revelation that struck Analog Devices' holders is known in executive payland as a holy-cow moment
Executive perk: Deferred compensation
GRETCHEN MORGENSON The New York Times
SUNDAY, FEBRUARY 19, 2006
NEW YORK Everybody knows that executive compensation at many companies has been obscene. What everybody does not know is how obscene obscene is now.
Some shareholders have a better idea than most, of course. Consider the owners of Analog Devices, a semiconductor maker in Norwood, Massachusetts. Those who bothered to read the company's proxy, filed on Feb. 2, saw in glorious black and white that Jerald Fishman, the chief executive, had backed up his truck to corporate headquarters late last year and loaded up the $144.7 million that he was owed in deferred compensation.
In keeping with a practice that is widespread in corporate America - and that the Securities and Exchange Commission hopes to change soon - the company had not disclosed the amount of Fishman's deferred-compensation balance as it grew each year.
The revelation that struck Analog Devices' holders is known in executive payland as a holy-cow moment - that electrifying instant when shareholders learn how much of their money is being siphoned off by their company's leaders. The SEC wants shareholders to have precise details about how much deferred compensation is growing in the dark , and it has proposed rules that would force companies to shine light on the balances being accrued by executives.
Give Analog Devices a gold star for disclosing the deferred compensation earned by its executives and directors before regulators required it. Maria Tagliaferro, a company spokeswoman, said Analog Devices wanted to be completely transparent to its shareholders.
But Analog Devices is also in the midst of settling a matter that was initiated in late 2004 by the SEC related to its compensation practices - specifically, to the timing of the company's stock option grants to its employees, officers and directors. It seems that in November 1999 and in November 2000 the company may have made grants just before its release of favorable financial reports; it may also have granted options on the wrong dates in 1998, 1999 and 2001.
Analog Devices said in its proxy that it hoped to resolve the matter by paying a $3 million penalty. Under the proposed deal, Fishman would pay $1million and make an unspecified disgorgement payment. The company and its executives would settle without admitting or denying wrongdoing.
Stock options also played a role in the $144.7 million that Fishman took out of the company last year, a money mountain that is remarkable both for its size and what it included.
According to Analog Devices' proxy statement, the $144.7 million included gains on stock options he had exercised between 1997 and 2003. That is unusual; salary and bonus are types of compensation that companies typically allow their executives to defer.
Analog Devices' deferred-compensation program is notable for another reason: the above-market interest that Fishman and other Analog executives earned on the pay they chose to defer.
The proxy stated that the interest rate paid to Analog Devices' executives in fiscal 2005 was 6.48 percent - well above the average long-term rate of 4.64 percent that U.S. Treasury bonds paid last year. This sweet rate helped Fishman earn $8.7 million last year in interest on his deferred pay balance. Interest generated by four other top Analog Devices executives totaled an additional $5.6 million.
Tagliaferro said the interest rate paid by the company is based on the cost that Analog Devices pays to borrow money. The rate is reviewed by the company's compensation committee and approved by its entire board.
Itzhak Sharav, an adjunct professor of accounting at Columbia Business School, said the above-market interest rate paid by Analog Devices was problematic. "To the extent they pay them above-market interest, somebody has to pay for it, somebody suffers," he said. "And that is the stockholders."
Tagliaferro defended Fishman's deferred compensation, saying that it reflected the climb in Analog Devices' stock price since 1995.
"Analog Devices is not at all an example of corporate greed," she said.
Analog Devices certainly has produced gains for those lucky enough to have held the stock since the beginning of 1995. From then until the end of last year, the shares have risen at an average annual rate of 18.1 percent. The Philadelphia semiconductor index has risen just 12.1 percent, annualized, during that period.
In the last five years, however, the situation has been different.
Analog Devices has lost 6.55 percent, annualized, versus a decline of 3.38 percent for the index.
In calculating Fishman's total pay, Analog Devices' compensation committee said it took into account his "strong leadership in guiding ADI through the downturn in the semiconductor industry, his position as a leading executive in the semiconductor industry and ADI's performance over the past fiscal year relative to its peer companies." As for linking pay to performance, the committee said Fishman's bonus was calculated based on the company's operating profit before tax as a percentage of its revenue.
But the company also excluded restructuring charges from the figure used to calculate the bonus. Too bad shareholders' returns can't be similarly adjusted to exclude the restructuring charges their companies take.
Fishman, bless his soul, did decide to turn back the options that his board had planned to give him in 2006. Perhaps he concluded that his $144.7 million in deferred compensation, his $931,000 salary, his bonus of $414,000, his 400,000 options at a strike price of $37.70 each, and the $2.85 million he received from the exercise of 95,000 options in fiscal 2005 were enough to feed and clothe his family.
As shareholders are learning, executive pay today is like the iceberg that sank the Titanic: scary on the surface, but scarier below it.
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