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Watch for interest rates when considering executive pay

The rates at which pension accruals have altered total compensation have actually contributed to a decline in overall CEO pay

Executive compensation is a hot button topic for the legal and financial worlds these days as companies report their CEO salaries for 2013, with most of the reports coming to the conclusion that executives are overpaid and that the standards that CEOs are held to are too low to qualify them for the kinds of salaries they are rewarded. These arguments become particularly vehement as shareholder value is accounted for, and investors become more vocal about the potential devaluing of shares owed them. Coca-Cola’s executive payment plan has been in the spotlight over the past several weeks as Warren Buffet first criticized the company’s plan to reward its executives in equity amounting to $13 billion over four years. He later retracted his statements, and has cast general doubt on the ability of boards to oversee excessive executive compensation, but Coca-Cola is not alone in this publicized criticism over large CEO paychecks.

Still, even as many decry the increases in executive compensation over the last year, some data points to the decline in total CEO pay. Forbes reports that company filings for the Russell 3000 indicate that total compensation is down because of pension accruals. As interest rates rise, pension accruals go down, and this decline in pension accruals has contributed to an overall decline in total compensation, as the report notes. The Russell 3000 filings for 2014 so far have recorded a decline in average pension change to $646,000 in 2013 from $1.3 million in 2012. Because the total compensation figures — including total direct compensation plus pensions and all other compensation — are independent of executive board decisions or compensation committee decision, it is important for comparison’s sake to consider the impact of pension accruals on total compensation. 

The report notes that companies have responded to the decline in pension values in a few ways, including: adjusting the time frame of the average interest rate to three or four years’ average instead of just taking last year’s, providing more detail into compensation, discussion, and analysis, and providing information on the impact of pension alterations to total compensation. Interest rates undoubtedly have driven changes on pension accruals, and therefore overall pay rates for executives, but since they are figures that are oft-overlooked, cursory glances at year-over-year executive pay without interest rate consideration tend to be less than accurate.

 

Further reading:

 

CEO ‘pay’ definition remains unclear as SEC struggles to meet Dodd-Frank deadlines

Is Intel’s executive compensation shift really a ‘cultural change’?

Directors, investors diverge on executive pay

Contributing Author

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Juliana Kenny

Juliana Kenny is a contributor to InsideCounsel.com, covering a range of topics including patent litigation, conflict mineral laws, executive compensation, and antitrust regulation. Juliana earned B.A.s...

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