Put another way, HP has told its shareholders that the government regulations for setting value on incentive compensation are useless, so the company has provided its own. Unfortunately, the firm’s analysis is more complex than that of the SEC.

None of the SEC reporting standards gives shareholders enough information to divine what a CEO makes over time, especially from stock options and retirement programs. T
he rules attempt to get the best “guess” from public companies based on arcane calculations. The results of those calculations are only good insofar as the stock market’s predicted stability is. A CEO could get a 10 million share option grant at a $5 price point. If the company’s stock goes to $1 and stays there for the duration of the grant, the options are probably worthless.

The SEC would do public company investors a favor if it set up rules that forced companies to show the range of what a CEO would make over time if the stock rose during his tenure. This is less arbitrary than setting a fixed value on the shares at the time of the grant, even if the complex calculation is accepted by both the accounting profession and the SEC. An investor, even a sophisticated institution, would rather know what a CEO makes if his company’s shares rise 50% than what an actuary has concluded using an abacus.

Douglas A. McIntyre

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