In evaluating our executive compensation program for 2012, we think it is important to note that we granted certain special equity awards prior to our 2012 annual meeting (as disclosed in our 2012 proxy statement) that are not part of our “regular” annual compensation program. Specifically, we granted (a) long-term retention stock options that vest over five years to 27 officers, including our named executive officers, and (b) a one-time special restricted stock unit award to Mr. Smith, which is 50% performance-based and vests over seven years, in recognition of his excellent and longstanding service to the Company (over 30 years of service with the Company and its predecessors), to incentivize him over the remaining term of his employment agreement and in connection with his voluntarily relinquishing several legacy rights under his employment agreement. Although no stock options vested in 2012 and only 1/7th of Mr. Smith’s special RSU award vested in 2012, the entire grant-date fair value for all of these awards appears as 2012 compensation for our named executive officers in the Summary Compensation Table in accordance with applicable rules of the Securities and Exchange Commission. As a result, the 2012 compensation for our named executive officers, and for Mr. Smith in particular, appears significantly higher than the way our Compensation Committee views this compensation (with the compensation attributable to the special equity awards spread out over the applicable long-term vesting period). These special awards are intended to promote retention, encourage enhanced performance and help ensure effective leadership over the long-term vesting periods applicable to the awards.
Before, with commentary
There is a plausible explanation here for the apparent spike in compensation, but it is buried. The Company’s version is five sentences long, and one of those sentences contains 90 words. My version is nine shorter sentences that walk the reader through the reasons for the special awards and explain why 2012 compensation numbers are misleading. Granted, mine looks longer, but it works better (and it’s actually 11 fewer words).
To help you evaluate our executive compensation program for 2012, we wish to put last year’s one-time special equity awards in perspective. As disclosed in our last proxy statement, we granted two kinds of special equity awards in [month], 2012. First, we granted long-term stock options that vest over five years to 27 officers, including our named executive officers (other than Mr. Smith). These awards are intended to promote retention, encourage enhanced performance, and help ensure effective leadership over the five-year vesting period. Second, we granted a special restricted stock unit award to Mr. Smith. This award, which is 50% performance-based and vests over seven years, was designed to recognize Mr. Smith’s excellent and longstanding service to the Company, to motivate him over the remaining term of his employment agreement, and to compensate him for relinquishing several legacy rights under that agreement.
Although the total value of these awards, if earned, will be spread out over five years (or seven years in the case of Mr. Smith), Securities and Exchange Commission rules require us to show the entire grant-date fair value as 2012 compensation in the Summary Compensation Table. Consequently, our named executive officers’ compensation for 2012 appears to be inconsistent with compensation in other years, and also seems unusually high. In fact, however, realized compensation was considerably lower than the amounts shown in the Summary Compensation Table: no stock options vested in 2012, and only 1/7th of Mr. Smith’s special RSU award vested in 2012.
[If the numbers are palatable, this is where the company might consider inserting a table to show how compensation looks with those awards spread out over the vesting period.]