Pro Forma Compensation: Useful Insight or Window Dressing?

In recent years, companies have begun to voluntarily disclose alternative measures of CEO compensation. These figures differ — sometimes significantly — from those reported in the summary compensation tables of the annual proxy. The motivation to report this information, however, is not entirely clear. A company might disclose adjusted compensation because it believes this measure to be more informative about executive incentives than SEC-designated calculations. Alternatively, it might do so to make its compensation practices and payouts appear more favorable than under SEC rules.

We examine this practice in detail, and ask:

• Are alternative measures of compensation useful in assessing CEO compensation?
• Does their prevalence indicate shortcomings in SEC standards, or a desire to mislead investors?
• Are alternative pay calculations beneficial in helping investors understand the relationship between CEO pay and performance?