July 26, 2006
The SEC is quite right to seek a single figure which best represents the total compensation received by a director in a year.
There are however two technical difficulties in determining this figure.
1) When compensation is given in the form of options there is the difficulty of appropriately valuing the option. How do we know that the valuations are given in a fair and consistent way?
2) When compensation is differed, or conditional, there is the difficulty of knowing in which year it should be shown.
The attached spreadsheet shows a layout which addresses both these problems. An estimate of the present value of compensation is shown in the year in which the compensation is awarded. That estimate is then revised in each subsequent year until the compensation is finally unconditional transferred. The changes in value of past compensation are added or subtracted to each year's compensation.
This approach ensures that poor valuation methodologies can have limited long term impact. It also ensures a consistent and realistic treatment of deferred compensation.
The layout forms appendix 2 of my book "Performance and Reward". See www.performanceandreward.blogspot.com