, it is the true pay received by an executive during the fiscal year, in addition to exercised or vested equity.
Although these three processes of calculating pay happen in a cycle, if one is disclosed over another, or side by side, confusion may arise in trying to understand the actual meaning of each compensation amount. Do they represent the pay structure, the actual compensation received, or comprise both? Although realized pay accurately addresses what executives take home, and reported and realizable pay give a better understanding of the pay structure and likely pay opportunities, no methodology provides a complete picture.
The Rules Proposed by SEC for Actual Pay Disclosure
To provide more transparency on pay vs. performance, the SEC proposed a rule in April 2015 which if implemented as conceived would make public companies disclose company executives realized pay. The formal definition of actual pay according to the SEC is total compensation based on the report in the SCT with two modifications.
First, the aggregate change in the actuarial present value of the accumulated benefit under all defined benefit pension plans plus the cost of service under all such pension plans will be subtracted from SCT overall compensation.
Second, equity awards, including stocks, options, performance shares and units will be valued at the vesting date fair value as opposed to granting date fair value. Therefore, certain long-term compensations will be excluded from actual pay, e.g. not yet vested incentive awards and equity.
Upon the finalization of the rule, a clear explanation would be required from companies, highlighting the CEOs actual pay and other NEOs average actual pay. Although the proposed rule has not been made official, realized pay is already being discussed in annual proxies by many companies. Based on Equilars 2016 Compensation and Governance Outlook report, there was a jump from 1.7% to 13.7% in the disclosure of realized pay in the proxies of S&P 500 companies between 2011 and 2015.
By making available an alternative to SCT reported pay, companies clarify the distinction between the amount paid and granted to executives throughout the fiscal year, and the actual amount taken by the executives to the bank. By clarifying the difference between reported and realized pay, the story told by companies can be well related to pay for performance.
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