How much are executives really paid?

updated 6:13 p.m. ET March 19, 2006

What did Jerald Fishman, president and chief executive officer of Analog Devices, earn last year? A table in the Norwood, Mass., semiconductor maker's recent proxy statement shows $2.35 million in salary, bonus, and "other" compensation. But if you dig through the fine print and crunch some numbers, you'll see that the $2.35 million is just part of a total package worth as much as $12.7 million, depending on the method you use to compute it.

Compensation specialists say pay packages for top executives and the rules for disclosing them are so complex that even they have a hard time figuring them out. Coming up with a total price tag means assigning a number to every benefit and sorting out what portion of a stock option grant belongs in this year's paycheck, vs. last year's or next year's.

That's why the Securities & Exchange Commission recently proposed sweeping changes to the disclosure of executive compensation. Among other things, regulators want companies to do the math for investors and publish total compensation — including some items that now escape disclosure — for the CEO, chief financial officer, and three other highest-paid executives. If adopted, the changes are likely to show up in proxy statements this time next year. But some firms, including Analog, Avaya, and Pfizer, have already improved their disclosures, says Mark Borges, principal at Mercer Human Resource Consulting. While Analog doesn't include all the details the SEC wants, its proxy gives an idea of what to expect.

Current disclosure rules are partly to blame for the difficulty of calculating CEO pay. Loopholes allow some forms of compensation to be partly or entirely concealed. Companies also routinely bury in fine print summaries of agreements that put them on the hook for fat golden parachutes and retirement plans. While shareholders must be told these agreements exist, they needn't be told their estimated value, although they can add up to millions of dollars. For example, Delves Group estimates that MBNA owed CEO Bruce Hammonds $102 million after it was acquired by Bank of America. If the SEC gets its way, companies will have to estimate potential payouts in the proxy.

MORE FROM BUSINESSWEEK ONLINE Corporate gifts Steve Jobs - Redefining the CEO The great communicators The best leaders of 2005 The fittest CEOs Is the MBA overrated?

So how much did Analog's Fishman earn in 2005? Download the company's proxy statement at analog.com or sec.gov (find form "DEF14A"). Flip past the sections on nominees to the board of directors and director pay to the "Summary Compensation Table" (table 1, in a section on executive compensation). Here, you'll find the salary, bonus, and stock option awards Analog handed its top executives, including Fishman, over the past three years.

Because U.S. tax law doesn't allow companies to deduct more than $1 million of an executive's salary, most firms keep it below that threshold, says Dennis Beresford, an accounting professor at the University of Georgia. Fishman's salary — $930,935 a year — is no exception.

In contrast, when it comes to bonuses and other forms of performance-related pay, there's no limit on what companies can deduct. As a result, CEOs often pocket the big money on these awards. Larry Mizel, CEO of home builder M.D.C. Holdings, earned a 2005 bonus of $20.5 million. That far outstrips the $1 million average for 2004, the most recent figure available from the Corporate Library. Fishman's take: $414,445.

In the next column of the compensation table, you'll see that Fishman received $1,003,632 in "Other Annual Compensation" in 2005. According to the footnotes, this was an interest payment. Why did Analog pay its CEO interest? Because like many top executives, Fishman participates in a plan that allows him to defer his pay to postpone taxes. In a separate table, Analog voluntarily discloses that at the start of its fiscal 2005, Fishman's deferred compensation account had reached $134.5 million. Because Analog had use of that money, it paid Fishman interest. The CEO recently withdrew the entire account balance.

Still, the $1,003,632 that's listed here is only a small portion of the $8.74 million in interest the footnote says Fishman actually received in 2005. Why the gap? Currently, companies only have to count as compensation the interest they pay that's above a "market rate" — calculated by taking 120% of the AFR, or applicable federal rate the Internal Revenue Service publishes monthly. Because Analog paid its CEO an average of 6.48% while the market rate was 5.57%, the interest payment that resulted from the 0.91% difference is all that's in the Summary Compensation Table. The rest, or the $7.74 million in interest paid at the market rate, remains out of the tally -- although this will change, too, if the SEC's proposals prevail. "Under current disclosure rules, interest on deferred compensation for most plans is not disclosed," says Diane Doubleday, global leader of Mercer's executive remuneration service segment.

MORE FROM BUSINESSWEEK

BusinessWeek Section Front

Obama's Climate Push Plays Catch-up With Corporate Lobbyists Citi Can't Quit TARP Until Treasury Sells Stake Absolute Return: Preparing for an Uncertain 2010 Let's Give Visas to Startup Founders Lessons from the Apple-Psystar Battle Treasury's Mortgage Modification: Empty Threats? Stocks Sink on Dubai Debt Worries IBM vs. SAS: The Battle over Data Analysis Software Picks of the Week: Microsoft, H-P, Goldman, TiVo Stock Picks: Microsoft, TiVo, J.Crew BusinessWeek Section Front