Gretchen Morgenson and the obfuscation game

Gretchen Morgenson continues to obsess over executive pay. Today’s subject is a Business Roundtable report that responds to executive pay critics by showing that executive pay in Roundtable companies has not outstripped shareholder return over the last 11 years.

Morgenson picks apart these numbers, noting that they don’t reflect dividends paid to executives on their restricted stockholdings, though they’re compared to shareholder return numbers that do include dividends; include only the value of options and stock as of the grant dates and not additional amounts from cashing in stock options and restricted stock; don’t include pension benefits and other deferred compensation; and include targeted rather than actual values of other performance-based cash or stock awards.

As usual, Morgenson practices her own game, artfully combining plausible criticisms with distortions and omissions, preferring questionable muckraking to solid reporting.

The plausible criticisms concern the omission of dividends from the pay but not the benchmark shareholder returns and the use of targeted rather than actual values. Although the BRT might be able to offer reasonable justifications for these glitches, I don’t think they belonged in a report that was trying to set the record straight.

The issues are less clear regarding amounts from cashing in options and stock. Here, the executives are, in effect, selling back to the company investments that were part of their compensation, and whose value was recorded as of the grant date. If the executives had simply received that grant date value in cash and then invested the cash in the stock market, should resulting gains on those investments be included in compensation they received from the company? Moreover, there is the problem, discussed further below, of allocating the payouts to particular periods. 

Finally, the deferred compensation is very difficult to account for precisely because it is deferred.

The basic problem here is that the BRT is responding to critics – notably including Morgenson – who are guilty of their own distortions. Morgenson notes that the BRT “study was started three or four months ago. That was right around the time that Mr. McKinnell [ceo of Pfizer and head of the BRT] became the target of shareholder outrage over the munificent pay he has received as Pfizer's performance declined.”

[To be more accurate, that was right around the time that McKinnell’s pay became the target of Morgenson’s outrage, as I’ve written in previous comments on Morgenson. The shareholder outrage was well contained, as I described here:

Despite Morgenson's repeatedly harping on this issue to her millions of readers in a succession of increasingly alarmist columns, and despite the highly public efforts of shareholder activist Frederick Rowe quoted at length in Morgenson's columns, only about 20% of the votes were withheld, far short of the majority necessary to justify even a recommendation to remove the targeted directors. Dale Oesterle describes this as "a big, disastrous, embarrassing loss." Morgenson, apparently a glass-half-full sort of person, says "shareholders interested in holding their directors accountable should be pleased with the Pfizer results."]

Anyway, as the author of the BRT study says, the excluded realized gains “most often represent years of grants," adding that "[w]e felt the critics of executive comp were falling into the trap of using the big gain numbers, which could represent grants earned over multiple years." Indeed, as I have said about a previous Morgenson column:

The column begins by discussing yet another overpaid (in Morgenson's view) executive. In this case it is Henry McKinnell, Pfizer CEO, who reportedly received $65 million in total compensation over a five-year period in which the stock lost 43% of its value, and stood to receive a $83 million pension benefit when he retires in 2008 because the benefit reflects long-term increase in Pfizer's value. (Already we see the practice documented by Core, Guay & Larcker of sensationalizing pay by emphasizing one-time equity and option payoffs rather than annual increments.)

Morgenson then adds another distortion when she says “that the roundtable doesn't consider options and restricted shares to be real money is reminiscent of Silicon Valley executives arguing that options shouldn't be accounted for as an employee cost because their precise value was hard to calculate.” This is truly disingenuous. The BRT report is not denying that options and restricted shares are “real money” – it is, in fact, accounting for the value of those options and restricted shares as received. Moreover, Morgenson's account of the options expensing debate is grossly oversimplified, discussed, e.g., here.

The bottom line is that while I wish the BRT report had been more straightforward, Morgenson herself has done little but enshroud these issues in smoke and mirrors. Moreover, she seems to think this is all great. Morgenson concludes today:

the roundtable's analysis does exactly what it has accused pay critics of doing: picking and choosing numbers to bolster their views. That's fine. Even expected. But will it be the last word?

So she does not deny the distortions of the critics (i.e., her), and suggests that distortions in response are “fine” and “expected.” With more smoke to come. Is this some sort of a game, or journalism? Or is there any difference, Gretchen?

Comments

[DaleW]

Gretchen should consider some financial education. Valuing options or restricted stock as of the grant dates is the correct way to account for equity-based compensation.