Relatando opções de ações de incentivo em w-2

Otimismo do CEO e compensação de incentivo ☆
Eu estudo o efeito do otimismo do diretor executivo (CEO) na remuneração do CEO. Usando dados sobre remuneração em empresas dos EUA, forneço evidências de que CEOs cuja opção exerce comportamento e previsões de lucros são indicativos de crenças otimistas recebem menores concessões de opções de ações, menos pagamentos de bônus e menos remuneração total do que seus pares. Essas descobertas aumentam nossa compreensão da interação entre vieses gerenciais e remuneração e mostram como os princípios sofisticados podem tirar proveito dos agentes otimistas, ajustando apropriadamente seus contratos de remuneração.
Classificação JEL.
Escolha uma opção para localizar / acessar este artigo:
Verifique se você tem acesso através de suas credenciais de login ou de sua instituição.
Verifique este artigo em outro lugar.
Agradeço a Ramin Baghai, Malcolm Baker, Nittai Bergman, João Cocco, Ian Cooper, Francesca Cornelli, Lauren Cohen, David De Angelis, James Dow, Thierry Foucault, Julian Franks, Carola Frydman, Marc Gabarro, João Gomes, Francisco Gomes, Denis Gromb , Christopher Hennessy, Oğuzhan Karakaş, Samuli Knüpfer, Ramon Lecuona, Yun Lou, Gustavo Manso, Anna Pavlova, Ravi Avri, Farzad Saidi, Sergey Sanzhar, Henri Servaes, Tate Geoffrey, Irem Tuna, Philip Valta, Vikant Vig, Paolo Volpin, e participantes do seminário na London Business School, Universidade de Lausanne, HEC Paris, Universidade de Lugano, Universidade de Wisconsin, Universidade Rice, Washington University em St. Louis, Universidade de Western Ontario, UC Berkeley, Universidade de Mannheim, MIT Finance Lunch, 10th Transatlantic Conferência de Doutorado em Londres, Whitebox Advisors - Conferência de Alunos de Pós-Graduação 2011 em Yale, EFA Tutorial de Doutorado 2011, WFA 2012, e workshops de PhD na LSE e INSEAD para comentários e sugestões úteis. Todos os erros remanescentes são de minha autoria.

Notícia do mercado de ações de hoje & amp; Análise.
Roku mostra a volatilidade é seu amigo em ações individuais, também.
A Roku tem uma visão para o futuro.
Vídeos de notícias mais recentes.
Últimas notícias.
Procurar notícias por categoria.
Tecnologia.
Commodities.
Idéias de investimento.
Inteligência de mercado.
Fique à frente dos mercados com estes artigos de leitura obrigatória.
Mercado de ações hoje.
Ações para assistir.
Rally dos estoques conforme os investidores reavaliam o relatório do Fed.
História em destaque de.
Últimos artigos por Martin Tillier.
A nova coluna de leitura obrigatória de Martin Tiller nos mercados.
Esclarecedor. Divertido. Todo dia. Apenas na NASDAQ.
Editar favoritos.
Insira até 25 símbolos separados por vírgulas ou espaços na caixa de texto abaixo. Esses símbolos estarão disponíveis durante sua sessão para uso nas páginas aplicáveis.
Personalize sua experiência NASDAQ.
Selecione a cor de fundo de sua escolha:
Selecione uma página de destino padrão para sua pesquisa de cotação:
Por favor, confirme sua seleção:
Você selecionou para alterar sua configuração padrão para a Pesquisa de cotação. Esta será agora sua página de destino padrão; a menos que você altere sua configuração novamente ou exclua seus cookies. Tem certeza de que deseja alterar suas configurações?
Desative seu bloqueador de anúncios (ou atualize suas configurações para garantir que o JavaScript e os cookies estejam ativados), para que possamos continuar a fornecer a você as notícias e os dados de mercado de primeira linha que você espera de nós.

Os principais executivos fazem 300 vezes mais do que os trabalhadores típicos: o crescimento pago supera os ganhos de estoque e o crescimento salarial dos 0,1% mais altos.
Issue Brief # 399.
Os diretores executivos das maiores firmas americanas ganham três vezes mais do que há 20 anos e, pelo menos, dez vezes mais do que há 30 anos, grandes ganhos, mesmo em relação a outros assalariados de salários muito altos. Esses aumentos salariais extraordinários tiveram efeitos indiretos na redução do pagamento de outros executivos e gerentes, que constituem um grupo maior de trabalhadores do que é comumente reconhecido.1 Consequentemente, o crescimento da remuneração dos CEOs e executivos em geral foi um fator importante que levou à duplicação as parcelas de renda do 1% mais alto e 0,1% das famílias americanas de 1979 a 2007 (Bivens e Mishel 2013; Bakija, Cole e Heim 2012). Desde então, o crescimento da renda permaneceu desequilibrado: como os lucros atingiram altas recordes e o mercado de ações explodiu, os salários da maioria dos trabalhadores, estagnados nos últimos 12 anos, inclusive durante a recuperação anterior, declinaram durante esse período (Bivens et al. 2014, Gould 2015).
Ao examinar as tendências na remuneração dos CEOs para determinar quão bem os primeiros 1 e os 0,1 por cento estão se saindo em 2014, este artigo descobre:
A remuneração média do CEO para as maiores empresas foi de US $ 16,3 milhões em 2014. Essa estimativa usa uma medida abrangente do pagamento de CEOs que cobre os principais executivos das 350 principais empresas dos EUA e inclui o valor das opções de ações exercidas em um determinado ano. A compensação subiu 3,9% desde 2013 e 54,3% desde que a recuperação começou em 2009. De 1978 a 2014, a remuneração do CEO ajustada pela inflação aumentou 997%, um aumento quase duplo do crescimento do mercado de ações e substancialmente maior do que o dolorosamente lento crescimento de 10,9% remuneração anual do trabalhador típico no mesmo período. O índice de remuneração de CEO para trabalhador, de 20 para 1 em 1965, chegou a 376 para 1 em 2000 e foi de 303 para 1 em 2014, bem mais alto do que nas décadas de 1960, 1970, 1980 ou 1990.
Ao examinar a remuneração do CEO em relação à de outras pessoas com alta renda, encontramos:
Nas últimas três décadas, a remuneração dos CEOs cresceu muito mais rapidamente do que a de outros trabalhadores altamente remunerados, ou seja, aqueles que ganham mais de 99,9% dos assalariados. A remuneração dos CEOs em 2013 (o último ano em dados sobre os principais assalariados) foi 5,84 vezes maior do que os salários dos 0,1% dos assalariados, uma relação 2,66 pontos maior do que a 3,18 que prevaleceu no período de 1947-1979. Este ganho salarial por si só equivale ao salário de 2,66 assalariados de muito alto salário. Também ao longo das últimas três décadas, a remuneração dos CEOs aumentou mais em relação ao pagamento de outros assalariados muito elevados do que os salários de graduados em faculdades subiram em relação aos salários dos formandos do ensino médio. O pagamento do CEO cresceu muito mais rápido do que o pagamento de 0,1% dos assalariados indica que o crescimento da remuneração do CEO não reflete simplesmente o aumento do valor de profissionais altamente remunerados em uma corrida competitiva por habilidades (o "mercado de talentos"), mas reflete a presença de “rendas” substanciais embutidas na remuneração dos executivos (ou seja, o pagamento do CEO não reflete uma maior produtividade dos executivos, mas sim o poder dos CEOs de extrair concessões). Consequentemente, se os CEOs ganhassem menos ou fossem mais tributados, não haveria impacto adverso na produção ou no emprego. Os críticos de examinar essas tendências sugerem olhar para o pagamento do CEO médio, e não para os CEOs das maiores empresas. No entanto, a empresa média é muito pequena, empregando apenas 20 trabalhadores e não representa uma comparação útil com o pagamento de um trabalhador típico que trabalha em uma empresa com cerca de 1.000 trabalhadores. Metade (52%) do emprego e 58% da folha de pagamento total estão em empresas com mais de 500 ou mais empregados. Empresas com pelo menos 10.000 trabalhadores fornecem 27,9% de todo o emprego e 31,4% de toda a folha de pagamento.
Tendências de remuneração do CEO.
A Tabela 1 apresenta as tendências na remuneração dos CEOs de 1965 a 2014.2 Os dados medem a remuneração dos CEOs nas maiores empresas e incorporam opções de ações de acordo com o quanto o CEO realizou naquele ano específico, exercendo opções de ações disponíveis. A medida realizada pelas opções reflete o que os CEOs informam como seus salários do formulário W-2 para fins de relatórios fiscais e é o que eles realmente ganharam em um determinado ano. Essa é a medida mais usada pelos economistas.3 Além das opções de ações, a medida de compensação inclui salário, bônus, subvenções restritas e incentivos de longo prazo. Detalhes metodológicos completos para a construção desta medida de compensação do CEO e benchmarking para outros estudos podem ser encontrados em Mishel e Sabadish (2013).
Remuneração do CEO, índice de remuneração de CEO a funcionário e preços das ações, 1965-2014 (dólares de 2014)
* A remuneração anual do CEO é calculada usando a série de remuneração de "opções realizadas", que inclui salário, bônus, concessões de ações restritas, opções exercidas e pagamentos de incentivo de longo prazo para CEOs nas 350 principais empresas dos EUA classificadas por vendas.
** Remuneração anual dos trabalhadores da indústria chave das empresas da amostra.
*** Com base na média dos índices firmes específicos e não na proporção de médias de remuneração do CEO e do trabalhador.
Fonte: Análise dos autores dos dados do banco de dados ExecuComp da Compustat, do Federal Reserve Economic Data (FRED) do Federal Reserve Bank de St. Louis, do programa Current Employment Statistics e das tabelas do Bureau of Economic Analysis da NIPA.
Copie o código abaixo para incorporar este gráfico no seu site.
A remuneração dos CEOs relatada na Tabela 1, assim como durante todo o restante do relatório, é a remuneração média dos CEOs nas 350 empresas de capital aberto dos EUA (ou seja, empresas que vendem ações no mercado aberto) com a maior receita a cada ano. Nossa amostra a cada ano será inferior a 350 empresas, na medida em que essas grandes empresas não tiveram o mesmo CEO durante a maior parte do ano ou em todo o ano, ou os dados de compensação ainda não estão disponíveis. Para fins de comparação, a Tabela 1 também apresenta a remuneração anual (salários e benefícios de um trabalhador de período integral) de um trabalhador privado de produção / não-supervisionado (um grupo cobrindo mais de 80% do emprego de folha de pagamento), permitindo-nos compare a remuneração do CEO com a de um trabalhador “típico”. A partir de 1995, o quadro identifica a remuneração média anual dos trabalhadores de produção / não-supervisores nas principais indústrias das empresas incluídas na amostra. Tomamos essa compensação como uma proxy para o pagamento de trabalhadores típicos nessas empresas específicas.
A história moderna da remuneração dos CEOs (começando nos anos 60) é a seguinte. Embora o mercado acionário, medido pelo índice Dow Jones Industrial Average e S & P 500, e mostrado na Tabela 1, tenha caído cerca de metade entre 1965 e 1978, o pagamento dos CEOs aumentou 78,7%. A remuneração média dos trabalhadores teve um crescimento relativamente forte durante esse período (em relação aos períodos subseqüentes, não em relação ao pagamento de CEOs ou pagamento de outros no topo da distribuição de salários). A remuneração anual dos trabalhadores cresceu 19,5% de 1965 a 1978, apenas cerca de um quarto do crescimento das remunerações dos CEOs nesse período.
A remuneração dos CEOs cresceu fortemente durante os anos 80, mas explodiu nos anos 90 e atingiu o pico em 2000 em torno de US $ 20 milhões, um aumento de mais de 200 por cento apenas em 1995 e 1.271 por cento de 1978. Este último aumento chegou a superar o crescimento do mercado de ações 513 por cento para o S & amp; P 500 e 439 por cento para o Dow. Em forte contraste tanto com o mercado acionário quanto com a remuneração dos CEOs, a remuneração dos trabalhadores do setor privado aumentou apenas 1,4% no mesmo período.
A queda no mercado acionário no início dos anos 2000 levou a uma redução substancial da remuneração dos CEOs, mas em 2007 (quando o mercado de ações se recuperou principalmente), a remuneração do CEO retornou perto do nível de 2000. A Figura A mostra como o pagamento do CEO flutua em conjunto com o mercado de ações, medido pelo índice S & P 500, confirmando que os CEOs tendem a lucrar com suas opções quando os preços das ações estão altos. A crise financeira em 2008 e a consequente queda do mercado de ações derrubaram a remuneração dos CEOs em 44% até 2009. Em 2014, o mercado de ações recuperou todo o terreno perdido na crise e, sem surpresa, a remuneração dos CEOs também se recuperou. Em 2014, a remuneração média do CEO foi de US $ 16,3 milhões, um aumento de 3,9% desde 2013 e 54,3% desde 2009. A remuneração do CEO em 2014 permaneceu abaixo do pico de 2000 e 2007, mas muito acima dos níveis de remuneração de meados dos anos 90 e muito acima Compensação do CEO nas décadas anteriores.
Compensação do CEO e o S & # 038; P 500 Index (em dólares de 2014), 1965–2014.
Os dados abaixo podem ser salvos ou copiados diretamente no Excel.
Os dados subjacentes à figura.
Nota: A remuneração anual do CEO é calculada usando a série de remuneração de "opções realizadas", que inclui salário, bônus, concessões de ações restritas, opções exercidas e pagamentos de incentivo de longo prazo para CEOs nas 350 principais empresas dos EUA classificadas por vendas.
Fonte: Análise dos autores dos dados do banco de dados ExecuComp da Compustat e do Federal Reserve Economic Data (FRED) do Federal Reserve Bank de St. Louis.
Copie o código abaixo para incorporar este gráfico no seu site.
O alinhamento da remuneração dos CEOs aos altos e baixos do mercado de ações lança dúvidas sobre qualquer explicação do alto e crescente pagamento dos CEOs que depende da produtividade individual dos executivos, seja porque eles lideram empresas maiores, adotaram novas tecnologias ou por outras razões. . A remuneração dos CEOs geralmente aumenta muito quando o mercado de ações em geral aumenta e os valores das ações de cada empresa aumentam junto com ela (Figura A). Este é um fenômeno de mercado e não de melhor desempenho de empresas individuais: a maioria dos pacotes de remuneração dos CEOs permite que o pagamento aumente sempre que o valor das ações da empresa aumenta e permite que os CEOs retirem opções de ações independentemente de o aumento do valor das ações da empresa ser ou não excepcional em relação a empresas comparáveis. Durante todo o período de 1978 a 2014, a remuneração dos CEOs aumentou cerca de 997%, um aumento quase duplo do crescimento do mercado acionário e substancialmente maior do que o dolorosamente lento crescimento de 10,9% na remuneração de um trabalhador típico no mesmo período.
É interessante notar que o crescimento do pagamento dos CEOs em 2014 não foi impulsionado por grandes aumentos no pagamento de apenas alguns executivos ou apenas daqueles com os salários mais altos. A Figura B mostra o crescimento da remuneração do CEO quando a remuneração é classificada e calculada pela remuneração do CEO em quinto. A remuneração dos CEOs subiu em todos os níveis e, de fato, cresceu mais no segundo e segundo quinto - 11,1 e 7,9%, respectivamente - entre 2013 e 2014.
Crescimento real da remuneração do CEO, pelo CEO pagam o quinto, 2013–2014.
Os dados abaixo podem ser salvos ou copiados diretamente no Excel.
Os dados subjacentes à figura.
Nota: A remuneração anual do CEO é calculada usando a série de remuneração de "opções realizadas", que inclui salário, bônus, concessões de ações restritas, opções exercidas e pagamentos de incentivo de longo prazo para CEOs nas 350 principais empresas dos EUA classificadas por vendas.
Fonte: Análise dos autores dos dados do banco de dados ExecuComp da Compustat.
Copie o código abaixo para incorporar este gráfico no seu site.
O aumento no pagamento dos CEOs nos últimos anos reflete a melhoria das condições do mercado, impulsionada pelos desenvolvimentos macroeconômicos e pelo aumento geral da lucratividade. Para a maioria das empresas, os lucros das empresas continuam a melhorar e os preços das ações das empresas movem-se de acordo. Parece evidente que os CEOs individuais não são responsáveis ​​por essa ampla melhora nos lucros nos últimos anos, mas eles claramente estão se beneficiando disso.
Essa análise deixa claro que a economia está se recuperando para alguns americanos, mas não para a maioria. O mercado de ações e os lucros corporativos se recuperaram após a Grande Recessão, mas o mercado de trabalho continua lento. Aqueles no topo da distribuição de renda, incluindo muitos CEOs, estão vendo uma forte recuperação - compensação de 54,3% - enquanto o trabalhador típico ainda está experimentando os efeitos prejudiciais de um mercado de trabalho estagnado: compensação para trabalhadores do setor privado nas principais indústrias dos CEOs de nossa amostra caiu 1,7% desde 2009.
Tendências no índice de remuneração de CEO para trabalhador.
A Tabela 1 também apresenta a tendência na proporção de remuneração de CEO para trabalhador para ilustrar a crescente divergência entre o pagamento do CEO e do trabalhador ao longo do tempo. Este rácio global é calculado em dois passos. O primeiro passo é construir, para cada uma das 350 maiores empresas, a proporção entre a remuneração do CEO e a remuneração anual dos trabalhadores do setor chave da empresa (os dados sobre o pagamento dos trabalhadores em qualquer empresa em particular são não disponível). O segundo passo é calcular essa relação entre todas as empresas. A última coluna na Tabela 1 é a razão resultante em anos selecionados. As tendências anteriores a 1995 baseiam-se nas mudanças na remuneração média do CEO e da produção do setor privado / não-supervisor dos setores econômicos em geral. A tendência ano a ano é apresentada na Figura C.
Índice de remuneração de CEO para trabalhador, 1965 a 2014.
Os dados abaixo podem ser salvos ou copiados diretamente no Excel.
Os dados subjacentes à figura.
Nota: A remuneração anual do CEO é calculada usando a série de remuneração de "opções realizadas", que inclui salário, bônus, concessões de ações restritas, opções exercidas e pagamentos de incentivo de longo prazo para CEOs nas 350 principais empresas dos EUA classificadas por vendas.
Fonte: Análise dos autores dos dados do banco de dados ExecuComp da Compustat, do programa Current Employment Statistics e das tabelas do Bureau of Economic Analysis NIPA.
Copie o código abaixo para incorporar este gráfico no seu site.
Os CEOs americanos de grandes empresas ganharam 20 vezes mais do que um trabalhador típico em 1965; esta proporção cresceu para 29,9 para 1 em 1978 e 58,7 para 1 em 1989, e então subiu na década de 1990 para atingir 376,1 para 1 no final da década de 90, em 2000. A queda no mercado de ações depois de 2000, reduziu o pagamento das ações do CEO (por exemplo, opções) e causou uma queda na remuneração dos CEOs até 2002 e 2003. A remuneração do CEO se recuperou em 345,3 vezes o salário dos trabalhadores até 2007, quase em 2000. A crise financeira em 2008 e o consequente declínio do mercado de ações reduziram a remuneração dos CEOs após 2007-2008, como discutido acima, e a proporção de remuneração de CEO para trabalhador caiu em paralelo. Em 2014, o mercado de ações havia recuperado todo o valor que perdeu após a crise financeira. Da mesma forma, a remuneração dos CEOs cresceu desde 2009, e o índice de remuneração de CEO para Trabalhador em 2014 havia se recuperado para 303,4 para 1, um aumento de 107,6 desde 2009. Embora o índice de remuneração de CEO a funcionário permaneça abaixo do valores de pico alcançados no início dos anos 2000, é muito maior do que o que prevaleceu nas décadas de 1960, 1970, 1980 e 1990.
O aumento do pagamento do CEO simplesmente reflete o mercado de habilidades?
A remuneração dos CEOs cresceu muito, mas também o pagamento de outros assalariados de alto salário. Para alguns analistas, isso sugere que o aumento dramático na remuneração dos CEOs foi impulsionado em grande parte pela demanda pelas habilidades de CEOs e outros profissionais altamente remunerados. Nessa interpretação, a compensação dos CEOs está sendo definida pelo mercado para “habilidades”, e a remuneração crescente dos CEOs não se deve ao poder gerencial e ao comportamento de procura de renda (Bebchuk e Fried, 2004). Um exemplo proeminente do argumento “outras profissões também” vem de Kaplan (2012a, 2012b). Por exemplo, na prestigiosa conferência Martin Feldstein Lecture 2012, Kaplan (2012a, 4) afirmou:
Nos últimos 20 anos, o pagamento do CEO da empresa pública em relação aos 0,1% mais altos permaneceu relativamente constante ou diminuiu. Esses padrões são consistentes com um mercado competitivo de talentos. Eles são menos consistentes com o poder gerencial. Outros grandes grupos de renda, não sujeitos a forças gerenciais de poder, viram um crescimento similar no pagamento.
E em um documento de acompanhamento para o Instituto CATO, publicado como um documento de trabalho do Escritório Nacional de Pesquisa Econômica, Kaplan (2012b, 21) expandiu ainda mais este ponto:
O objetivo dessas comparações é confirmar que, embora os CEOs de empresas públicas ganhem muito, eles não são únicos. Outros grupos com origens semelhantes - executivos de empresas privadas, advogados corporativos, investidores em fundos de hedge, investidores em private equity e outros - viram aumentos salariais significativos onde há um mercado competitivo para o talento e os problemas de poder gerencial estão ausentes. Novamente, se alguém usa evidências de pagamento de CEO mais alto como evidência de poder gerencial ou captura, deve-se também explicar por que esses grupos profissionais tiveram um crescimento similar ou mesmo maior em remuneração. Parece mais provável que uma parcela significativa do aumento no pagamento dos CEOs tenha sido impulsionada também pelas forças do mercado.
Bivens e Mishel (2013) abordam a questão maior do papel da remuneração do CEO ao gerar ganhos de renda no topo e concluem que há aluguéis substanciais embutidos na remuneração dos executivos, o que significa que os ganhos do CEO não são simplesmente o resultado de um mercado competitivo. para o talento. Utilizamos e atualizamos essa análise para mostrar que a remuneração do CEO cresceu muito mais rapidamente do que a remuneração de outros funcionários altamente remunerados nas últimas décadas, o que sugere que o mercado de habilidades não foi responsável pelo rápido crescimento da remuneração dos CEOs. Para alcançar este resultado, empregamos a própria série da Kaplan sobre remuneração de CEOs e a comparamos com a renda dos principais lares, como ele faz, mas também a comparamos com um padrão melhor, os salários dos principais assalariados, em vez da renda familiar do topo. 0,1 por cento.4 Atualizamos a série da Kaplan para além de 2010, usando o crescimento da remuneração do CEO em nossa própria série. Esta análise conclui, ao contrário de Kaplan, que a remuneração dos CEOs superou em muito a dos trabalhadores altamente remunerados, os 0,1 por cento dos assalariados.
A Tabela 2 apresenta a relação entre a remuneração média dos diretores executivos de grandes empresas, a série desenvolvida pela Kaplan, para dois benchmarks. O primeiro benchmark é o que a Kaplan emprega: a renda familiar média dos que estão no topo 0,1%, dados desenvolvidos por Piketty e Saez (2015). O segundo é o salário médio anual dos 0,1% dos assalariados com base em uma série desenvolvida por Kopczuk, Saez e Song (2010) e atualizada em Mishel et al. (2012) e Mishel e Kimball (2014). Cada proporção é apresentada como uma razão simples e registrada (para converter em um “prêmio”, o diferencial de pagamento relativo entre um grupo e outro). O referencial de salário parece ser o mais adequado, uma vez que evita questões de demografia doméstica - mudanças em casais com dois assalariados, por exemplo - e limita a renda à renda do trabalho (ou seja, excluindo a renda do capital). Tanto os rácios quanto os índices de log subestimam claramente o salário relativo dos CEOs, uma vez que a remuneração dos executivos é uma parte não trivial do denominador, um viés que provavelmente cresceu com o tempo simplesmente porque o salário relativo do CEO cresceu.5 Para fins de comparação, a Tabela 2 também mostra as mudanças no prêmio salarial bruta (não ajustado à regressão) da faculdade para a escola secundária. Isso também é útil porque alguns comentaristas, como Mankiw (2013), simplesmente afirmaram que o aumento de 1% no salário e na renda reflete o aumento geral dos retornos das habilidades, como um prêmio salarial mais alto do ensino médio. As comparações terminam em 2013 porque os dados de 2014 dos principais salários de 0,1% ainda não estão disponíveis.
Crescimento da remuneração relativa do CEO e dos salários das faculdades, 1979–2013.
Fonte: Análise dos autores de Kaplan (2012b) e Mishel et al. (2012, Tabela 4.8)
Copie o código abaixo para incorporar este gráfico no seu site.
A remuneração dos CEOs cresceu de 1,14 vezes a renda dos 0,1% dos domicílios em 1989 para 2,54 vezes em 2013. O salário dos CEOs em relação ao pagamento dos 0,1% dos assalariados cresceu ainda mais, de uma razão de 2,63 em 1989 para 5,84. em 2013, um aumento (3,21) igual à remuneração de mais de três assalariados muito altos. A razão log do salário relativo do CEO cresceu 80 pontos log de 1989 a 2013, utilizando os rendimentos domiciliares de 0,1 por cento ou os salários como comparação.
Isso é um grande aumento? Kaplan (2012a, 4) concluiu que o salário relativo do CEO “permaneceu relativamente constante ou diminuiu”. Kaplan (2012b, 14) considera que a proporção “permanece acima da sua média histórica e do nível em meados da década de 1980”. no contexto histórico, apresentando os rácios apresentados na Tabela 2 de volta a 1947. O rácio de remuneração dos CEOs ao topo (0,1 por cento) dos rendimentos familiares em 2013 (2,54) foi mais do que o dobro da média histórica (1947-1979) de 1,11. O índice de remuneração dos CEOs em relação aos principais salários em 2013 foi de 5,84, 2,66 pontos a mais do que a média histórica de 3,18 (um ganho relativo dos salários auferidos por 2,66 trabalhadores de alto salário). Como mostram os dados da Tabela 2, o aumento do prêmio de pagamento de CEOs registrados desde 1979, e particularmente desde 1989, excedeu em muito o aumento do prêmio salarial de faculdade para o segundo grau que é amplamente e apropriadamente considerado como um crescimento substancial. A alegação de Mankiw de que o pagamento de 1% ou a remuneração dos altos executivos simplesmente corresponde ao aumento do prêmio salarial do ensino médio é infundado (Mishel 2013a, 2013b). Além disso, os dados mostrariam um crescimento ainda mais rápido do salário relativo do CEO se Kaplan tivesse construído sua série histórica usando as séries de Frydman e Saks (2010) para o período 1980-1994, em vez dos dados de Hall e Leibman (1997).
Comparação da remuneração do CEO aos maiores salários e rendimentos, 1947-2013.
Os dados abaixo podem ser salvos ou copiados diretamente no Excel.
Os dados subjacentes à figura.
Fonte: Análise dos autores de Kaplan (2012b) e Mishel et al. (2012, Tabela 4.8)
Copie o código abaixo para incorporar este gráfico no seu site.
Presumivelmente, o salário relativo do CEO cresceu mais desde 2013. Os dados da Tabela 1 mostram que a remuneração do CEO subiu 3,9% entre 2013 e 2014. (Infelizmente, os dados sobre os ganhos dos principais assalariados para 2014 ainda não estão disponíveis para uma comparação com o CEO Se o pagamento do CEO crescer muito mais rápido do que o de outras pessoas com alta renda é um teste da presença de aluguéis, como Kaplan sugeriu, então concluiríamos que os executivos de hoje recebem aluguéis substanciais, o que significa que, se recebessem menos, não haverá perda de produtividade ou saída. A grande discrepância entre o pagamento de CEOs e outros assalariados também lança dúvidas sobre a alegação de que os CEOs estão recebendo esses valores extraordinários por causa de suas habilidades especiais e do mercado para essas habilidades. É provável que as habilidades dos CEOs em firmas muito grandes sejam tão desequilibradas e desconectadas das habilidades dos outros que elas impulsionam os CEOs a ultrapassarem a maior parte de suas coortes no nível máximo de 10%? Para todos os outros, a distribuição de habilidades, como refletido na distribuição geral de salários, tende a ser muito mais contínua.
E quanto ao CEO médio?
Uma crítica relativamente nova ao examinar o pagamento de CEOs nas maiores empresas, como nós, é que tais esforços são enganosos. Por exemplo, o acadêmico do American Enterprise Institute Mark Perry (2015) diz que as amostras de CEOs examinadas pela Associated Press, o Wall Street Journal ou nosso trabalho anterior “não são muito representativos da média da empresa americana ou do CEO médio dos EUA” porque “as amostras de 300 a 350 empresas para remuneração de CEOs representam apenas uma de cada 21.500 firmas privadas nos EUA, ou cerca de 1/200 de 1% do número total de firmas americanas.” Perry observa: “De acordo com o BLS e o Census Bureau, existem mais de 7 milhões de empresas privadas nos EUA ”Perry considera o pagamento do CEO médio, US $ 187.000, como um indicador muito mais importante.
Esta é uma crítica inteligente, mas equivocada. Surpreendentemente, cerca de dezesseis por cento dos CEOs da medida preferida de Perry estão no setor público. Aqueles no setor privado incluem CEOs de organizações religiosas, grupos de defesa e sindicatos. Alguém se pergunta por que Perry não é crítico do Bureau of Labor Statistics & # 8217; medida do pagamento do CEO, uma vez que o BLS relata que existem apenas 207.660 CEOs do setor privado, muito aquém dos 7,4 milhões que haveria se cada empresa privada tivesse um. O déficit de CEOs nos dados do BLS é compreensível, no entanto, uma vez que se reconhece que a empresa média tem apenas 20,2 trabalhadores (Caruso 2015, Tabela 1 do Apêndice). As 5,2 milhões de empresas com menos de 19 funcionários, com uma média de quatro funcionários por empresa, provavelmente não têm um CEO nem provavelmente 2 milhões das 2,4 milhões de empresas com mais de 19 funcionários.
A razão para se concentrar no salário dos CEOs das maiores empresas é que elas empregam um grande número de trabalhadores, são os líderes da comunidade de negócios e estabelecem os padrões de remuneração no mercado de remuneração de executivos e provavelmente o fazem no setor sem fins lucrativos. bem (por exemplo, hospitais, universidades). Nenhuma agência informa quantos trabalhadores trabalham para empresas muito grandes. Sabemos por dados do Censo (Caruso 2015, Anexo Tabela 1) que as 18.219 empresas em 2012 com pelo menos 500 empregados empregavam 51,6% de todos os empregados e suas folhas de pagamento representavam 58,1% da folha de pagamento total (salários vezes o emprego). Os dados do County Business Patterns fornecem uma fuga das 964 empresas (apenas 0,017% de todas as empresas) com pelo menos 10 mil funcionários; essas grandes empresas fornecem 27,9% de todo o emprego e 31,4% de toda a folha de pagamento. Em outras palavras, o CEO da “empresa média dos EUA”, sobre o qual Perry se propõe a se interessar, não corresponde ao CEO da empresa onde a “média” ou mediana trabalha. Isto é ainda confirmado por um novo estudo que relata que a empresa mediana, classificada por emprego, tem cerca de 1.000 trabalhadores, enquanto a empresa média tem cerca de 20 (Song et al. 2015).
Executivos e gerentes abrangem uma grande parcela dos que estão entre os 1% mais ricos e os 1% mais ricos dos assalariados. A análise das declarações fiscais em Bakija et al. (2012) mostra a composição dos executivos nos domicílios de maior renda; Nossa tabulação dos dados da Pesquisa da Comunidade Americana para 2009–2011 mostra que 41,2% (o maior grupo) dos que lideram uma família nos primeiros 1% de renda eram executivos ou gerentes. Assim, sabemos que os gerentes altamente remunerados são o maior grupo entre os 1% e 1,1% mais altos, medidos em termos de salários ou renda familiar, e por isso há muitos bons motivos para se interessar pela remuneração de executivos grandes empresas. Além disso, o pagamento de CEOs nas maiores empresas cresceu mais rápido do que os salários de outros funcionários de alta renda e centenas de vezes mais rápido do que os salários que esses CEOs proporcionam aos seus funcionários.
Conclusão.
Às vezes, argumenta-se que a crescente remuneração do CEO é uma questão simbólica sem consequências para a grande maioria. No entanto, a escalada da remuneração dos CEOs e da remuneração dos executivos em geral alimentou o crescimento dos rendimentos de 1%. Em um estudo de declarações fiscais de 1979 a 2005, Bakija, Cole e Heim (2010), estudando as declarações fiscais de 1979 a 2005, estabeleceram que os aumentos na renda entre os 1 e os 0,1 por cento das famílias eram desproporcionalmente dirigidos pelas famílias por alguém que era um "executivo" do setor não financeiro (incluindo gerentes e supervisores e daqui em diante referidos como executivos não financeiros) ou um executivo do setor financeiro ou outro trabalhador. Quarenta e quatro por cento do crescimento da participação de 0,1% na receita e 36% da participação de 1% na receita aumentaram para as famílias chefiadas por executivos não financeiros; outros 23 por cento para cada grupo acumulado para as famílias do setor financeiro. Juntos, os trabalhadores das finanças e os executivos de não-financiamento responderam por 58% da expansão da renda para os 1% das famílias e 67% do crescimento da renda dos 0,1% mais ricos. Em comparação com os outros 1%, os agregados familiares chefiados por executivos não financeiros tinham um crescimento médio do rendimento, os chefiados por alguém do sector financeiro tinham um crescimento do rendimento acima da média e os restantes agregados (não executivos, não financiados) eram mais lentos que a média. crescimento da renda. Essas ações podem, na verdade, subestimar o papel dos executivos não financiados e do setor financeiro, uma vez que não levam em conta o aumento da renda conjugal dessas fontes.7.
Argumentamos acima que o alto pagamento do CEO reflete aluguéis, concessões que os CEOs podem tirar da economia não em virtude de sua contribuição para a produção econômica, mas em virtude de sua posição. Consequentemente, a remuneração dos CEOs poderia ser reduzida e a economia não sofreria nenhuma perda de produção. Outra implicação do aumento da remuneração dos executivos é que ela reflete a receita que de outra forma teria acumulado para os outros: o que os executivos ganhavam não estava disponível para um crescimento salarial mais amplo para outros trabalhadores. (Bivens e Mishel 2013 exploram essa questão em profundidade).
Existem opções políticas para reduzir a escalada dos salários dos executivos e ampliar o crescimento dos salários. Alguns envolvem impostos. A implementação de alíquotas de imposto de renda marginal mais altas no topo limitaria o comportamento de busca de aluguéis e reduziria os incentivos para que os executivos pressionassem por salários tão altos. Também foi proposta legislação que removeria o incentivo fiscal para o pagamento de desempenho executivo estabelecido no início do governo Clinton; Ao permitir a dedutibilidade do pagamento por desempenho, essa alteração tributária ajudou a impulsionar o crescimento das opções de ações e outras formas dessa compensação. Outra opção é aumentar as alíquotas de impostos corporativos para empresas que têm índices mais altos de remuneração de CEO para trabalhador. Other policies that can potentially limit executive pay growth are changes in corporate governance, such as greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.
– The authors thank the Stephen Silberstein Foundation for their generous support of this research.
Sobre os autores.
Lawrence Mishel is president of the Economic Policy Institute and was formerly its research director and then vice president. He is the co-author of all 12 editions of The State of Working America . Ele é Ph. D. in economics from the University of Wisconsin at Madison, and his articles have appeared in a variety of academic and nonacademic journals. His areas of research are labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education.
Alyssa Davis joined EPI in 2013 as the Bernard and Audre Rapoport Fellow. She assists EPI’s researchers in their ongoing analysis of the labor force, labor standards, and other aspects of the economy. Davis aids in the design and execution of research projects in areas such as poverty, education, health care, and immigration. She also works with the Economic Analysis and Research Network (EARN) to provide research support to various state advocacy organizations. Davis has previously worked in the Texas House of Representatives and the U. S. Senate. She holds a B. A. from the University of Texas at Austin.
1. In 2007, according to the Capital IQ database, there were 38,824 executives in publicly held firms (tabulations provided by Temple University Professor Steve Balsam). There were 9,692 in the top 0.1 percent of wage earners.
2. The years chosen are based on data availability, though where possible we chose cyclical peaks (years of low unemployment).
3. For instance, all of the papers prepared for the symposium on the top 1 percent, published in the Journal of Economic Perspectives (summer 2013), used CEO pay measures with realized options. Bivens and Mishel (2013) follow this approach because the editors asked them to drop references to the options-granted measure.
4. We thank Steve Kaplan for sharing his series with us.
5. Temple University Professor Steve Balsam provided tabulations of annual W-2 wages of executives in the top 0.1 percent from the Capital IQ database. The 9,692 executives in publicly held firms who were in the top 0.1 percent of wage earners had average W-2 earnings of $4,400,028. Using Mishel et al. (2012) estimates of top 0.1 percent wages, executive wages make up 13.3 percent of total top 0.1 percent wages. One can gauge the bias of including executives in the denominator by noting that the ratio of executive wages to all top 0.1 percent wages in 2007 was 2.14, but the ratio of executive wages to nonexecutive wages was 2.32. Unfortunately, we do not have data that permit an assessment of the bias in 1979 or 1989. We also do not have information on the number and wages of executives in privately held firms; their inclusion would clearly indicate an even larger bias. The IRS reports there were nearly 15,000 corporate tax returns in 2007 of firms with assets exceeding $250 million, indicating there are many more executives of large firms than just those in publicly held firms.
6. Kaplan (2012b, 14) notes that the Frydman and Saks series grew 289 percent, while the Hall and Leibman series grew 209 percent. He also notes that the Frydman and Saks series grows faster than that reported by Murphy (2012).
7. The discussion in this paragraph is taken from Bivens and Mishel (2013).
Referências.
Balsam, Steven. 2013. Equity Compensation: Motivations and Implications . Washington, DC: WorldatWork Press.
Bivens, Josh, Elise Gould, Lawrence Mishel, and Heidi Shierholz. 2014. “ Raising America’s Pay: Why It’s Our Central Economic Policy Challenge .” Economic Policy Institute, Briefing Paper #378.
Secretaria de Estatísticas Trabalhistas. Various years. Business Employment Dynamics. Public data series.
Secretaria de Estatísticas Trabalhistas. Various years. Current Employment Statistics. Public data series. Employment, Hours and Earnings-National [database].
Bureau of Economic Analysis. Various years. National Income and Product Accounts Tables [online data tables]. Tables 6.2C, 6.2D, 6.3C, and 6.3D.
Compustat. Various years. ExecuComp database [commercial database product accessible by purchase].
Federal Reserve Bank of St. Louis. Various years. Federal Reserve Economic Data (FRED) [database].
Frydman, Carola, and Raven E. Saks. 2010. “ Executive Compensation: A New View From a Long-Term Perspective, 1936–2005.” Review of Financial Studies 23, 2099–138.
Hall, Brian J., and Jeffrey B. Liebman. 1997. “Are CEOs Really Paid Like Bureaucrats?” National Bureau of Economic Research, Working Paper #6213.
Mankiw, N. Gregory. 2013. “Defending the One Percent.” Journal of Economic Perspectives 27, no. 3: p. 21-24.
Mishel, Lawrence. 2013b. “Working as Designed: High Profits and Stagnant Wages.” Working Economics (Economic Policy Institute blog), March 28.
Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012. The State of Working America, 12th Edition . An Economic Policy Institute book. Ithaca, NY: Cornell University Press.
Murphy, Kevin. 2012. “The Politics of Pay: A Legislative History of Executive Compensation.” University of Southern California Marshall School of Business Working Paper #FBE 01.11.
Piketty, Thomas, and Emmanuel Saez. 2015. “Income Inequality in the United States, 1913–1998” Quarterly Journal of Economics 118, no. 1, 1–39, tables and figures updated to 2013 in Excel format, January 2015.
Song, Jae, David J. Price, Faith Guvenen, and Nicholas Bloom. 2015. “Firming Up Inequality.” National Bureau of Economic Research Working Paper #21199.
Sign up to stay informed.
Track EPI on Twitter.
EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. EPI’s research helps policymakers, opinion leaders, advocates, journalists, and the public understand the bread-and-butter issues affecting ordinary Americans.
Follow EPI.
1225 Eye St. NW, Suite 600.
Washington, DC 20005.
&cópia de; 2018 Economic Policy Institute.
The Perkins Project on Worker Rights and Wages.
Tracking the wage and employment policies coming out of the White House, Congress, and the courts.
State of Working America Data Library.
Authoritative, up-to-date data on the living standards of American workers.
Inequality. is.
Interactive tools and videos bringing clarity to the national dialogue on economic inequality.
Affiliated programs.
Economic Analysis and Research Network (EARN)
A network of state and local organizations improving workers' lives through research and advocacy.

Compensação.
Advisory Approval of Our Named Executives’ Pay & Frequency of Future Votes.
What are you voting on?
MANAGEMENT PROPOSALS NOS. 1 & amp; 2
In accordance with Section 14A of the Exchange Act, we are asking shareowners to vote on an advisory basis on:
Say on pay. Approval of the compensation paid to our named executives, as described in this proxy statement (Management Proposal No. 1). Say on frequency. Approval of the frequency of future say-on-pay votes (Management Proposal No. 2). Shareowners are not voting to approve the Board's recommendation, but rather will be able to specify whether future votes should occur every one year, two years or three years.
Why the Board recommends a vote for the say-on-pay proposal.
The Board believes that our compensation policies and practices are effective in achieving the company’s goals of:
Rewarding sustained financial and operating performance and leadership excellence. Aligning our executives’ interests with those of our shareowners to create long-term value. Motivating executives to remain with us for long and productive careers.
Why the Board recommends holding future say-on-pay votes EVERY YEAR. We have engaged shareowners on this issue and, based on their feedback, we believe that a significant portion of our investors would prefer an annual say-on-pay vote. Under the Board’s policy of providing for annual votes, the next say-on-pay vote will occur at our 2018 annual meeting.
Impact of the votes. These advisory proposals are not binding on the Board. However, the Board and the Compensation Committee will review and consider the voting results when evaluating our executive compensation program.
YOUR BOARD RECOMMENDS A VOTE FOR SAY-ON-PAY PROPOSAL AND FOR HOLDING FUTURE SAY-ON-PAY VOTES EVERY YEAR.
Overview of Our Executive Compensation Program.
Although the executive compensation discussion in this proxy statement focuses on the compensation decisions for our named executives — Jeff Immelt (Chair & CEO), Jeff Bornstein (SVP & CFO), Beth Comstock (Vice Chair & CEO of Business Innovations), David Joyce (Vice Chair & CEO of Aviation), John Rice (Vice Chair & CEO of our Global Growth Organization) and Keith Sherin (Former Vice Chair & CEO of GE Capital) — our executive compensation programs apply broadly across GE’s employee ranks. For example, approximately 120,000 employees participate in an annual bonus program, more than 5,000 executives receive equity incentives, and approximately 1,000 senior executives participate in our long-term performance award (LTPA) program. We strive to pay fair and competitive wages to all of our employees, considering the specific job markets and peer compensation.
Key Considerations in Setting Pay.
EMPHASIS ON CONSISTENT, SUSTAINABLE AND RELATIVE PERFORMANCE.
Our compensation program provides the greatest pay opportunity for named executives who demonstrate superior performance for sustained periods of time. It also rewards them for executing GE’s strategy through business cycles (for example, maintaining consistent levels of R&D investment through economic cycles). In evaluating performance consistency, we also weigh the performance of each named executive relative to his peers in his industry segment or function.
CHALLENGING PERFORMANCE METRICS ALIGNED TO OUR INVESTOR FRAMEWORK.
We set performance metrics for our incentive compensation programs that match our short-term and long-term operating frameworks. We set target performance levels that are challenging but achievable with good performance, and maximum performance levels that represent stretch goals. For example, all of our long-term performance award programs have paid out at less than 105% of target performance, ranging between 71% and 104%.
FUTURE PAY OPPORTUNITY VERSUS CURRENT PAY.
The Compensation Committee strives to provide an appropriate mix of compensation elements, including finding a balance between current and long-term compensation and between cash and equity incentive compensation. Cash payments primarily are aligned with and reward more recent performance, while equity awards encourage our named executives to continue to deliver results over a longer period of time and also serve as a retention tool. The committee believes that most of our named executives’ compensation should be contingent on company performance, primarily long-term operating and stock-price performance.
COMPENSATION COMMITTEE JUDGMENT.
Our compensation programs balance arrangements where the payouts are tied to specific quantitative performance objectives with those where the committee evaluates a broad range of quantitative and qualitative factors, such as reliability in delivering financial and growth targets, sustainability-focused measures (including performance in light of risk assumed), performance in the context of the economic environment relative to other companies, a track record of integrity, good judgment, the ability to create further growth and lead others, and the absolute size of total pay packages.
SIGNIFICANCE OF OVERALL COMPANY RESULTS.
The committee’s evaluation of the named executives’ performance places strong emphasis on their contributions to the company’s overall performance rather than focusing only on their particular businesses or functions. The committee believes that the named executives, as key members of the company’s leadership team, share the responsibility to support GE’s goals and performance. While this compensation philosophy influences all of the committee’s compensation decisions, it has the biggest impact on annual equity incentive grants.
CONSIDERATION OF RISK.
Our compensation programs are balanced and focused on the long term so that our named executives can achieve the highest compensation through consistent superior performance over sustained periods of time. In addition, large amounts of compensation are usually deferred or realizable only upon retirement, providing strong incentives to manage for the long term while avoiding excessive risk-taking in the short term. Goals and objectives, which include specific, risk-focused measures, reflect a balanced mix of performance measures to avoid placing excessive weight on any single measure. Compensation is also balanced among current cash payments, deferred cash and equity awards. With limited exceptions, the committee retains discretion to adjust compensation pursuant to our clawback policy as well as for quality of performance and adherence to company values. See “How We Oversee & Manage Enterprise Risk” on Governance.
Primary Compensation Elements for 2016.
How Our Incentive Compensation Plans Paid Out for 2016.
This section provides an overview of how GE performed against the goals established under its 2016 annual bonus program and the 2013–2016 PSUs and 2014–2016 PSUs. See “Compensation Actions for 2016” below for amounts paid to the named executives under these programs as well as how we assessed their individual performance. See “Long-Term Performance Awards (LTPAs)” below for information on our 2016–2018 LTPAs.
2016 Annual Bonuses.
BONUS POOL FUNDED AT 80%. We granted bonuses to our named executives under a recently redesigned, more formulaic bonus program. The size of the bonus pool was contingent on the achievement of specified financial and strategic performance metrics as shown below.
NO ADJUSTMENTS TO FINANCIAL PERFORMANCE METRICS. Although the Compensation Committee had the authority under the terms of the bonus program to adjust the financial performance metrics, it did not make any such adjustments for 2016 (i. e., they were calculated the same way GE reported them for financial reporting purposes).
HOW WE PERFORMED AGAINST OUR STRATEGIC GOALS.
EXECUTE ON PORTFOLIO TRANSFORMATION. In 2016, GE aggressively executed on its Alstom integration, with cost synergies ahead of plan and Alstom contributing $0.05 to GE’s earnings per share (excluding foreign exchange impact). The company also capitalized on the oil and gas cycle, planning a combination with Baker Hughes to create a digitized, fullstream oil and gas company (subject to customary closing conditions). GE made strategic investments to recapture supply chain value and grow the company’s Digital and Additive businesses. The company also continued simplifying the portfolio, announcing plans to sell Water and Industrial Solutions and making substantial progress on the GE Capital exit plan (signing deals for 96% of the planned asset sales as of 2016 year-end and terminating GE Capital’s designation as a nonbank SIFI). MAINTAIN BALANCED CAPITAL ALLOCATION STRATEGY. GE executed on a balanced capital allocation strategy in 2016, returning $30.5 billion to investors ($8.5 billion in dividends and $22.0 billion in buyback), which exceeded our investor framework target of approximately $26 billion. The company also made $8.9 billion in organic investments (capital expenditures including R&D, P&E and Digital) and invested $2.3 billion on M&A to support GE’s long-term growth. IMPROVE CHALLENGED GE BUSINESSES. Healthcare had an excellent year, turning around business declines in 2015 to increase segment profit 10% to $3.2 billion and operating margins 100 basis points to 17.3% in 2016, driven by productivity improvements and strong growth in Life Sciences. Oil & amp; Gas experienced continued market pressure from depressed oil prices, but has taken advantage of the cycle by planning a combination with Baker Hughes and reducing costs by $700 million while restructuring the business. Energy Connections & Lighting had a tough year, but is working to integrate Alstom’s grid business and restructure to position the business for growth in 2017. ACCELERATE DIGITAL INDUSTRIAL. The company made significant progress in building out its digital capability in 2016, ending the year with $4 billion Predix-powered and software orders (up 22% year-over-year). GE invested more than $1 billion to acquire ServiceMax, BitStew, Wise. io and Meridium. The company also continued to expand Predix, GE’s software platform for the Industrial Internet, which, at the end of 2016, had approximately 22,000 developers and more than 400 partners. LOWER PRODUCT COSTS. Industrial segment gross margins increased by 40 basis points in 2016 to 27.8% (excluding Alstom).* GE continued to execute on its product cost reduction initiative through investments in additive manufacturing (Concept Laser and Arcam acquisitions) and backwards integration of the supply chain (planned LM Wind Power acquisition). The company also captured $0.9 billion in sourcing value through deflation. REALIZE GE STORE OUTCOMES. Industrial segment organic revenue growth (adjusted to include Alstom for November and December of both 2015 and 2016) of 1%* for 2016 missed our investor framework of 2–4%, and Industrial operating margins (excluding Alstom) were down 30 basis points* (also below target). Industrial return on total capital was down 150 basis points.* However, the company continued to intensify its focus on demonstrating the value of the GE Store (a global exchange of technology, talent and expertise through GE’s broad and diverse network of businesses and markets). GE’s industrial segment revenues from growth markets were $45 billion (up 6%) while growth market infrastructure orders were $47 billion (flat year-over-year). Industrial segment revenues from services were $52 billion (up 9%). Backlog increased by $6 billion to a record $321 billion as of year-end. GE Capital enabled (through financing or arranging financing) more than $13 billion of industrial orders. The company also continued to improve new product introduction efficiency while executing on significant product launches. MANAGE ENTERPRISE RISK AND CULTURE. The company continued to focus on managing critical enterprise risks, including liquidity (maintaining a strong balance sheet, ending 2016 with $48.1 billion in cash and equivalents, including $10.5 billion at the parent level), product quality (reformulating the Board committees to focus on industrial risk), cybersecurity (continuing to expand capabilities), and compliance and business integrations (with a keen focus on Alstom). GE also focused on accelerating its digital industrial cultural transformation with the roll-out of its performance development tool and sending key leaders to its global leadership institute (
28% of salaried employees attended Crotonville in 2016).
The Compensation Committee assessed GE’s performance on its strategic goals at 95% instead of 100% because, although the company overall had a good year, GE missed some of its key investor goals (organic revenue growth and margin expansion) and some key businesses, including Power, Oil & Gas and Energy Connections, experienced challenging business environments.
*Non-GAAP financial measures available below.
HOW WE EVALUATED BUSINESS PERFORMANCE AND ALLOCATED THE BONUS POOL.
HOW THE BONUS PROGRAM WORKS. We pay cash bonuses to our named executives each February or March for the prior year under a program designed to closely align incentive compensation and annual company results. Here’s how the plan works:
2013 & 2014 PSU Grants.
2013 PSUs PAY OUT AT 100% AND 2014 PSUs PAY OUT AT 83%. In February 2017, Mr. Immelt earned 100% of the PSUs granted to him in 2013 and 83% of the PSUs granted to him in 2014. The remaining PSUs from the 2014 grant were forfeited because of the negative adjustment from the TSR modifier. (The table below is specific to Mr. Immelt as we did not start granting PSUs to the full senior leadership team until 2015.)
Compensation Actions for 2016.
CEO Compensation Aligns With Performance.
Jeff Immelt.
CHAIRMAN & CEO Age: 61 Education: Dartmouth; MBA, Harvard GE tenure: 35 years.
DESEMPENHO. As the Chairman & CEO, Mr. Immelt plays a critical role in delivering on the performance framework for the company’s annual bonus program and, as such, his performance goals were the same as the financial and strategic goals used to fund the 2016 bonus pool (see “2016 Annual Bonuses” above). The Compensation Committee believes that Mr. Immelt performed well in a challenging environment.
PAY. In light of his performance, the Compensation Committee awarded Mr. Immelt a $4.3 million cash bonus, 80% of target (same as the company’s bonus pool funding). In addition, the committee granted Mr. Immelt an equity award with a grant date fair value of $6.8 million (down 26% from $9.2 million in 2015), weighted 2/3 PSUs (200k granted) and 1/3 stock options (600k granted). Mr. Immelt’s base salary remained flat at $3.8 million (and has been increased only twice since 2005).
CEO Compensation Analysis.
CEO Accountability.
A significant portion of Mr. Immelt’s compensation is at risk each year, tied to the company’s operating and stock price performance. For 2016, 71% of his compensation was at risk.* As a result, Mr. Immelt may not earn all of the compensation that we are required to include in the Summary Compensation Table.
Over the past five years, GE’s earnings have ranked 10–16th in the S&P 500, while Mr. Immelt’s compensation has ranked 21st–169th among S&P 500 CEOs.**
*Represents the sum of the amounts reported in the Bonus, PSUs & RSUs, Stock Options and LTPAs columns as a percentage of total compensation minus change in pension value.
 **Earnings reflects reported net earnings, except for 2015 and 2016, which reflect Industrial operating + Verticals earnings in light of the GE Capital exit plan charges (based on Bloomberg data). Compensation data is through 2015 (the most recent year for which data is available) and reflects reported SEC total compensation minus change in pension value (based on Equilar data).
OUR CEO OWNS A SUBSTANTIAL AMOUNT OF GE STOCK AND IS ALIGNED WITH SHAREOWNERS.
As an indication of Mr. Immelt’s alignment with shareowners, he has purchased approximately 1.2 million shares in the open market since he became CEO in 2001. Also, since he became CEO, he has not sold any of the shares he has acquired through exercising stock options or the vesting of RSUs or PSUs (except those withheld to pay option exercise prices and taxes on such awards). See “Stock Ownership Information” on Governance for more information on Mr. Immelt’s ownership of GE stock.
CEO PAY ADJUSTMENTS OVER THE LAST 10 YEARS.
8 out of 10 years.
Without a salary increase.
Value of earned 2006–2008 LTPA payment waived.
Mr. Immelt requested (and the committee approved) that he not receive a bonus.
PSUs and options canceled because of the rigor of the performance targets.
Compensation for Our Other Named Executives.
Jeff Bornstein.
Age: 51 Education: Northeastern GE Tenure: 28 Years.
CFO, GE (since 2013) and senior vice president; previously CFO of GE Capital, Aircraft Engine Services and Plastics.
The committee recognized Mr. Bornstein’s contribution toward the overall GE and Corporate goals for the annual bonus program as well as his execution on the company’s capital allocation strategy (returning $30.5 billion to investors) and leadership of key initiatives to reduce costs and improve cash conversion.
COMPENSATION DECISIONS FOR 2016.
Base salary — increased by 11% to $1.775 million, effective July 2016, after an 18-month interval since his last salary increase that is standard for GE’s named executives Cash bonus — $1.9 million, 80% of $2.4 million target (same as Corporate’s 80% funding) Equity grant — $2.3 million grant date fair value (same as other vice chairs), divided evenly among PSUs, RSUs and options.
Beth Comstock.
Age: 56 Education: William & Mary GE tenure: 24 years.
CEO, Business Innovations (since 2015) and vice chair; previously chief marketing and commercial officer; president of integrated media at NBC Universal.
The committee recognized Ms. Comstock’s contribution toward the overall GE and Business Innovations goals for the annual bonus program as well as her leadership in accelerating the company’s simplification initiative by driving a more entrepreneurial culture through FastWorks.
COMPENSATION DECISIONS FOR 2016.
Base salary — remained flat at $1.5 million, with her last salary increase effective September 2015 Cash bonus — $1.2 million, 66% of $1.9 million target (equal to Lighting/Corporate’s blended funding of 37/80%, with Corporate weighted 2/3) Equity grant — $2.3 million grant date fair value (same as the other vice chairs), divided evenly among PSUs, RSUs and options Special retention grant — 150k RSUs for retention.
David Joyce.
Age: 60 Education: Michigan State; MA Finance, Xavier GE tenure: 37 years.
Presidente & amp; CEO, Aviation (since 2008) and vice chair, leading GE Additive; previously vice president and general manager of commercial engines and held other GM positions within Aviation.
The committee recognized Mr. Joyce’s contribution toward the overall GE and Aviation goals for the annual bonus program as well as his leadership in launching GE’s new additive manufacturing business and acquiring Arcam and Concept Laser.
COMPENSATION DECISIONS FOR 2016.
Base salary — increased by 8% to $1.3 million, effective March 2016, after an 18-month interval since his last salary increase that is standard for GE’s named executives; subsequently increased by 12% to $1.45 million, effective September 2016, upon his promotion to vice chair Cash bonus — $1.4 million, 89% of $1.6 million target (same as Aviation’s 89% funding), plus $100,000 for extraordinary performance at Aviation and with GE Additive Equity grant — $2.3 million grant date fair value (same as the other vice chairs), divided evenly among PSUs, RSUs and options Special retention grant — 150k RSUs for retention.
Age: 60 Education: Hamilton GE tenure: 39 years.
Presidente & amp; CEO, Global Growth Organization (since 2010) and vice chair; previously CEO of Technology Infrastructure, Industrial, Energy and Transport Systems.
The committee recognized Mr. Rice’s contribution toward the overall GE and GGO goals for the annual bonus program as well as his leadership in building out the company’s project finance capabilities and partnering with export credit agencies to help finance key infrastructure projects.
COMPENSATION DECISIONS FOR 2016.
Base salary — increased by 7% to $2.8 million, effective January 1, 2017, after an 18-month interval since his last salary increase that is standard for GE’s named executives Cash bonus — $3.3 million, 75% of $4.4 million target (equal to GGO/Corporate’s blended funding of 69/80%, each weighted 1/2) Equity grant — $2.3 million grant date fair value (same as other vice chairs), divided evenly among PSUs, RSUs and options.
Keith Sherin.
Age: 58 Education: Notre Dame; MBA, Columbia GE tenure: 36 years.
Former Chairman & CEO, GE Capital and vice chair (retired December 31, 2016); previously CFO, GE; leadership roles at many key GE businesses.
The committee recognized Mr. Sherin’s contribution toward the overall GE and GE Capital goals for the annual bonus program, including his leadership of the GE Capital exit plan.
COMPENSATION DECISIONS FOR 2016.
Base salary — increased by 6% to $2.65 million, effective July 1, 2016, after an 18-month interval since his last salary increase that is standard for GE’s named executives Cash bonus — $3.8 million, 94% of $4.0 million target (same as GE Capital’s 94% funding) Equity grant — did not receive an equity grant in light of his planned retirement.
Realized Compensation.
The SEC’s calculation of total compensation, as shown in the Summary Compensation Table below, includes several items driven by accounting and actuarial assumptions. As a result, total compensation as defined by the SEC differs substantially from the compensation actually realized by our named executives in a particular year. To supplement the SEC-required disclosure, the table below shows compensation actually realized by the named executives, as reported on their IRS W-2 forms. These amounts are not a substitute for the amounts reported as SEC total compensation. Information on how realized compensation is calculated can be found in the supplemental materials on GE’s proxy website (see Helpful Resources).
2016 VS. 2015 AMOUNTS. The increase in realized compensation from 2015 to 2016 is due primarily to the payout in early 2016 of LTPAs earned over the three-year performance period from 2013 to 2015. On average, these payouts comprised 45% of the named executives’ realized compensation in 2016.
Summary Compensation.
Summary Compensation Table.
Year-over-year changes in pension value generally are driven in large part by changes in actuarial pension assumptions as well as increases in service, age and compensation. For 2016, the change in pension value for Mr. Immelt was lower than 2015, due in part to his lower bonus payment and being over age 60. Except for Mr. Sherin, the other named executives’ change in pension value was higher than 2015 in part due to the 27-basis-point decrease in the statutory discount rate assumption from 4.38% to 4.11%. See “Pension Benefits” below for additional information, including the present value assumptions used in this calculation. For Mr. Sherin, the change in pension value includes early retirement allowance payments valued at $7,191,154 (see “Early Retirement Agreement with Mr. Sherin” below).
Above-market earnings represent the difference between market interest rates calculated under SEC rules and the 6% to 14% interest contingently credited by the company on salary that the named executives deferred under various executive deferred salary programs in effect between 1987 and 2016. See “Deferred Compensation” below for additional information.
ALL OTHER COMP. We provide our named executives with other benefits that we believe are reasonable, competitive and consistent with our overall executive compensation program. The costs of these benefits for 2016, minus any reimbursements by the named executives, are shown in the table below.
Life Insurance Premiums. Taxable payments to cover premiums for universal life insurance policies they own. These policies include: (1) Executive Life, which provides universal life insurance policies for the named executives totaling $3 million in coverage at the time of enrollment and increased 4% annually thereafter; and (2) Leadership Life, which provides universal life insurance policies for the named executives with coverage of 2X their annual pay (salary + most recent bonus).
Retirement Savings Plan. GE’s matching contributions to the named executives’ RSP accounts equaling 3.5% of pay up to the caps imposed under IRS rules.
Personal Use of Aircraft. For security purposes, the committee requires our CEO to use company aircraft for all air travel (personal and business). Amounts reflect the incremental cost to GE for the named executives’ personal use of company aircraft, based on the following variable costs: a portion of ongoing maintenance and repairs, aircraft fuel, satellite communications and any travel expenses for the flight crew. These amounts exclude non-variable costs, such as exterior paint, interior refurbishment and regularly scheduled inspections, which would have been incurred regardless of whether there was any personal use. Aggregate incremental cost, if any, of travel by the executive’s family or guests is also included.
Leased Cars. Expenses for the leased cars program, such as leasing and management fees, administrative costs and maintenance costs.
Financeiro & amp; Planejamento Tributário. Expenses for the use of advisors for financial, estate and tax preparation and planning, and investment analysis and advice.
HQ Relocation. Expenses for relocating the named executives and their families in connection with the move of GE’s corporate headquarters from Fairfield, CT to Boston, MA. Benefits for the named executives, including the tax benefits described below, generally were consistent with those provided to all employees who were asked to relocate, except that the company’s officers received a higher potential home loss buyout benefit than other employees.
Relocation Tax Benefits. Tax benefits provided in connection with the company’s headquarters relocation.
De outros. Total amount of other benefits provided, none of which individually exceeded the greater of $25,000 or 10% of the total amount of benefits included in the Personal Use of Aircraft, Leased Cars, Financial & Tax Planning, HQ Relocation and Other columns for the named executive (except as otherwise described in this section). These other benefits included items such as: (1) car service fees; (2) home alarm and generator installation, maintenance and monitoring; (3) participation in the Executive Products and Lighting Program, which was terminated for executives in June 2016 when we sold our Appliances business; (4) an annual physical examination; and (5) certain expenses associated with the named executives’ and their invited guests’ attendance at the 2016 Olympic Games in Rio de Janeiro, Brazil, of which GE was an official sponsor.
With respect to Mr. Rice, this column also reports the following benefits provided to him in connection with his non-permanent relocation, at the company’s request, to Hong Kong. These benefits, which are consistent with those we provide to employees working on non-permanent assignments outside their home countries, consisted of: (1) cost-of-living adjustment ($397,622); (2) housing and utilities ($699,125); and (3) other expatriate and relocation allowances and expenses ($84,276). Any benefits paid in Hong Kong dollars (HKD) were converted to USD on a monthly basis using the following average monthly exchange rates for 2016 (expressed as HKD per USD): January through June — ​7.75; July through December — ​7.76.
SEC TOTAL. Total compensation, as determined under SEC rules.
ADJUSTED SEC TOTAL. We are presenting this supplemental column to show how the Compensation Committee views the named executives’ annual compensation. This column adjusts the amounts reported in the SEC Total column by subtracting the change in pension value reported in the Pension & Deferred Comp. column to show how year-over-year changes in pension value impact total compensation. The amounts reported in this column differ substantially from, and are not a substitute for, the amounts reported in the SEC Total column.
Long-Term Incentive Compensation.
Long-Term Performance Awards (LTPAs)
We grant LTPAs only once every three or more years, in contrast to many companies that grant such awards annually. These awards have formulaically determined payouts, based on equally weighted performance metrics that the Compensation Committee sets at the beginning of each three-year performance period. Over the last five LTPA programs, the committee has largely used consistent performance metrics (earnings, cash generation and ROTC), modifying them only to realign them with changes in our strategic focus (as with the Industrial operating profit margin and cash returned to investors metrics in our 2016–2018 LTPA program). LTPAs are paid in cash or, at the committee’s discretion, in stock.
2016–2018 LTPAs . In March 2016, the Compensation Committee granted contingent LTPAs for the 2016–2018 performance period to approximately 1,000 executives across the company, including the named executives. The awards are payable based on achievement of the performance metrics shown in the table below. The terms and conditions of this LTPA program are the same as the 2013–2015 LTPA program, except for the following modifications:
Five equally weighted performance metrics. Cash returned to investors was added as a metric to the four metrics in the prior program to incentivize returning excess cash to shareowners, and margins replaced the Industrial earnings percentage metric in light of the substantial progress made on the GE Capital exit plan; Lower payout multiples for the named executives. Payout multiples were set at 0.50X, 1.00X, 2.00X at threshold, target and maximum performance (versus 0.75X, 1.50X and 2.00X in the prior program) as part of the committee’s consideration of the size of total pay packages; and Payout multiples based on final salary + average bonus during the performance period. Payout multiples are based on salary in effect at the end of the performance period plus the average bonus received for the three years in the performance period (compared to the higher of participants’ 2014 and 2015 bonuses in the prior program) in light of the increased volatility in bonus amounts under our new annual bonus program.
1 Under the LTPA program, the Compensation Committee can adjust these metrics for extraordinary items. For information on how these metrics are calculated, see “Explanation of Non-GAAP Financial Measures and Performance Metrics” abaixo.
2 Includes GE CFOA (Industrial CFOA plus dividends from GE Capital) plus proceeds from Industrial dispositions (after taxes).
3 Includes Industrial segment profit plus adjusted Corporate operating costs (excludes non-operating pension costs, restructuring and other charges & gains).
4 Includes dividends plus share repurchases.
5 Target performance levels, which were pre-established by the Compensation Committee, are not disclosed (N. D.). Consistent with our historical practice, we will disclose them following completion of the 3-year performance period.
TARGET PERFORMANCE LEVELS ARE CHALLENGING. As with our prior LTPA programs, the target performance levels of the 2016–2018 LTPA metrics are challenging and difficult to achieve, while the maximum performance levels represent stretch goals.
PAST LTPA PAYOUT LEVELS FOR NAMED EXECUTIVES.
HOW THE COMPENSATION COMMITTEE CALCULATES PAYOUTS. For each named executive, LTPA payouts are calculated as shown below (payout multiples for other participants start at significantly lower levels). There is no payout for performance below the threshold level, and amounts are prorated for performance between the established levels. LTPAs are subject to forfeiture under our compensation recoupment policy or if employment terminates before the end of the performance period for any reason other than disability, death or retirement.
2016–2018 LTPA PAYOUT CALCULATION.
HOW THE PAYOUT STRUCTURE FOR OUR NAMED EXECUTIVES DIFFERS FROM THE STRUCTURE FOR OTHER EXECUTIVES. To enhance the transparency of the LTPA program and reinforce the impact of participants’ efforts over each year in the performance period, LTPAs are credited to each named executive’s deferred compensation account in annual installments but not actually paid out until after the third year. (This installment structure does not apply to Mr. Joyce for the 2016–2018 LTPAs, as he was not a named executive when they were granted.) The amount of each installment is calculated, following the end of each year in the performance period, by multiplying total cash compensation at the time by 30% of the projected total 3-year payout percentage (up to the target payout level for the first year). Following the third year, the named executives receive the amounts credited, without interest, adjusted to reflect GE’s actual 3-year performance. The first-year installment is reported as 2016 compensation in the LTPAs column in the Summary Compensation Table above.
Annual Equity Incentive Awards.
Historically, GE used a different equity compensation structure for the CEO than for other senior leaders: the CEO typically received equity compensation solely in the form of PSUs while other senior leaders received it largely in the form of stock options. In 2015, we began granting annual equity incentive awards to all named executives in the form of stock options, RSUs and PSUs to better align the equity compensation structure for the company’s most senior leaders and drive greater accountability.
How we determine award amounts. Annual equity incentive awards are targeted to be equally weighted (by approximate accounting value) among stock options, RSUs and PSUs, except that the CEO’s award is targeted to be weighted 2/3 PSUs and 1/3 options (he does not receive RSUs). In determining award amounts, the committee evaluates executives’ achievement of specific performance goals — with strong emphasis on their contributions to overall company performance in addition to their individual business or function — as well as expected future contributions to GE’s long-term success, using past performance as a key indicator.
Why we use equity awards. Equity awards encourage our named executives to continue to deliver results over a longer period of time, and they also serve as a retention tool.
Why we use stock options and RSUs. W e believe that stock options and RSUs are a means to effectively focus our named executives on delivering long-term value to our shareowners. Options have value only to the extent that the price of GE stock rises between the grant date and the exercise date, and RSUs reward and retain the named executives by offering them the opportunity to receive GE stock if they are still employed by us on the date the restrictions lapse. Why we use PSUs. We see PSUs as a means to focus our named executives on GE’s long-term operating goals. PSUs have formulaically determined payouts that convert into shares of GE stock only if the company achieves specified performance goals. See the “Outstanding Equity Awards Table” below for information regarding the performance conditions for outstanding PSUs.
Long-Term Incentive Compensation Table.
The following table — also known as the Grants of Plan-Based Awards Table — shows LTPAs, PSUs, RSUs and stock options granted to our named executives in 2016 under the 2007 Long-Term Incentive Plan, a plan that shareowners approved in 2007 and 2012 (and that shareowners are being asked to reapprove at the annual meeting, see “Management Proposal No. 3 — Approval of the GE 2007 Long-Term Incentive Plan, as Amended to Extend the Plan and Increase the Number of Plan Shares” on Shareowner Proposals).
*Amounts reported as RSUs and stock options for Mr. Sherin reflect awards previously granted that were modified pursuant to Mr. Sherin’s early retirement agreement (see “Early Retirement Agreement with Mr. Sherin” below). The exercise price reflects the weighted average exercise price for the previously granted options that were modified.
ESTIMATED FUTURE PAYOUTS UNDER LONG-TERM PERFORMANCE AWARDS. The named executives were granted LTPAs under the 2016–2018 LTPA program (reported as a multiple of the executive’s salary and bonus at the time of grant), subject to achievement of the threshold, target and maximum goals for all five performance measures. The actual payouts, if any, will be calculated using the executive’s base salary as in effect in December 2018 and the average of the executive’s bonuses awarded for 2016 through 2018. The potential LTPA payouts are performance-driven and therefore completely at risk. See “Long-Term Performance Awards (LTPAs)” above for a description of the performance goals and salary and bonus multiples for determining payouts. See the Summary Compensation Table above for the first-year (2016) installments for these awards.
ESTIMATED FUTURE PAYOUTS UNDER PERFORMANCE SHARE UNITS. The named executives were granted PSUs in 2016 that could convert into shares of GE stock at the end of the three-year performance period based on two equally weighted operating goals: Total Cash and Operating Margin. Each operating goal has specified threshold and target performance levels such that performance below threshold results in no PSUs being earned, performance at threshold results in 50% of the PSUs being earned, and performance at or above target results in 100% of the PSUs being earned (with proportional adjustments for performance between threshold and target). In addition, the PSUs have a relative TSR modifier so that the number of PSUs that convert into shares based on achievement of the two operating goals may be adjusted upward or downward by up to 25%, depending on the company’s TSR performance versus the S&P 500 over the performance period. Accordingly, the named executives may receive between 0% and 125% of the target number of PSUs granted. Dividend equivalents are paid out only on shares actually received.
The number of PSUs shown in the threshold, target and maximum columns are calculated as follows: (1) threshold assumes that GE achieves the threshold performance level for only one operating goal and there is a negative 25% adjustment for relative TSR performance, (2) target assumes that GE achieves the target performance level for both operating goals and there is no adjustment for relative TSR performance, and (3) maximum assumes that GE achieves the target performance level for both operating goals and there is a positive 25% adjustment for relative TSR performance. See “PSUs” below for additional information.
RESTRICTED STOCK UNITS. The number of RSUs granted in 2016, which will vest in five equal annual installments, with the first installment (20%) vesting one year from the grant date (except that Mr. Joyce’s special retention grant in July will cliff vest 100% on December 31, 2019). Dividend equivalents are paid out only on shares actually received.
OPÇÕES DE AÇÕES. The number of stock options granted in 2016, which will vest in five equal annual installments, with the first installment (20%) becoming exercisable one year from the grant date. See the Outstanding Equity Awards Table below and “Potential Termination Payments” below for information on accelerated vesting for retirement-eligible awards.
STOCK OPTION EXERCISE PRICE. Stock option exercise prices reflect the closing price of GE stock on the grant date.
GRANT DATE FAIR VALUE OF AWARDS. Generally, the aggregate grant date fair value is the amount that the company expects to expense in its financial statements over the award’s vesting schedule.
For stock options, fair value is calculated using the Black-Scholes value of each option on the grant date (resulting in a $3.75 per unit value for the September grants and a $3.57 per unit value for the November grant). For RSUs, fair value is calculated based on the closing price of the company’s stock on the grant date, reduced by the present value of dividends expected to be paid on GE common stock before the RSUs vest (resulting in a $31.19 per unit value for Ms. Comstock’s July grant, a $31.20 per unit value for Mr. Joyce’s July grant, and a $30.05 per unit value for the September grants) because dividend equivalents on unvested RSUs (granted after 2013) are accrued and paid out only if and when the award vests. For PSUs, the actual value of units received will depend on the company’s performance, as described above. Fair value is calculated by multiplying the per unit value of the award ($28.87 for the September grants and $26.12 for the November grant) by the number of units corresponding to the most probable outcome of the performance conditions as of the grant date. The per unit value is based on the closing price of the company’s stock on the grant date, adjusted to reflect the relative TSR modifier by using a Monte Carlo simulation that includes multiple inputs such as stock price, performance period, volatility and dividend yield.
Outstanding Equity Awards Table.
The following table — also known as the Outstanding Equity Awards at Fiscal Year-End Table — shows the named executives’ stock and option grants as of year-end. It includes unexercised stock options (vested and unvested) and RSUs and PSUs for which vesting conditions were not yet satisfied as of December 31, 2016.
MARKET VALUE. The market value of RSUs and PSUs is calculated by multiplying the closing price of GE stock as of December 31, 2016 ($31.60) by the number of shares underlying each award and, with respect to the PSUs, assuming satisfaction of the target levels for the applicable performance conditions. For options, the market value is calculated by multiplying the number of shares underlying each award by the spread between the award’s exercise price and the closing price of GE stock as of December 31, 2016.
VESTING SCHEDULE.
Options vest on the anniversary of the grant date in the years shown in the table. The table shows an accelerated stock option vesting schedule for Ms. Comstock and Messrs. Immelt, Joyce and Rice because their awards qualified for retirement-eligible vesting between 2016 and 2020. See “Potential Termination Payments” below for the requirements for an award to qualify for retirement-eligible accelerated vesting (the executive is age 60 or older and the award has been held for at least one year). RSUs vest on the anniversary of the grant date in the years shown in the table, except that certain awards vest on the named executive’s 65th birthday or upon the awards qualifying for retirement-eligible vesting (as discussed above for Options). PSUs vest at the beginning of the year indicated when the Compensation Committee certifies that the performance conditions have been achieved. See “2013 & 2014 PSU Grants” above for details on the performance conditions and payouts for the 2013 and 2014 grants, which have vested. See the table below for details on the performance conditions for the 2015 and 2016 grants.
HOW WE DEFINE THE PERFORMANCE GOALS*
Total cash = GE CFOA (Industrial CFOA + dividends from GE Capital) + proceeds from Industrial dispositions (after tax)
Operating margin = Industrial segment operating margin for 2015 grant (excludes adjusted corporate operating costs); Industrial operating margin for 2016 grant (includes adjusted corporate operating costs)
*The Compensation Committee has the authority to adjust these metrics for extraordinary items.
+/- 25% adjustment to # of PSUs earned refers to:
GE TSR performance 75th percentile positive 25% adjustment GE TSR performance 40th percentile negative 25% adjustment GE TSR performance 50th percentile no adjustment (with proportional adjustment for performance between 40th–75th percentiles)
Why are the total cash and operating margin targets for the 2016 grant lower than the 2015 grant?
The difference in threshold/target performance levels between the 2015 and 2016 grants is due primarily to differences in how we calculate the metrics, as shown below:
Option Exercises and Stock Vested Table.
The table below shows the number of shares the named executives acquired and the values they realized upon the exercise of options and the vesting of RSUs and PSUs during 2016. Values are shown before payment of any applicable withholding taxes or brokerage commissions.
STOCK AWARDS. For Messrs. Immelt and Rice, includes partial vesting of certain awards for U. S. Federal Insurance Contributions Act (FICA) tax purposes. For Mr. Sherin, includes accelerated vesting of certain awards pursuant to his retirement agreement. Receipt of a portion of these awards ($6,054,019) is subject to a six-month delay under applicable U. S. federal income tax regulations.
Deferred Compensation.
The company has offered both a deferred bonus program and, from time to time, a deferred salary program. These deferral programs are intended to promote retention by providing a long-term savings opportunity on a tax-efficient basis. The deferred salary program is viewed as a strong retention tool because executives generally must remain with the company for at least five years after deferral to receive any interest on deferred balances. In addition, because the deferral programs are unfunded and deferred payments are satisfied from the company’s general assets, they provide an incentive for the company’s executives to minimize risks that could jeopardize the long-term financial health of the company.
Bonus Deferrals.
ELIGIBILITY AND DEFERRAL OPTIONS. Employees in our executive band and above, including the named executives, can elect to defer all or a portion of their bonus payments into the deferral options shown below. Participants may change their election among these options four times per year.
TIME AND FORM OF PAYMENT. Participants can elect to receive their deferred compensation balance upon termination of employment either in a lump sum or in 10 to 20 annual installments.
Salary Deferrals.
ELIGIBILITY . We periodically offer eligible employees in our executive band and above the opportunity to defer their salary payments (the last such plan was offered in 2010 for 2011 salary). Individuals who are named executives at the time a deferred salary program is initiated are not eligible to participate.
INTEREST INCOME. These programs provide accrued interest on deferred amounts (including an above-market interest rate as defined by the SEC) ranging from 6% to 14% compounded annually. A participant who terminates employment before the end of the five-year vesting period will receive a payout of the deferred amount but will forfeit the accrued interest (with exceptions for events such as retirement, death and disability).
TIME AND FORM OF PAYMENT . Our deferred salary programs have required participants to elect, before the salary was deferred, to receive deferred amounts either in a lump sum or in 10 to 20 annual installments.
The company makes all decisions regarding the measures for calculating interest or other earnings on deferred bonuses and salary. The named executives cannot withdraw any amounts from their deferred compensation balances until they either leave or retire from GE.
Deferred Compensation Table.
The table below — also known as the Nonqualified Deferred Compensation Table — shows amounts credited to the named executives’ accounts under nonqualified deferred compensation plans and plan balances as of December 31, 2016. For 2016, the company did not make any matching contributions into these plans. In addition, no withdrawals or distributions were made in 2016.
EXECUTIVE CONTRIBUTIONS IN 2016. Amounts represent compensation deferred during 2016. They do not include any amounts reported as part of 2016 compensation in the Summary Compensation Table above, which were credited to the named executive’s deferred account, if any, in 2017.
AGGREGATE EARNINGS IN 2016. Reflects earnings on each type of deferred compensation listed in this section that were deposited into the named executive’s deferred compensation account during 2016. The earnings on deferred bonus payments may be positive or negative, depending on the named executive’s investment choice, and are calculated based on: (1) the total number of deferred units in the account multiplied by the GE stock or S&P 500 Index price as of December 31, 2016; minus (2) that amount as of December 31, 2015; minus (3) any named executive contributions during the year. The earnings on the deferred salary programs are calculated based on the total amount of interest earned. See the Summary Compensation Table above for the above-market portion of those interest earnings in 2016.
AGGREGATE BALANCE AT 12/31/16. The fiscal year-end balances reported in the table above include the following amounts that were previously reported in the Summary Compensation Table as 2014 and 2015 compensation:
Pension Benefits.
The company provides retirement benefits to the named executives under the same GE Pension Plan and GE Supplementary Pension Plan in which other eligible employees participate. The Pension Plan is a funded, tax-qualified plan. The Supplementary Pension Plan, which increases retirement benefits above amounts available under the Pension Plan, is an unfunded, unsecured obligation of the company and is not qualified for tax purposes. Because participants generally forfeit any benefits under this plan if they leave the company before age 60, we believe it is a strong retention tool that significantly reduces departures of high-performing executives and greatly enhances the caliber of the company’s executive workforce. In addition, because the Supplementary Pension Plan is unfunded and benefit payments are satisfied from the company’s general assets, it provides an incentive for executives to minimize risks that could jeopardize the long-term financial health of GE.
GE Pension Plan.
ELIGIBILITY AND VESTING. The GE Pension Plan is a broad-based retirement program that is closed to new participants. Eligible employees vest in the plan after five years of qualifying service. The plan also requires employee contributions, which vest immediately.
BENEFIT FORMULA. For the named executives, the plan provides benefits based primarily on a formula that takes into account their earnings for each fiscal year. Since 1989, this formula has provided an annual benefit accrual equal to 1.45% of a named executive’s earnings for the year up to covered compensation and 1.9% of his or her earnings for the year in excess of covered compensation. “Covered compensation” was $50,000 for 2016 and has varied over the years based in part on changes in the Social Security taxable wage base. For purposes of the formula, annual earnings include base salary and up to one-half of bonus payments, but may not exceed an IRS-prescribed limit applicable to tax-qualified plans ($265,000 for 2016). As a result, the maximum incremental annual benefit a named executive could have earned for service in 2016 was $4,810. Over the years, we have made special one-time adjustments to this plan that increased eligible participants’ pensions, but we did not make any such adjustment in 2016.
TIME AND FORM OF PAYMENT. The accumulated benefit an employee earns over his or her career is payable after retirement on a monthly basis for life with a guaranteed minimum benefit of five years. The normal retirement age as defined in this plan is 65; however, employees who began working at GE prior to 2005, including the named executives, may retire at age 60 without any reduction in benefits. In addition, the plan provides for Social Security supplements and spousal joint and survivor annuity options.
TAX CODE LIMITATIONS ON BENEFITS. The tax code limits the benefits payable under the GE Pension Plan. For 2016, the maximum single life annuity a named executive could have received under these limits was $210,000 per year. This ceiling is actuarially adjusted in accordance with IRS rules to reflect employee contributions, actual forms of distribution and actual retirement dates.
GE Supplementary Pension Plan.
ELEGIBILIDADE. The GE Supplementary Pension Plan is an unfunded and non-tax-qualified retirement program that is offered to eligible employees in the executive band and above, including the named executives, to provide retirement benefits above amounts available under our other pension programs. The portion of the plan providing the benefits described below has been closed to new participants.
BENEFIT FORMULA. A named executive’s annual supplementary pension, when combined with certain amounts payable under the company’s other pension programs and Social Security, will equal 1.75% of his or her “earnings credited for retirement benefits” multiplied by the number of years of credited service, up to a maximum of 60% of such earnings credited for retirement benefits. The “earnings credited for retirement benefits” are the named executive’s average annual compensation (base salary and bonus) for the highest 36 consecutive months out of the last 120 months prior to retirement.
TIME AND FORM OF PAYMENT. Employees are generally not eligible for benefits under the Supplementary Pension Plan if they leave the company before age 60. The normal retirement age under this plan is 65; however, employees who began working at GE prior to 2005, including the named executives, may retire at age 60 without any reduction in benefits. The plan provides for spousal joint and survivor annuities for the named executives. Benefits under this plan would be available to the named executives only as monthly payments and could not be received in a lump sum.
GE Excess Benefits Plan.
ELEGIBILIDADE. The GE Excess Benefits Plan is an unfunded and non-tax-qualified retirement program that is offered to employees whose benefits under the GE Pension Plan are limited by certain tax code provisions. There were no accruals for named executives under this plan in 2016, and the company expects only insignificant accruals, if any, under this plan in future years.
BENEFIT FORMULA. Benefits payable under this plan are equal to the amount that would be payable under the terms of the GE Pension Plan disregarding the limitations imposed by certain tax code provisions minus the amount actually payable under the GE Pension Plan taking those limitations into account.
TIME AND FORM OF PAYMENT. Benefits for the named executives are generally payable at the same time and in the same manner as their GE Pension Plan benefits.
Pension Benefits Table.
The table below shows the present value of the accumulated benefit at year-end for the named executives under each plan, as calculated based upon the assumptions described below. Although SEC rules require us to show this present value, the named executives are not entitled to receive these amounts in a lump sum. None of the named executives received a payment under these plans in 2016.
*Excludes early retirement allowance payments valued at $7,191,154 (see “Early Retirement Agreement with Mr. Sherin” below).
PRESENT VALUE OF ACCUMULATED BENEFIT. The accumulated benefit is based on years of service and earnings (base salary and bonus, as described above) considered by the plans for the period through December 31, 2016. It also includes the value of contributions made by the named executives throughout their careers. For purposes of calculating the present value, we assume that all named executives who are not yet 60 (except for Mr. Sherin, who retired before age 60) will remain in service until age 60, the age at which they may retire without any reduction in benefits. We also assume that benefits are payable under the available forms of annuity consistent with the assumptions described in the Postretirement Benefit Plans notes in GE’s financial statements in our 2016 annual report on Form 10-K, including the statutory discount rate assumption of 4.11%. The postretirement mortality assumption used for present value calculations is the RP-2014 mortality table, adjusted for GE’s experience and factoring in projected generational improvements.
Potential Termination Payments.
In this section, we describe and quantify certain compensation that would have been payable under existing compensation plans and arrangements had a named executive’s employment terminated on December 31, 2016. For this hypothetical calculation, we have used each executive’s compensation and service levels as of this date (and, where applicable, GE’s closing stock price on this date). Since many factors (e. g., the time of year when the event occurs, GE’s stock price and the executive’s age) could affect the nature and amount of benefits a named executive could potentially receive, any amounts paid or distributed upon a future termination may be different from those shown in the tables below. The amounts shown are in addition to benefits generally available to salaried employees who joined the company before 2005, such as distributions under the Retirement Savings Plan, subsidized retiree medical benefits and disability benefits.
EARLY RETIREMENT AGREEMENT WITH MR. SHERIN. Mr. Sherin retired on December 31, 2016 after a 35-year career with GE. In connection with this, we entered into an early retirement agreement with Mr. Sherin pursuant to which, subject to a 12-month non-compete, Mr. Sherin will receive: (1) his 2016 annual cash bonus (as reported in the Summary Compensation Table) and a prorated 2016–2018 LTPA payment, in each case based upon actual company performance and determined in accordance with the company’s normal processes; (2) accelerated vesting (the PSUs remain subject to actual company performance) and up to a 5-year extension of the expiration period for his outstanding equity awards (the value of which is reported in the Summary Compensation Table), consistent with the benefits provided to other employees impacted by the GE Capital exit plan; (3) vesting at age 60 of his accrued benefits under the GE Supplementary Pension Plan (with benefits based on his approximately 35 years of service as of his retirement date); and (4) an early retirement allowance, payable monthly, from his retirement through age 60 (and, for certain amounts, through age 63 2⁄3).
Our Policies on Post-Termination Payments.
NO EMPLOYMENT OR INDIVIDUAL SEVERANCE AGREEMENTS. Our named executives serve at the will of the Board and do not have individual employment, severance or change-of-control agreements. This preserves the Compensation Committee’s flexibility to set the terms of any employment termination based on the particular facts and circumstances.
SHAREOWNER APPROVAL OF SEVERANCE AND DEATH BENEFITS. If the Board were to agree to pay severance or unearned death benefits to a named executive, we would seek shareowner approval. For severance benefits, this policy applies only when the executive’s employment had been terminated before retirement for performance reasons and the value of the proposed severance benefits exceeded 2.99 times the sum of his or her base salary and bonus. See the Board’s Governance Principles (at Helpful Resources) for the full policies.
Equity Awards.
The following table shows the intrinsic value of equity awards that would have vested or become exercisable if the named executive had died, become disabled or retired as of December 31, 2016. Intrinsic value is based upon the company’s stock price (minus the exercise price in the case of stock options). Amounts shown assume the achievement of all applicable performance objectives.
POTENTIAL TERMINATION PAYMENTS TABLE (EQUITY BENEFITS)
DEATH/DISABILITY. Unvested options would vest and remain exercisable until their expiration date. In the case of disability, this applies only to options that have been held for at least one year. Unvested RSUs would become fully vested in some cases, depending on the award terms. PSUs would be earned, subject to the achievement of the performance objectives. For these purposes, “disability” generally means the executive being unable to perform his or her job.
RETIREMENT. Unvested options or RSUs held for at least one year would become fully vested and would remain exercisable until their expiration date. This treatment applies to the named executives either becoming retirement-eligible (reaching the applicable retirement age) or retiring at age 60 or thereafter, depending on the award terms, and provided the award holder has at least five years of service with GE. Messrs. Immelt, Joyce and Rice had reached the applicable retirement age as of December 31, 2016.
Pension Benefits.
“Pension Benefits” above describes the general terms of each pension plan in which the named executives participate, the years of credited service and the present value of their accumulated pension benefit (assuming payment begins at age 60 or, for those named executives age 60 or above, January 1, 2017). The table below shows the pension benefits that would have become payable if the named executives had died, become disabled, voluntarily terminated or retired as of December 31, 2016.
In the event of death before retirement, the named executive’s surviving spouse may receive the following pension benefits:
GE Pension Plan and GE Excess Benefits Plan. Either an annuity, as if the named executive had retired and elected the spousal 50% joint and survivor annuity option prior to death, or an immediate lump-sum payment based on five years of pension distributions, in each case based upon the accrued benefits under these plans. GE Supplementary Pension Plan. A lump-sum payment based on whichever of the following has a higher value: (1) the 50% survivor annuity that the spouse would have received under this plan if the named executive had retired and elected the spousal 50% joint and survivor annuity option prior to death, or (2) five years of pension distributions under this plan.
The amounts payable depend on several factors, including employee contributions and the ages of the named executive and surviving spouse.
In the event a disability occurs before retirement, the named executive may receive an annuity payment of accrued pension benefits, payable immediately.
POTENTIAL TERMINATION PAYMENTS TABLE (PENSION BENEFITS)
LUMP SUM UPON DEATH. Lump sum payable to the surviving spouse.
ANNUAL ANNUITY UPON DEATH. Annuity payable for the life of the surviving spouse. In accordance with his early retirement agreement, in the event of Mr. Sherin’s death prior to age 60, his surviving spouse would receive payments beginning on his 60th birthday based on the 50% joint and survivor annuity option under the pension plans.
ANNUAL ANNUITY UPON DISABILITY. 50% joint and survivor annuity payable to each executive.
ANNUAL ANNUITY UPON VOLUNTARY TERMINATION. 50% joint and survivor annuity payable to each executive at age 60; this does not include any payments under the GE Supplementary Pension Plan because they are forfeited upon voluntary termination before age 60.
ANNUAL ANNUITY UPON RETIREMENT. 50% joint and survivor annuity, except for Mr. Sherin. Mr. Sherin’s amounts reflect his elections under his early retirement allowance, which is valued at $7,191,154 (see “Early Retirement Agreement with Mr. Sherin” above).
Deferred Compensation.
The named executives are entitled to receive the amount in their deferred compensation accounts if their employment terminates. Between the termination event and the date that distributions are made, these accounts would continue to increase or decrease in value based on changes in the value of GE Stock Units or S&P 500 Index Units, and to accrue interest income or dividend payments, as applicable. Therefore, amounts received by the named executives would differ from those shown in the Deferred Compensation Table above. See “Deferred Compensation” above for information on the available distribution types under each deferral plan.
Life Insurance Benefits.
For a description of the supplemental life insurance plans that provide coverage to the named executives, see “Life Insurance Premiums” acima. If the named executives had died on December 31, 2016, the survivors of the named executives would have received the following under these arrangements. The company would continue to pay the premiums in the event of a disability until the policy is fully funded.
Other Executive Compensation Practices & Policies.
Roles and Responsibilities in Succession Planning and Compensation.
COMPENSATION COMMITTEE. The committee has primary responsibility for helping the Board develop and evaluate potential candidates for executive positions and for overseeing the development of executive succession plans. As part of this responsibility, the committee oversees the compensation program for the CEO and the other named executives.
GESTÃO. Our CEO and our senior vice president, human resources, help the committee administer our executive compensation program. The senior vice president, human resources, also advises the committee on matters such as past compensation, total annual compensation, potential accrued benefits, GE compensation practices and guidelines, company performance, industry compensation practices and competitive market information.
How We Establish Performance Goals and Evaluate Performance.
ESTABLISHING PERFORMANCE GOALS. At the beginning of each year, Mr. Immelt develops the objectives that he believes should be achieved for the company to be successful. He then reviews these objectives with the Compensation Committee for the corollary purpose of establishing how the committee will assess his and the other named executives’ performance, including forming the basis for the performance metrics and strategic goals included in the annual bonus plan. These objectives are derived largely from the company’s annual financial and strategic planning sessions, during which the Board and management conduct in-depth reviews of the company’s growth opportunities and establish goals for the upcoming year. The objectives include quantitative financial measurements as well as qualitative strategic, risk and operational considerations, and are focused on those factors that our CEO and the committee believe create long-term shareowner value.
EVALUATING PERFORMANCE. Mr. Immelt leads the assessment of each named executive’s individual performance against the objectives established for that executive, the company’s overall performance and the performance of the executive’s business or function, and makes an initial compensation recommendation to the Compensation Committee for each executive. In doing so, he solicits the input of, and receives advice and data from, our senior vice president, human resources. Mr. Immelt also reviews and discusses preliminary considerations as to his own compensation with the committee, but does not participate in the final determination of his compensation. The named executives also play no role in their compensation determinations, other than discussing with the CEO their individual performance against predetermined objectives.
Our Policies on Compensation Consultants and Peer Group Comparisons.
STRATEGIC USE OF COMPENSATION CONSULTANTS. From time to time, the Compensation Committee and the company’s human resources function have sought the views of Frederic W. Cook & Co., Inc. (Frederic Cook) about market intelligence on compensation trends and on particular compensation programs designed by our human resources function. For 2016, the Compensation Committee chair and the company’s human resources function consulted with Frederic Cook on market practices related to senior executive compensation. In addition, the Governance Committee and the company’s legal function consulted with Frederic Cook on market practices relating to compensation and benefits for non-employee directors. In addition, the company’s human resource function consulted with Exequity to obtain its views and information on the company’s broad-based 2007 Long-Term Incentive Plan. All of these services were obtained under hourly fee arrangements rather than through a standing engagement.
COMPENSATION CONSULTANT INDEPENDENCE POLICY. Any compensation consultant that advises the Board on executive or director compensation will not at the same time advise the company on any other human resources matter, and the committee has determined that Frederic Cook’s work with the committee, Governance Committee and the company’s human resources function does not raise any conflict of interest.
LIMITED USE OF PEER GROUP COMPARISONS. The Compensation Committee considers executive compensation at the other Dow 30 companies as just one among several factors in setting pay. It does not target a percentile within this group and instead uses the comparative data merely as a reference point in exercising its judgment about compensation types and amounts.
Clawbacks and Other Remedies for Potential Misconduct.
CLAWBACKS. The Board may seek reimbursement from an executive officer if it determines that the officer engaged in conduct that was detrimental to the company and resulted in a material inaccuracy in either our financial statements or in performance metrics that affected the officer’s compensation. If the Board determines that the officer engaged in fraudulent misconduct, it will seek such reimbursement. For more information, see the Board’s Governance Principles (see Helpful Resources).
OTHER REMEDIES. In cases of detrimental misconduct by an executive officer, the Board may also take a range of other actions to remedy the misconduct, prevent its recurrence, and discipline the individual as appropriate, including terminating the individual’s employment. These remedies would be in addition to, and not in lieu of, any actions imposed by law enforcement agencies, regulators or other authorities.
Share Ownership and Equity Grant Policies.
SHARE OWNERSHIP REQUIREMENTS. We require our named executives to own significant amounts of GE stock as shown on the next page. The required amounts are set at multiples of base salary. All named executives are in compliance with our stock ownership requirements. For details on these requirements, see the Compensation Committee’s Key Practices (see Helpful Resources). The named executives’ ownership is shown in the Common Stock & Total Stock-Based Holdings Table on Governance.
STOCK OWNERSHIP REQUIREMENTS.
(multiples of base salary)
for vice chairs.
for senior vice presidents.
HOLDING PERIOD REQUIREMENTS. Our executive officers must also hold for at least one year any net shares of GE stock they receive through stock option exercises.
NO HEDGING. We believe our executive officers and directors should not speculate or hedge their interests in our stock. We therefore prohibit them from entering into any derivative transactions in GE stock, including any short sale, forward, equity swap, option or collar that is based on GE’s stock price.
NO PLEDGING. We prohibit executive officers and directors from pledging GE stock.
NO OPTION BACKDATING OR SPRING-LOADING. The exercise price of each stock option is the closing price of GE stock on the grant date (the date of the Compensation Committee meeting at which equity awards are determined). Board and committee meetings are generally scheduled at least a year in advance and without regard to major company announcements.
NO OPTION REPRICING. We prohibit the repricing of stock options. This includes amending outstanding options to lower their exercise price, substituting new awards with a lower exercise price or executing a cash buyout.
NO UNEARNED DIVIDEND EQUIVALENTS. PSUs, as well as RSUs granted to executive officers after 2013, do not pay dividend equivalents on shares that are not yet owned. Instead, dividend equivalents are accrued during the vesting or performance period and paid out only on shares actually received. For more information, see the Compensation Committee’s Key Practices (see Helpful Resources).
Tax Deductibility of Compensation.
The Internal Revenue Code generally imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the company’s named executives. This limitation does not apply to compensation that meets the tax code requirements for “qualifying performance-based” compensation. With respect to compensation reported in the Summary Compensation Table for 2016 above, annual cash bonus payments as well as PSU, RSU and stock option grants were designed to satisfy the requirements for deductible compensation (but we may pay compensation that does not qualify as deductible). To allow annual bonus payments, LTPA payments and grants of PSUs and RSUs to qualify as deductible, the Compensation Committee established a performance goal (positive net earnings, adjusted to remove the impact under GAAP of unusual events) and the maximum amounts that could be granted to the executive officers (expressed as a percentage of adjusted net earnings). That goal was met for 2016, and the bonus payments and PSU and RSU grant amounts were within the pre-established limits. Because deductibility is determined under a set of standards that may be subject to different interpretations in application, arrangements intended to satisfy the deductibility requirements may subsequently be determined not to be deductible.
Explanation of Non-GAAP Financial Measures and Performance Metrics.
Information on how GE calculates the following metrics:
Industrial segment organic revenue growth (incl. Alstom for Nov. & Dec. of 2015 & 2016), Industrial operating + Verticals EPS, Industrial operating profit, Industrial operating margin, Industrial operating margin, Industrial segment operating margin (ex. Alstom Appliances), Industrial segment gross margin (ex. Alstom), Industrial ROTC, GE Capital Verticals earnings, GE CFOA (ex. deal taxes & pension funding), Free cash flow + dispositions, and Total cash generation,
is disclosed in the supplemental materials on GE’s proxy website (see Helpful Resources) and in the “Supplemental Information” section of GE’s annual report on Form 10-K for 2016. Information on how GE calculates the funding metrics for the annual bonus program as well as the performance metrics for the 2016–2018 LTPA program and 2013–2016 and 2014–2016 PSUs is also disclosed in the supplemental materials on GE’s proxy website.
Caution Concerning Forward-Looking Statements.
This document contains “forward-looking statements” & mdash; that is, statements related to future events that by their nature address matters that are, to different degrees, uncertain. For details on the uncertainties that may cause our actual future results to be materially different than those expressed in our forward-looking statements, see the Forward-Looking Statements Information page on our Investor Relations website (see Helpful Resources) as well as our annual reports on Form 10-K and quarterly reports on Form 10-Q. We do not undertake to update our forward-looking statements. This document also includes certain forward-looking projected financial information that is based on current estimates and forecasts. Actual results could differ materially.
Compensation Committee Report.
The Compensation Committee has reviewed the compensation discussion and analysis, and discussed that analysis with management. Based on its review and discussions with management, the committee recommended to the Board that the compensation discussion and analysis be included in the company’s annual report on Form 10-K for 2016 and this proxy statement. This report is provided by the following independent directors, who comprise the committee:
John J. Brennan (Chairman)
Marijn E. Dekkers.
Rochelle B. Lazarus.
Director Compensation.
The compensation program for independent directors is designed to achieve the following goals:
Fairly pay directors for the work required at a company of GE’s size and scope; Align directors’ interests with the long-term interests of GE shareowners; and Be simple, transparent and easy for shareowners to understand.
Annual Compensation.
OVERVIEW. Our independent directors receive annual compensation as shown in the table below. There are no additional meeting fees. The lead director and members of our Board committees receive additional compensation due to the workload and broad responsibilities of these positions.
HOW DEFERRED STOCK UNITS WORK. Each DSU is equal in value to a share of GE stock and is fully vested upon grant, but does not have voting rights. To calculate the number of DSUs to be granted, we divide the target value of the DSUs by the average closing price of GE stock for the 20 days preceding and including the grant date. DSUs accumulate quarterly dividend-equivalent payments, which are reinvested into additional DSUs. The DSUs are paid out in cash beginning one year after the director leaves the Board. Directors may elect to take their DSU payments as a lump sum or in payments spread out for up to 10 years.
OTHER COMPENSATION. Our independent directors may also receive the following benefits:
Matching Gifts Program. Independent directors may participate in the GE Foundation’s Matching Gifts Program on the same terms as GE employees. Under this program, the GE Foundation matched for each participant up to $25,000 for 2016 contributions to approved charitable organizations. Charitable Award Program. Each director who joined the Board before 2016 may, upon leaving the Board, designate up to five charitable organizations to share in a $1 million GE contribution. Directors may not choose a private foundation with which they are affiliated. Executive Products and Lighting Program. Independent directors could participate in our Executive Products and Lighting Program on the same basis as our named executives. Under this program, directors could receive up to $30,000 in GE appliances over a three-year period. This program terminated in June 2016 when we sold our Appliances business, but directors can continue to receive light bulbs going forward. Incidental Board Meeting Expenses. The company occasionally provides travel and sponsors activities for spouses or other guests of the directors in connection with Board meetings.
Changes to Director Compensation.
The Governance Committee reviews director compensation annually, assisted periodically by an independent compensation consultant. In 2016, with the advice of Frederic Cook, the Board made the following changes:
Increased the annual retainers by $25,000 for independent directors and by an additional $10,000 for members of the Audit, Governance and Industrial Risk Committees. Commensurately increased directors’ stock ownership requirements. The Board increased the director stock ownership requirement from $500,000 to $550,000 to keep the level at 5X the cash portion of the annual retainer. Established an annual limit for director compensation, which was set at $1,500,000 annually.
Over the past few years, in line with the company’s simplification initiative, the Board has taken several actions to reduce benefits provided to directors, including lowering the maximum annual match under the Matching Gifts Program from $50,000 to $25,000, and closing the Charitable Award Program to new directors.
Director Compensation Table.
This table shows the compensation that each independent director earned for his or her 2016 Board and committee service. Amounts reflect partial-year Board service for Messrs. Cash, Swieringa and Warner, who retired from the Board in April 2016.
CASH FEES. Amount of cash compensation earned in 2016 for Board and committee service.
STOCK AWARDS. Aggregate grant date fair value of DSUs granted in 2016, as calculated in accordance with SEC rules, including amounts that the directors deferred into DSUs in lieu of all or a part of their cash compensation. Grant date fair value is calculated by multiplying the number of DSUs granted by the closing price of GE stock on the grant date, which was $31.79 for March 31, 2016 grants, $31.48 for June 30, 2016 grants, $29.62 for September 30, 2016 grants, and $31.60 for December 31, 2016 grants. The table below shows the cash amounts that the directors deferred into DSUs in 2016 and the number of DSUs accrued as of 2016 fiscal year-end.
ALL OTHER COMPENSATION. The following table provides more information on the type and amount of benefits included in the All Other Compensation column.
Matching gifts. Under the terms of the Matching Gifts Program, contributions made within a calendar year are eligible to be matched if they are reported to GE by April 15 of the following year. Amounts shown in this column reflect all contributions reported to the company in 2016, including 2015 contributions reported to GE by April 2016 and excluding any 2016 contributions that were not reported until 2017. Other benefits. This column includes: (1) the fair market value of products received under the Executive Products and Lighting Program, the appliances portion of which terminated in June 2016; and (2) a $1,000,000 contribution under our legacy Charitable Award Program for each of our retiring directors (Cash, Swieringa and Warner).
No Additional Director Compensation.
Independent directors do not receive any cash incentive compensation, hold deferred compensation balances or receive pension benefits. Since 2003, DSUs have been the only equity incentive compensation awarded to the independent directors; we ceased granting stock options to directors in 2002, and no independent director had stock options outstanding at 2016 fiscal year-end. Directors who are company employees do not receive any compensation for their services as directors.
Share Ownership Requirements for Independent Directors.
All independent directors are required to hold at least $550,000 (5X the cash portion of their annual retainer) worth of GE stock and/or DSUs while serving as GE directors. They have five years to meet this ownership threshold. All directors are in compliance with this requirement.
Director and Officer (D&O) Insurance.
GE provides liability insurance for its directors and officers. The annual cost of this coverage is approximately $7.5 million.
Approval of the GE 2007 Long-Term Incentive Plan, as Amended to Extend the Plan and Increase the Number of Plan Shares.
What are you voting on?
MANAGEMENT PROPOSAL NO. 3
We are asking shareowners to approve the GE 2007 Long-Term Incentive Plan (Plan), as amended to extend the term of the Plan, increase the number of authorized shares and make other changes.
Why the Board recommends a vote FOR the amended plan.
The purposes of the plan are to:
Encourage selected salaried employees to acquire a proprietary interest in the growth and performance of GE; Generate an increased incentive to contribute to GE’s future success and prosperity, thus enhancing the value of the company; and Enhance the ability of the company to attract and retain exceptionally qualified individuals upon whom the sustained progress, growth and profitability of GE depend.
The amended plan would further these objectives by allowing GE to continue to grant awards under the Plan for another four to five years.
YOUR BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE GE 2007 LONG-TERM INCENTIVE PLAN, AS AMENDED.
Balanced mix of PSUs, RSUs & options for senior officers Long-term vesting with 5 years for options/RSUs, 3 years for PSUs No dividend equivalent payments to executive officers on unearned RSUs/PSUs Share buybacks to offset dilution from equity programs.
Overview of the 2007 LTIP.
On February 10, 2017, the Board adopted, subject to shareowner approval, an amendment to the GE 2007 Long-Term Incentive Plan (Plan) to extend the term of the Plan, which otherwise would terminate at the 2017 annual meeting, and to increase the Plan’s share pool — that is, the number of shares that GE is authorized to issue for awards under the Plan. When shareowners previously approved the Plan at our 2007 and 2012 annual meetings, they authorized the issuance of up to 925 million shares for Plan awards (of which 223.5 million were available for future awards as of December 31, 2016).
If shareowners approve this proposal, the Plan would be amended to:
Authorize GE to issue up to 150 million additional shares for use under the Plan, which would bring the total number of authorized shares to 1,075 million (although 25 million of these shares would come from the reallocation of shares from the Consultant’s Plan to the Plan), of which 373.5 million would be available for new grants after 2016. Extend the term of the Plan by ten years, with the 2027 annual meeting as the end date. Raise the limit on the number of shares available for incentive stock options by 150 million (same as the increase in the share pool). Add non-employee directors as participants under the Plan, bringing the director DSU program under the auspices of the Plan. Establish an annual limit for director compensation (both cash and equity) at $1.5 million per year. Clarify that Plan awards are subject to the company’s clawback policy. Make other, non-substantive changes to the Plan.
How Long We Expect the Share Pool to Last.
We expect that the proposed share pool for new grants under the Plan (i. e., the 373.5 million shares available for grants after 2016), if shareowners approve this proposal, will last four to five years. However, regardless of actual Plan usage, as a matter of good corporate governance, we intend to ask shareowners to reapprove the Plan no later than the 2022 annual meeting. This is consistent with our historical practice of seeking shareowner approval for the Plan every five years.
How the Plan is Designed to Protect Shareowners’ Interesses
The following features of the Plan will continue to protect the interests of our shareowners:
Limits on authorized shares — no evergreen provision. If the amendment to the Plan is approved, the maximum number of shares available for grants of stock options and other stock awards will be 1,075 million, including shares that have been granted since the Plan’s adoption in 2007. Of these shares, no more than 230 million are available for “full value” awards (e. g., RSUs and PSUs). The Plan does not have an “evergreen” característica. Limits on terms of stock options. The maximum terms of each stock option and SAR that can be granted under the Plan is ten years. Limits on share counting. Shares surrendered or withheld for the payment of the exercise price or taxes under stock options or SARs, shares surrendered or withheld for the payment of taxes on RSUs, PSUs and other full value awards, and shares repurchased in the open market with the proceeds of an option exercise, may not again be made available for issuance under the Plan. No stock option repricing. The Plan prohibits the repricing of “underwater” options and SARs, whether by amending an existing award, substituting a new award at a lower price or executing a cash buyout. No discounted stock option grants. The Plan prohibits granting stock options or SARs with an exercise price less than the fair market value of GE stock on the date of grant. No automatic change-of-control benefits. The Plan does not provide any automatic benefits upon a change of control or any excise tax gross-ups.
Key Data About Our Grant Practices.
Burn rate measures how rapidly we are using the Plan’s share pool. We measure burn rate on both a gross basis (does not take into account shares returned to the share pool due to forfeiture) and a net basis (takes into account shares returned to the share pool due to forfeiture), calculated as follows:
(total shares granted) (Weighted average GE shares outstanding (undiluted)) NET BASIS.
(total shares granted) — (shares returned to the share pool) (Weighted average GE shares outstanding (undiluted))
GE COMPARES FAVORABLY TO DOW 30. Over the last three years, our gross burn rate averaged 0.6%, compared to 0.9% for the Dow 30, and our net burn rate averaged 0.5%, compared to 0.7% for the Dow 30.* See the Historical GE Data table for more information.
GE PERSPECTIVE. The committee manages burn rate by considering the aggregate value of our annual equity grants in the context of the company’s stock price and other compensation actions. Over the last five years, the committee has twice “reset” overall grant levels (i. e., reducing the amount) in light of these considerations.
Overhang measures the potential shareowner dilution from outstanding equity awards and shares available for grant. We use a “simple overhang” measurement, calculated as follows:
(awards outstanding) + (shares available for grant) (Weighted average GE shares outstanding (undiluted))
GE COMPARES FAVORABLY TO DOW 30. Over the last three years, our overhang averaged 7.8%, compared to 10.5% for the Dow 30.* See the Historical GE Data table for more information. If this proposal is approved, our potential dilution would increase from 7.6% in 2016 to 9.2%.
GE PERSPECTIVE. The company manages shareowner dilution from equity compensation through its buyback program. In 2016, the company repurchased $22 billion of GE shares, approximately $1.9 billion of which was to offset dilution from the Plan.
Concentration Ratio.
Concentration ratio measures the percentage of Plan awards granted to our named executives and is a useful indicator of whether a plan is broad-based. We calculate concentration ratio as follows:
(shares granted to named executives) (total shares granted)
GE COMPARES FAVORABLY TO DOW 30. Over the last three years, our concentration ratio averaged 4.2%, compared to 7.6% for the Dow 30.* See the Historical GE Data table for more information.
GE PERSPECTIVE. The committee believes that it is important for a broad group of GE executives and other employees to receive equity awards so that their interests are aligned with shareowners. In 2016, more than 5,000 GE employees received awards under the Plan.
*Represents the median of the Dow 30 companies’ average over the three-year period 2013–2015 (the last year for which data is available).
Historical GE Data.
*See “PSUs” above for a description of the performance metrics for the PSUs.
** Basic weighted average.
Equity Compensation Plan Information.
The following table provides information regarding the total share authorization under the Plan if this proposal is approved.
The following table provides information regarding outstanding equity awards and shares available for future issuance under all of GE’s equity plans. As required by SEC rules, it does not give effect to the proposed amendment to the Plan.
Frequently Asked Questions About the Plan.
This summary is qualified by reference to the complete text of the Plan, which can be found in Appendix A to this proxy statement.
Who can participate in the Plan?
All salaried employees of GE and its affiliates — approximately 185,000 employees in total — are eligible to participate in the Plan, along with the company’s 17 non-employee directors (assuming Dr. Lavizzo-Mourey is elected).
Who administers the Plan?
GENERALLY. The Plan is administered by the Compensation Committee, an independent committee of the Board. The committee has the authority to make any determination or take any action that it deems necessary or desirable to administer the Plan, and also has the sole discretion to interpret the Plan and all award agreements. With limited exceptions, the committee can delegate its authority under the Plan to the committee chairman, a subcommittee or to GE officers or managers.
AS IT RELATES TO DIRECTOR COMPENSATION. If this proposal is approved, the Governance Committee will administer the Plan as it relates to director compensation.
How many shares are available for Plan awards?
If this proposal is approved, a total of 1,075 million shares will have been authorized for issuance under the Plan (including 25 million shares that were reallocated from the Consultant’s Plan), of which 701.5 million have been granted as of December 31, 2016. Shares delivered pursuant to an award may consist of authorized and unissued shares or treasury shares.
& middot; WHAT REDUCES THE SHARE POOL. Awards settled in shares and dividend equivalents denominated in shares.
& middot; WHAT DOES NOT REDUCE THE SHARE POOL. Awards made upon the assumption of or in substitution for outstanding grants made by a company that we acquire and awards settled in cash.
& middot; WHICH SHARES CAN RETURN TO THE SHARE POOL. Shares covered by an award that is terminated or forfeited because payout conditions are not met.
& middot; WHICH SHARES CANNOT RETURN TO THE SHARE POOL. Shares surrendered to pay the exercise price or withholding taxes for stock options or SARs, shares repurchased in the open market with the proceeds of an option exercise, shares that were subject to an option or stock-settled SAR that were not issued upon its net settlement, and shares withheld to pay withholding taxes on RSUs, PSUs and other full value awards.
The last sales price of GE’s common shares, $0.06 par value, on February 10, 2017 was $29.72 per share, as reported on the NYSE.
What kind of awards can the committee grant under the Plan?
STOCK OPTIONS AND SARs. The maximum term for either stock options or SARs is ten years. Options may be either nonqualified stock options or incentive stock options. The committee will establish the vesting schedule and the method for paying the exercise price of these awards.
RESTRICTED STOCK AND RSUs. The committee will establish the applicable restrictions (including limitations on voting and dividend rights) and vesting schedule of these awards.
PERFORMANCE AWARDS. These awards may be denominated in either cash or shares, and are subject to the achievement of performance goals over set performance periods, as established by the committee.
OTHER STOCK-BASED AWARDS. The committee may grant other stock-based awards, including DSUs, that are valued by reference to or denominated or payable in shares, under such terms as it determines.
In addition, the committee will determine (1) whether an award includes dividends or dividend equivalents (other than stock options or SARs); (2) what happens if a participant terminates employment; and (3) whether shares of GE stock issuable under an award are subject to additional restrictions. Awards generally are not transferable.
Are there minimum vesting periods for Plan awards?
The Plan does not have minimum vesting periods for Plan awards. However, the committee generally believes that options and RSUs should have vesting periods of at least five years (absent compelling recruitment and retention considerations) and PSUs should have performance periods of at least three years. Consistent with this, over the last three years, more than 95% of the awards granted under the Plan met these conditions.
Are Plan awards subject to a clawback policy?
Plan awards granted to executive officers and directors are subject to the company’s clawback policy (see “Clawbacks and Other Remedies for Potential Misconduct” above).
What are the per-person award limits?
Subject to any adjustments that the committee makes (as described below), the Plan limits the number of shares that can be granted to an individual in any three-year period as follows:
In addition, if this proposal is approved, there will be an annual limit on director compensation set at $1,500,000 per director. This would include awards granted under the Plan as well as cash or other compensation paid by the company with respect to service as a director. In certain circumstances, the committee may make an exception and grant compensation above this limit (up to an additional $1,000,000). For example, this exception would permit awards under the company's Charitable Award Program (which has been closed to new directors.)
What adjustments can the committee make under the Plan?
ANTI-DILUTION ADJUSTMENTS. In the event of certain corporate transactions affecting GE’s outstanding common shares — ​such as a dividend, recapitalization, stock split, merger, consolidation, split-up, spin-off, or exchange of shares — ​the committee will make adjustments as it deems appropriate to prevent dilution or enlargement of Plan benefits. This could include changes to the number and type of shares to be issued under the Plan and outstanding awards, the exercise price of outstanding awards, and Plan and per-person limits on the number of shares that can be granted.
PERFORMANCE CRITERIA ADJUSTMENTS. The committee may adjust performance award criteria in recognition of unusual or infrequently recurring events affecting GE or its financial statements or changes in applicable laws, regulations, or accounting principles.
ACQUISITION-RELATED ADJUSTMENTS. The committee may also adjust award terms in connection with business acquisitions in which GE assumes outstanding employee awards or the right to make future awards.
What’s the duration of the Plan?
The Plan became effective on the date of our 2007 annual meeting. If this proposal is approved, the Plan will be extended for an additional ten years, such that no award may be granted under the Plan after the date of our 2027 annual meeting.
How can the Plan or awards be amended?
AMENDMENTS TO THE PLAN. The Board may amend, suspend or terminate the Plan, but will seek shareowner approval of any amendment that would:
& middot; Increase the number of authorized shares under the Plan (except in connection with anti-dilution adjustments as discussed above);
& middot; Permit underwater stock options or SARs to be repriced, replaced or exchanged; ou.
& middot; Otherwise be considered a material amendment under NYSE rules.
AMENDMENTS TO AWARDS. The committee may waive award conditions or amend or terminate awards, but may not impair the rights of the award holder without his or her consent.
Other Information About the Plan.
Summary of U. S. Federal Income Tax Consequences.
The following summary of tax consequences to GE and to Plan participants is intended to be used solely by shareowners in considering how to vote on this proposal and not as tax guidance to participants in the Plan. It relates only to federal income tax and does not address state, local or foreign income tax rules or other U. S. tax provisions, such as estate or gift taxes. Different tax rules may apply to specific participants and transactions under the Plan, particularly in jurisdictions outside the United States. In addition, this summary is as of the date of this proxy statement; federal income tax laws and regulations are frequently revised and may be changed again at any time. Therefore, each recipient is urged to consult a tax advisor before exercising any award or before disposing of any shares acquired under the Plan.
STOCK OPTIONS AND SARs. The grant of an option or SAR will create no tax consequences for the participant or the company. A participant will have no taxable income upon exercise of an incentive stock option, except that the alternative minimum tax may apply. Upon exercise of an option other than an incentive stock option, a participant generally must recognize ordinary income equal to the fair market value of the shares acquired minus the exercise price. When disposing of shares acquired by exercise of an incentive stock option before the end of the applicable incentive stock option holding periods, the participant generally must recognize ordinary income equal to the lesser of (1) the fair market value of the shares at the date of exercise minus the exercise price or (2) the amount realized upon the disposition of the shares minus the exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an incentive stock option for which the incentive stock option holding periods are met) generally will result in only capital gain or loss.
OTHER AWARDS. Other awards under the Plan generally will result in ordinary income to the participant at the later of the time of delivery of cash, shares, or other awards, or the time that either the risk of forfeiture or restriction on transferability lapses on previously delivered cash, shares or other awards.
COMPANY DEDUCTION. Except as discussed below, the company is generally entitled to a tax deduction equal to the amount recognized as ordinary income by the participant in connection with options, SARs or other awards, but not for amounts the participant recognizes as capital gain. Thus, the company will not be entitled to any tax deduction with respect to an incentive stock option if the participant holds the shares for the incentive stock option holding periods.
IMPACT OF SECTION 162(m) DEDUCTION LIMITATION. Section 162(m) generally allows deductions without limit for compensation that qualifies as performance based. GE intends that options and SARs granted under the Plan will continue to qualify as performance-based compensation not subject to a deductibility cap (based on our shareowners’ original approval of the Plan), as will RSUs and performance awards if shareowners approve the material terms of the performance goals described under “Management Proposal No. 4 — Approval of the Material Terms of Senior Officer Performance Goals” on Shareowner Proposals. However, a number of requirements must be met in order for particular compensation to so qualify, so there can be no assurance that these types of compensation under the Plan will be fully deductible under all circumstances. In addition, other types of compensation provided under the Plan may not qualify as performance-based compensation under Section 162(m) and therefore may not be deductible.
Plan Benefits.
NEW PLAN BENEFITS. Awards granted under the Plan are within the discretion of the committee. As the committee has not determined future awards or who might receive them, the benefits that will be provided under the Plan are not currently determinable.
EXISTING PLAN BENEFITS. The following table contains information with respect to options and other awards previously granted under the Plan as of December 31, 2016. Until this proposal is approved, non‑employee directors cannot participate in the Plan.
APPROVAL OF THE MATERIAL TERMS OF SENIOR OFFICER PERFORMANCE GOALS.
What are you voting on?
MANAGEMENT PROPOSAL NO. 4
At the 2012 annual meeting, shareowners approved the material terms of performance goals to be used by the Compensation Committee for awarding certain compensation to executives until the date of the 2017 annual meeting. The Board is now requesting that shareowners reapprove the material terms of the performance goals so GE can continue to have a shareowner-approved arrangement under which certain compensation awarded to executives until the date of the 2022 annual meeting may qualify as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code.
Why are we asking you to vote?
Section 162(m) imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the company’s CEO or any of the company’s three other most highly compensated executive officers (other than the CFO) who are employed as of the end of the year. This limitation does not apply to compensation that meets the requirements under Section 162(m) for “qualifying performance-based” compensation. One of the requirements for compensation to qualify is that the material terms of the performance goals for such compensation be approved by shareowners every five years.
YOUR BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE MATIERAL TERMS OF SENIOR OFFICER PERFORMANCE GOALS.
Material Terms of the Performance Goals.
For purposes of Section 162(m), the material terms of the performance goals include the following:
which employees would be subject to the goals; the business measurements on which the performance goals would be based; and the formula that would be used to calculate the maximum amount of compensation that can be paid to an employee under the arrangement.
Each of these aspects is discussed below, and shareowner approval of this proposal constitutes re-approval of each of these aspects for purposes of Section 162(m).
Employees Covered.
The company’s executive officers (those employees who are required to file reports under Section 16 of the Exchange Act) would be subject to the performance goals described in this proposal. Although Section 162(m) only limits deductibility for compensation paid to a sub-set of this group, we may apply the performance goals to all executive officers in the event that any of them becomes a covered employee under Section 162(m).
Business Measurements.
The Compensation Committee expects to continue to use annual net earnings as determined under GAAP, adjusted to remove the effect under GAAP of unusual events (adjusted net earnings), as the basis for payment of annual bonuses and LTPAs as well as grants of RSUs (including PSUs).
COMMITTEE AUTHORITY TO MEASURE PERFORMANCE GOALS. The committee may establish performance goals that are measured either individually, alternatively or in any combination, are applied to either the company as a whole or to a business unit or related company, and are measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to a previous year’s results or to a designated comparison group, in each case as specified by the committee in the award.
COMMITTEE AUTHORITY TO ADJUST PERFORMANCE GOALS. The committee may adjust the performance goals to remove the effect of charges for restructurings, discontinued operations and all items of gain, loss or expense determined to be unusual in nature or infrequent in occurrence, related to the disposal of a segment or a business, or related to a change in accounting principle or otherwise.
Per-Person Maximum Amounts.
The maximum amounts granted (in the case of RSUs and PSUs) or payable (in the case of annual bonuses and LTPAs) to any senior officer under each performance goal are:
The committee has established business measurements and maximum amounts that it considers appropriate in light of foreseeable business conditions. If approved by shareowners, this proposal would not limit GE’s right to condition payment of annual bonuses, RSUs or LTPAs on achievement of additional quantitative or qualitative performance goals or to award or pay other or additional forms of compensation (including, but not limited to, salary, other incentive-based cash compensation or other stock-based awards under the Plan). These other forms of compensation may be paid regardless of whether the performance goals described in this proposal are achieved in any future year, and whether or not payment of such other forms of compensation would be tax deductible, but will be designed so as not to affect the deductibility of arrangements intended to qualify as performance-based compensation under Section 162(m). However, there can be no guarantee that amounts payable under these programs and awards will be treated as qualified performance-based compensation under Section 162(m).
If you hold your shares directly with GE or in the GE RSP:
If you hold your shares through a bank or a broker:

Taxes and executive compensation.
Briefing Paper #344.
The topic of executive compensation has long been of interest to academics, the popular press, and politicians. With the continued increase in executive compensation and resultant increase in pay disparity between those executives and the average worker, this issue is once again coming to the forefront of the public policy debate. Over the years, lawmakers have tweaked the tax code to limit disfavored forms of executive compensation, while regulators have increased the amount of disclosure companies must make. In the current Congress, Rep. Barbara Lee (D-Calif.) has introduced the Income Equity Act of 2011 (H. R. 382), which would amend the Internal Revenue Code to prohibit deductions for excessive compensation for any full-time employee; compensation is defined as “excessive” if it exceeds either $500,000 or 25 times the compensation of the lowest-paid employee, whichever is larger.
The objective of this study is to examine the impact of a prior limitation on deductibility of compensation, Internal Revenue Code Section 162(m). In contrast to much of the debate today on the need of the federal government to raise tax revenue, the primary goal of Section 162(m), which limited tax deductions for executive compensation, was not to raise revenue but to reduce excessive, non-performance-based compensation—in other words, to do something about excessive compensation that 1992 presidential candidate William Jefferson Clinton campaigned against. This paper will review the effectiveness of that provision in achieving its goals, and provide information on how much revenue it has raised or lost due to deductions for executive compensation. With respect to reducing excessive, non-performance-based compensation, many consider Section 162(m) a failure, including Christopher Cox, the then-chairman of the Securities and Exchange Commission, who went so far as to suggest it belonged “in the museum of unintended consequences.” Sen. Charles Grassley (R-Iowa), the then-chair of the Senate Committee on Finance, was even more direct, saying:
162(m) is broken. … It was well-intentioned. But it really hasn’t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule.
Since Section 162(m) passed nearly 20 years ago, both academic and practitioner research has shown a dramatic increase in executive compensation, with little evidence that it is more closely tied to performance than before. In this paper, we estimate that corporate deductions for executive compensation have been limited by this provision, with public corporations paying, on average, an extra $2.5 billion per year in federal taxes. They continue, however, to deduct the majority of their executive compensation, with these deductions costing the U. S. Treasury an estimated $7.5 billion per year. Because actual tax return data are, by statute, confidential, our estimates are somewhat imprecise, as we have to infer both the tax deductibility of executive compensation and the corporation’s tax status from public filings.
Our key findings are:
Companies are allowed to fully deduct components of executive compensation that meet the IRS requirements to qualify as “performance-based.” One of those requirements is shareholder approval. However, only very general information is provided to shareholders. Therefore, shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan. Performance pay, such as stock options and non-equity incentive plans, that meets the IRS requirements for the “performance-based” exception is fully deductible. Salary, bonuses, and stock grants are deductible but subject to a limit of $1 million. In 2010 our estimate was that there was $27.8 billion of executive compensation that was deductible. A total of $121.5 billion in executive compensation was deductible over the 2007–2010 period. Roughly 55 percent of that total was for performance-based compensation. Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions and continue to pay nondeductible executive salaries. The number of executives receiving salary exceeding the maximum deductible threshold of $1 million actually increased from 563 in 2007 to 594 in 2010. For all that Section 162(m) is intended to limit excessive executive compensation, it is the shareholders and the U. S. Treasury who have suffered financial losses. The code does not prohibit firms from paying any type of compensation; instead, they are prohibited from deducting that amount on their tax return. The result is decreased company profits and diminished returns to the shareholders. Assuming a 25 percent marginal tax rate on corporate profits (a conservative estimate), revenue lost to the federal government in 2010 from deductible executive compensation was $7 billion, and the foregone federal revenue over the 2007–2010 period was $30.4 billion. More than half the foregone federal revenue is due to taxpayer subsidies for executive “performance pay.” Executive compensation will likely recover in the near future, exceeding levels seen in 2007.
1. Background.
Section 162 of the Internal Revenue Code covers trade and business expenses. As put forth in Section 162(a), entities are allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including, as noted in Section 162(a)(1), a reasonable allowance for salaries or other compensation for personal services actually rendered.
However, a number of sections of the Internal Revenue Code—in particular, sections 162(m), 162(m)(5), 162(m)(6), and 280(g)—limit the deductibility of executive compensation. Adopted in 1993, Section 162(m), which applies to publicly traded corporations, limits the deduction for executive compensation to $1 million per covered individual,1 with an exception for qualified performance-based compensation. That is, a company can deduct $1 million of non-performance-based compensation per covered individual and an unlimited amount of performance-based compensation.
In contrast to Section 162(m), sections 162(m)(5) and 162(m)(6) are more recent and narrowly targeted; they apply, respectively, to Troubled Asset Relief Program (TARP) participants and health insurers. They also set a lower limit on the tax deductions allowed for compensation at $500,000 per individual, with no distinction or exception for performance-based compensation. Section 162(m)(5) was adopted in 2008 and applies to the chief executive officer (CEO), chief financial officer (CFO), and next three highest paid officers of public and private entities that accepted money under TARP. Section 162(m)(6) becomes effective in 2013, and its limitations apply to most employees of health care providers. Section 280(g) does not apply to periodic payments to employees, but rather to change in control payments.2 If the amount is equal to or greater than three times the covered individual’s average W-2 compensation for the prior five years, the company forfeits the tax deduction for that payment, and the individual is subject to a 20 percent excise tax on the excess payment. As with sections 162(m)(5) and 162(m)(6), Section 280(g) contains no performance-based exception.
To discuss the tax deductibility of executive compensation, this paper will focus on Section 162(m) because of its broader reach. Remember, it is not limited to a specific sector of the economy; it limits the deduction for executive compensation in public corporations to $1 million per covered individual, with an exception for qualified performance-based compensation. To qualify as performance-based compensation, the following requirements must be met:
The compensation must be paid solely on account of the executive’s attainment of one or more performance goals determined by an objective formula. These goals can include stock price, market share, sales, costs or earnings, and can be applied to individuals, business units, or the corporation as a whole; The performance goals must be established by a compensation committee of two or more independent directors; The terms must be disclosed to shareholders and approved by a majority vote; and The compensation committee must certify that the performance goals have been met before payment is made.
While Section 162(m) is intended to limit excessive executive compensation, this author sees several weaknesses or loopholes in the code. Regarding shareholder approval, companies need only give shareholders the most general terms when they put the compensation plan up for a vote. Shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan. Those details are left to the compensation committee, which must set the terms no later than the first quarter of the company’s fiscal year. Also problematic is that if these terms are not met, the corporation is not prohibited from paying the compensation. Instead, it is prohibited from deducting that amount on its tax return. The result is decreased company profits. The ones who suffer are the shareholders—the same people who, even in this day of expanded compensation disclosures, are not provided with details on the executive compensation plans before being asked to vote on them, nor are they given information on the tax deductions taken or forfeited.
In Section 2, we will go through the components of the compensation package and discuss the tax consequences of each. Section 3 will utilize executive compensation information disclosed in corporate proxy statements—those required statements, useful in assessing how management is paid and identifying potential conflicts of interest, that must be filed with the U. S. Securities and Exchange Commission (Form DEF 14A)—to summarize and tabulate compensation reported for each year from 2007 to 2010 and to contrast the amounts reported with those actually deductible by those corporations. Section 4 will estimate the revenue loss associated with those deductions. The paper will conclude with Section 5, which will look back on the impact of these tax provisions, specifically the limitations on deductions and their effect on executive compensation, and look forward to how certain current events, such as the adoption of say-on-pay policies, will affect the future of executive compensation.
2. Components of the executive compensation package.
Before we can fully explore the consequences of Section 162(m), we need to understand the executive compensation package. Hence, this section will introduce the components of the compensation package, which are summarized in the chart titled “Components of the compensation package,” and discuss their tax consequences to the executive and to the company.
Components of the compensation package.
Copy the code below to embed this chart on your website.
Salary is the fixed, possibly contracted, amount of compensation that does not explicitly vary with performance. By definition, salary is not performance-based and therefore would not qualify for the performance-based exception under Section 162(m). Consequently it is taxable for the executive and deductible for the firm (subject to deduction limitations) in the year paid. It should be noted that the $1 million deduction limitation applies to all non-performance compensation in aggregate, not each individual component of that compensation. If a firm pays an executive salary of $750,000, the entire amount would be deductible. However, if it pays an additional $500,000 in other forms of non-performance compensation, its total deduction for non-performance-based compensation would be limited to $1 million; the additional $250,000 is not deductible.
Bonus compensation may be conditioned on the performance of an individual, group, or corporation. Because it is conditioned upon performance, it is often paid after the end of the company’s fiscal year. From the employee’s point of view it is taxable not in the year earned, but in the year received. For the employer, Treasury Regulation 1.404(b)-1T allows that a corporation using an accrual method of accounting can use the deduction in the year earned if an employee receives compensation within 2.5 months after the end of the employer’s taxable year. In other words, bonuses are taxable to the executive in the year received, while deductible (subject to deduction limitations) in the year earned (under the assumption that bonuses are paid out within 2.5 months of year-end). Although bonuses are theoretically a reward for performance, they are not awarded or paid pursuant to a written plan approved by shareholders,3 and therefore do not qualify as performance-based under Section 162(m).
Non-equity incentive plan compensation.
Similar to bonuses, non-equity incentive plan compensation may be conditioned upon individual, group, or corporate performance. The difference between the two is that non-equity incentive plan compensation is paid under a written plan, which, for purposes of this study, we will assume meets the requirements of Section 162(m).4 Consequently, payments under a non-equity incentive plan are fully taxable to the executive in the year received and deductible by the company in the year earned.5.
Bolsas de estoque.
Stock grants occur when corporations give shares to their employees.6 They differ from stock options in that they have no exercise price. Whereas a stock option only has value if the corporation’s share price is above the exercise price, a stock grant has value as long as the share price is above zero. Consequently, a stock grant is always worth more than a stock-option grant for the same number of shares. Stock grants can be unrestricted or restricted; however, the vast majority of employee grants are restricted. For example, a restriction might be that the executive cannot sell the shares until he or she has worked for the corporation for a period of time (a typical vesting period would be three or four years). Restrictions may also be based upon performance. For example, the executive will forfeit the shares if earnings and/or stock returns do not achieve a pre-established goal.7 Once these restrictions expire, the executive has full ownership of the shares and, absent a Section 83(b) election,8 will immediately recognize taxable income equivalent to the fair value of the stock at that time. Therefore, the year of grant and the year of tax recognition are usually different. The deductibility of the stock grants as performance-based depends on those restrictions. That is, if the restrictions are based upon performance, then the stock grants may qualify for the performance-based exception under Section 162(m),9 whereas if the restrictions expire only with the passage of time, then they do not. In recent years there has been a trend to greater usage of what is now termed “performance shares”; however, in previous years they were a distinct minority of stock grants. Consequently, the assumption made in this paper is that most of the grants made in earlier years and vesting in the observation period do not qualify for the Section 162(m) performance-based exception. The possibility is that as more grants become performance-based, the percentage and dollar amount of executive compensation that will be deductible will increase. Even performance-based stock grants, however, need not meet the requirements for deductibility. Consider the following passage from the 2012 Intel Corporation proxy statement:
Section 162(m) of the tax code places a limit of $1 million on the amount of compensation that Intel may deduct in any one year with respect to its CEO and each of the next three most highly compensated executive officers (excluding the CFO). Certain performance-based compensation approved by stockholders is not subject to this deduction limit. Intel structured its 2006 Equity Incentive Plan with the intention that stock options awarded under the plan would qualify for tax deductibility. In addition, in order to maintain flexibility and promote simplicity in the administration of these arrangements, other compensation, such as OSUs, RSUs, and annual and semiannual incentive cash payments, are not designed to qualify for tax deductibility above the tax code Section 162(m) $1 million limitation.
The OSUs referred to in the above passage are outperformance stock units, i. e., performance-based, and yet are not designed to qualify under Section 162(m).
Opções de ações.
Stock options allow their holder to purchase one or more shares of stock at a fixed exercise price over a fixed period of time. They have value if the corporation’s share price at the time of exercise or purchase is greater than the exercise price. Since the exercise price is normally set at the share price on the date of grant, the ultimate value of the option depends upon the performance of a corporation’s share price subsequent to the date of grant. That is, they can be extremely valuable when the share price rises dramatically, but can also expire worthless if the share price declines. Like stock grants, stock options are normally granted to executives with restrictions. These restrictions generally expire with the passage of time. While companies can add performance conditions to their stock options, currently that is rather infrequent. As with stock grants, the year of grant and year of tax recognition is normally different for stock options. They differ, however, in that stock grants are taxable upon expiration of the restrictions or vesting, whereas stock options are not taxable until the holder elects to exercise the options.10 The amount that is taxable is not the fair value of the shares acquired, but the bargain element or discount, i. e., the difference between the fair value of the shares acquired less the exercise or purchase price paid. Stock options are considered performance-based under Section 162(m) if they meet minimal conditions (e. g., shareholder approval, options granted with an exercise price at or above market price on date of grant), the reasoning being that the option holder can only profit from the option if the share price increases. Thus the assumption made in this study is that stock option compensation is fully deductible to the firm.
Stock appreciation rights.
While not as popular as stock options and grants, some companies grant stock appreciation rights (SARs). Stock appreciation rights are the right to receive the increase in the value of a specified number of shares of common stock over a defined period of time. Economically, they are equivalent to stock options, with one exception. With a stock option, the executive has to purchase and then sell the shares to receive his or her profit. With a stock appreciation right, the corporation simply pays the executive, in cash or common stock, the excess of the current market price of the shares over the exercise price. Thus the executive is able to realize the benefits of a stock option without having to purchase the stock. In many cases, stock appreciation rights are granted in tandem with stock options where the executive, at the time of exercise, can choose either the stock option or stock appreciation right. For proxy-statement reporting purposes, SARs are combined with stock options. Similarly, they are treated like stock options for tax—including Section 162(m)—purposes. Consequently, for this analysis SARs will be incorporated into the broader category of stock options.
Pensions and deferred compensation.
Deferred compensation is compensation that is earned in one period but deferred by the executive to be received in a future period. If it meets the requirements of Section 409(A) of the Internal Revenue Code, tax recognition may also be deferred until a future period. Pensions are a form of deferred compensation (covered by multiple separate sections of the Internal Revenue Code), whereby after retirement from the corporation, the employee receives a payment or series of payments. These payments may be defined by the pension plan (known as a defined benefit plan), or based upon the amounts accumulated in the employee’s personal retirement account (known as a defined contribution plan, one type of which is a 401(k)). If the payments are defined by the pension plan they can be based upon a number of factors including, but not limited to, number of years with the corporation, earnings while working, and level within corporation. Pensions can be structured in many ways; for example, the payments can be fixed in amount, or they can be adjusted for inflation. Due to Internal Revenue Code limitations, executives are usually covered by more than one plan. That is, they participate in a primary “tax qualified” plan along with other employees, and have at least one “supplemental” non-qualified plan. The second plan is necessitated by Internal Revenue Code limitations on payments from a qualified plan. That is, in order to qualify for favorable tax treatment, the plan must be nondiscriminatory, that is, the benefits cannot be skewed in favor of highly paid employees, and the corporation cannot consider compensation in excess of a threshold, which was $250,000 for the year 2012 (Section 401(a)(17)), in determining pension benefits, nor make payments in excess of $200,000 (Section 415(b)). Most top executives make substantially larger sums.
For tax purposes, both defined benefit and defined contribution plans are divided into qualified and non-qualified plans. With a qualified plan, the company can contribute or fund it currently, and take the corresponding tax deductions (above and beyond the Section 162(m) limitations), while the executive does not recognize taxable income until the future when he or she receives the payments. However, given the limitations discussed above, companies turn to non-qualified or supplemental executive retirement plans (SERPs) for the bulk of retirement payments to their executives. Because these plans are not qualified, they are unfunded, as funding would subject the executive to current taxation.
To sum up, the bulk of pension and deferred-compensation payments are both taxable and deductible after retirement, at which point they are no longer disclosed in the corporate proxy statement. At that time, they will be fully deductible, as the then-retired executive will no longer be subject to Section 162(m). Thus, while the next section will discuss the amounts reported as increases in pensions and deferred compensation in the proxy statement, it will not incorporate any of those amounts when estimating the immediate tax consequences of executive compensation.11.
All other compensation.
The proxy statement summary compensation table contains one other category, a catch-all category that encompasses everything not included in the prior headings: “all other compensation.” All other compensation includes items such as those infamous perquisites; e. g., private airplanes, company cars, etc. For purposes of this paper, we assume that the amounts reported as “all other compensation” in the proxy statement are currently taxable to the executive and deductible by the company, subject to Section 162(m) limitations, as they are not performance-based.
In the above summary chart, “Components of the compensation package,” we use the phrase “likely to be fully deductible” for a reason. As outsiders, drawing data from a large-scale database, we cannot determine precisely what is and what is not deductible. Note from above that performance-based compensation can qualify for full deductibility if the company meets the requirements set forth in the Internal Revenue Code. However, sometimes companies choose not to comply with those requirements. Consider the following excerpt from Goodyear Tire & Rubber Company’s most recent proxy statement:
Tax Deductibility of Pay.
Section 162(m) of the Code provides that compensation paid to a public company’s chief executive officer and its three other highest paid executive officers at the end of the year (other than its chief financial officer) in excess of $1 million is not deductible unless certain requirements have been satisfied. The Compensation Committee believes that awards under the Management Incentive Plan and the 2008 Performance Plan qualify for full deductibility under Section 162(m).
Although compensation paid under the Executive Performance Plan is performance-based, it does not qualify for the deductibility exception for performance-based compensation since that Plan has not been approved by our shareholders. Therefore, payments under the Executive Performance Plan are subject to the Section 162(m) limitation on deductibility. Because of our significant U. S. deferred tax assets from prior periods, the limitation on deductibility has no impact on our financial position. In reviewing and considering payouts or earnings under the Executive Performance Plan, the Compensation Committee considered not only the impact of the lost tax deductions, but also the significant U. S. deferred tax assets available to us from prior periods, as well as the benefits realized by us and our shareholders from the successful efforts of our senior management team. In balancing these considerations, the Compensation Committee concluded that it would be appropriate to approve payouts in respect of the 2009-2011 grants and earnings for the 2011 performance period in respect of the 2010-2012 and 2011-2013 grants.
Without reading this passage we would have assumed that compensation paid under the Executive Performance Plan, which will be reported as non-equity incentive plan compensation, would be fully deductible. A further complication is that payments under both the Management Incentive Plan, which does qualify for the performance-based exception, and the Executive Performance Plan, which does not, are reported in the proxy statement summary compensation table as one number under the non-equity incentive column. And while Goodyear is to be commended for the clarity of its disclosure, most disclosures are not that clear.
3. Executive compensation, 2007–2010.
This section provides an analysis and discussion of executive compensation paid over 2007–2010. As shown in Table 1 , the sample is the population of U. S. public corporations as included in the Standard & Poor’s Capital IQ database and ranges from 8,960 in 2007 to 7,248 in 2010.12 Under current Securities and Exchange Commission regulations, companies are required to report in their proxy statements the compensation of each and every individual who has held either the CEO or CFO title during the year, compensation of the next three highest paid individuals,13 and compensation of up to two additional individuals who would have been among the next three highest paid individuals except that they were no longer employed at the end of the year. Reporting is not required if an individual’s compensation is less than $100,000. Turning to the second column of Table 1, we see that the number of executives included in the analysis ranges from 38,824 in 2007 to 28,365 in 2010.14 While Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals, excluding the CFO, Capital IQ and consequently we, include compensation of all executives included in the proxy statement. For executives beyond the CEO and the next three highest paid individuals we assume that compensation is fully deductible.
Sample information.
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
Table 2 describes the various components of the compensation package for 2007–2010, and lists the number of individuals receiving the item in a given year.15 For example, all executives in our sample receive a salary (companies with missing salary data are excluded from the analysis), but not all receive bonuses, and even fewer receive non-equity incentives and other forms of compensation. The mean total compensation was highest in 2007, at just over $1.7 million. The ensuing decrease in average compensation is due to the sharp drop in stock prices, which diminished the value of stock grants. The mean compensation values in this table are lower than those normally observed in the press and most studies for two reasons. The first is that most studies limit themselves to CEO compensation, whereas this study expands the sample to all executives. Because other executives are normally paid less than the CEO, this drives the average down. For example, in 2007 average total compensation for CEOs was $3,468,375, while the average for non-CEOs was $1,191,828. The second reason for lower means is the broader sample of companies used in this study. Most studies limit themselves to the S&P 500 or the S&P 1500 companies as encompassed in Standard & Poor’s ExecuComp, whereas this study incorporates those companies and many smaller publicly traded companies. Because compensation tends to increase with firm size, inclusion of these smaller companies reduces our averages. For example, in 2007 the average total compensation for executives in S&P 500 companies was $4,994,819, while the average for other companies was $1,448,167.
Mean amounts for executive compensation reported in summary compensation table (dollars; number of executives are below mean amounts)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
Table 3 aggregates the amounts reported in Table 2 to illustrate the total of executive compensation for all publicly traded companies. Aggregate total compensation decreased from over $66 billion in 2007 to $42 billion in 2010. There are two reasons for this decrease. First, the number of companies/executives incorporated in our analysis decreased in 2010 (as shown in Table 1 and reflecting the decline in the number of publicly traded companies). Second, average compensation (as shown in Table 2) decreased as well.
Aggregate amounts for executive compensation reported in summary compensation table (billions of dollars; number of executives are below aggregate amounts)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
As discussed in Section 2, the year of taxability for equity compensation, i. e., stock grants and stock options, differs from the year of grant. Similarly, the amounts will differ from that reported in the year of grant, as the amount reported in the year of grant will be based upon an expected amount, while that included in the executives’ income/deducted from the companies’ taxable income will be based on the actual amount. The amounts reported in tables 2 and 3 are grant date values based upon amounts from the proxy statement summary compensation table. In contrast, the amounts in Table 4 are based upon the vesting date value of stock grants and exercise date profits for stock options, as reported by companies in their proxy statements. Looking at the mean amounts, we are somewhat surprised to see that the number of employees with stock grants vesting (Table 4) is significantly less than the number receiving stock grants (Table 2). A number of potential explanations for this exist, such as stock grants vesting after retirement or stock grants not vesting because restrictions were not met. Unfortunately, the data do not allow us to determine what these reasons are. Similarly, for stock grants the aggregate amount recognized for tax purposes in Table 4 is less than the amount reported in Table 3, although the taxable amounts for stock options are generally greater than that reported in the summary compensation table.
Amounts reported for vested shares and exercised options (number of executives are below dollar amounts)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
Table 5 focuses on the impact of Section 162(m) on the deductibility of non-performance-based compensation, which is defined as salary, bonus, stock grants, and all other compensation. As noted above, although the bonus is normally performance-based, if it is not paid pursuant to a written plan that meets Internal Revenue Code requirements, it will not qualify for the performance-based exception (and if it were paid pursuant to a written plan, it should be included in the non-equity incentive column). Stock grants with performance conditions have become more common, and therefore may qualify for the Section 162(m) performance-based exception,16 but constitute a minority of those stock grants that vested during the years 2007 through 2010. Consequently we sum these four items—salary, bonus, stock grants, and all other compensation—by individual and treat the first $1 million as deductible.
Decomposition of non-performance-based compensation into deductible and nondeductible amounts (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
We shift gears in Table 6 to examine the total deductions associated with executive compensation, performance and non-performance based. On an aggregate basis the deductible components of the compensation package decline from about $39 billion in 2007 to a little less than $28 billion in 2010, with much of the decrease being associated with fewer deductions associated with stock options. In 2010 $15 billion of the deductions were based on performance pay, down from roughly $24 billion in 2007. As discussed in the next section, even at these reduced amounts in 2010 there are substantial tax savings for the companies and revenue foregone to the federal government. The Appendix Table provides more detail underlying the aggregates in Table 6 by delineating the total deductions for CEOs and other executives and doing so for large firms (S&P 500) and other firms.
Total deductible compensation (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
Compensation, taxation, and deductibility: An illustration.
At this point an illustration comparing the amounts reported in the proxy statement summary compensation table, executive’s tax return, and corporation’s tax return might be informative. Consider the 2011 compensation of Paul S. Otellini, president and CEO of Intel. According to the proxy statement summary compensation table, he received total compensation of $17,491,900 for that year.
Of that amount, stock awards ($7,331,100), option awards ($1,802,800), and change in deferred compensation ($319,000) are not taxable currently. His taxable income from Intel will include a salary ($1,100,000), a bonus ($34,000), non-equity incentive plan income ($6,429,500), all other compensation ($475,500), stock grants that vested during the year ($1,319,600), and exercised stock options ($132,100). His total taxable income was therefore $9,490,700.
The amount currently deductible by Intel includes both non-performance compensation and compensation that qualifies for the performance-based exception. Non-performance compensation includes the salary ($1,100,000), bonus ($34,000), all other compensation ($475,500), and stock grants that vested during the year ($1,319,600), for a total of $2,929,100. With the $1 million cap on deductions, Intel forfeits deductions on $1,929,100 of CEO compensation. At the same time, it can deduct for non-performance-based compensation (the maximum allowable at $1 million), non-equity incentive plan income ($6,429,500), and the exercised stock options ($132,100), for a total deduction of $7,561,600—an amount much less than Mr. Otellini’s $9,490,700 in taxable income.
Mr. Otellini and Intel provide a perfect illustration of the aggregate numbers in Table 5. What is most interesting, to this author, about Table 5 is the magnitude of deductions being forfeited by public corporations for the sake of executive compensation. Over the four-year period examined, executives recognized $96 billion in taxable income from the four categories of salary, bonus, vest value of stock grants, and all other compensation, while companies only deducted $55 billion, forfeiting slightly more than $41 billion in potential deductions!
Hence, one of the problems with Section 162(m), which was adopted ostensibly to reduce excessive, non-performance-based compensation (see U. S. House of Representatives 1993), was that it never touched on compensation directly. Instead, it legislated the deductibility of that compensation and penalized shareholders rather than executives. While corporations have “paid lip service” to the idea of preserving deductions, empirical research has shown only a marginal effect on executive compensation.17 Overall, however, executive compensation has continued to grow, and with it deductions have been forfeited.18 For example, the number of executives receiving salary in excess of $1 million increased from 563 in 2007 to 594 in 2010, and the number of executives receiving non-performance-based compensation in excess of $1 million increased from 3,379 in 2007 to 4,729 in 2010. This is despite a substantial decrease in the number of executives covered from 2007 to 2010 (see Table 1). Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions.
Consider Apple Inc. Duhigg and Kocieniewski (2012) detail how Apple avoids billions in taxes by setting up subsidiaries in low-tax jurisdictions. Yet when Apple made Tim Cook their CEO in August 2011, they gave him one million shares of restricted stock that vested purely with the passage of time, which therefore is not performance-based. Consequently, this grant, valued at $378 million at the time it was made, would not meet the performance-based exception of Section 162(m) and therefore would not be deductible—costing shareholders more than $100 million in additional taxes!
4. Tax benefits to corporations.
As noted above, compensation is normally deductible as an ordinary business expense under Section 162 of the Internal Revenue Code. This benefit can be large for the corporation and costly for the federal Treasury,19 as the corporate tax rate is 15 percent for taxable incomes under $50,000, 25 percent for those between $50,000 and $75,000, 34 percent for those between $75,000 and $100,000, 39 percent for those between $100,000 and $333,333, and 34 percent for taxable incomes between $333,333 and $10 million.20 Above $10 million, the rate increases to 35 percent (except between $15,000,000 and $18,333,333, where the tax rate is 38 percent). A reasonable assumption is that most public corporations have taxable incomes in excess of $100,000, so their tax rate would either be 34 or 35 percent.
For a number of reasons, such as tax deductions and credits, even large public corporations may pay taxes at a lower rate, or not at all—thus the tax benefit of executive compensation can be overstated. An example is Whirlpool Corporation, which, due to tax credits, did not pay taxes in 2010 and 2011. Whirlpool is not alone in this regard (for example, see the Goodyear excerpt above). So the question becomes: What is the value of the tax deductions associated with executive compensation to companies like Whirlpool? Note that if the corporation has a tax loss, as in the case of Whirlpool, it can use that loss to claim a refund on taxes paid in the previous two years or to shelter taxable income earned in the following 20 years. In theory, even if the company does not have any current taxable income, a $1 additional deduction will either increase this year’s tax refund by 35 cents, or reduce future taxes by 35 cents. But in practice, sometimes a company can’t claim the carryback because it hasn’t paid federal taxes in the past two years, and the existence of taxable income in the future may be uncertain as well. If so, how do we estimate the benefits of these deductions?
Academic researchers answer this question by estimating marginal tax rates, the rate of tax/benefit associated with the next dollar of income/deduction. Professor John Graham of Duke University, who has done extensive research in the area (see Graham 1996), provides estimates of these rates on his website, faculty. fuqua. duke. edu/
jgraham/taxform. html. Unfortunately, he does not provide tax rates for all companies in the Capital IQ data set. But for the approximately 25 percent of observations for which he does provide tax rates, the rates he provides are substantially lower than 35 percent, as the mean of his rates is slightly below 13 percent. As an alternative, in another paper (Graham and Mills 2008) he provides a fairly simple and less data-intensive method of calculating marginal tax rates. Using that algorithm still results in a sample reduction of about 30 percent, but perhaps a more realistic average tax rate of 25 percent. However, both rates are calculated after the impact of executive compensation, and Graham, Lang, and Shackelford (2004), among others, document that the stock-option deduction can significantly decrease marginal tax rates. So when calculating the average tax benefit of the executive compensation deductions, the relevant tax rate to use is something lower than 35 percent, yet is somewhat higher, perhaps significantly higher, than 13 or 25 percent. For this reason, Table 7 provides estimates using three alternative rates—15, 25, and 35 percent—while the following discussion uses what is probably the most realistic estimate, 25 percent.
Estimated tax savings/revenue loss as a result of executive compensation (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
Table 7 provides some boundaries for the aggregate tax savings to companies and costs to the Treasury using effective tax rates of 15, 25, and 35 percent. Using the 15 percent rate provides the lower bound on our estimate of the tax savings, which ranges from about $3.5 billion in 2009 to just under $6 billion in 2007. In contrast, using the 35 percent statutory federal rate provides an upper bound on our estimate of the aggregate tax benefits/cost to the U. S. Treasury, which ranges from about $13.7 billion in 2007 to $8.3 billion in 2009. If we assume a conservatively estimated 25 percent marginal tax rate, then revenue lost to the federal government in 2010 from deductible executive compensation was about $7 billion, and the total amount lost over the 2007–2010 period was $30.4 billion.
5. Looking back and forward.
While the data provided in this study do show a moderating of executive compensation over the study period 2007–2010, over a longer period it is well known that executive, in particular CEO, compensation has increased at rates far in excess of inflation and the wage growth of rank-and-file individuals. So the question exists: Is the moderating trend observed over the recent past a new paradigm, or is it merely one of the outcomes of the country’s severe financial crisis?
In terms of a new paradigm, 2010 marked a once-in-a-lifetime opportunity for shareholder empowerment. That July, the Dodd-Frank banking bill imposed the long-awaited “say-on-pay” on American corporations, which took effect with annual meetings on or after January 21, 2011. This provision, which was widely opposed by the business community, requires that publicly traded corporations provide their shareholders with a non-binding vote on their executive compensation at least once every three years. While the vote is (1) after the fact, i. e., shareholders are voting to approve compensation provided in the previous year, and (2) advisory, the possibility does exist that the board will moderate compensation to avoid being embarrassed by a negative outcome.21 In fact, Lucien Bebchuk of Harvard University notes in several of his papers that shame is perhaps the only constraint on executive compensation. Academic research in the United Kingdom, where say-on-pay has been in effect since 2002, and in the United States, by this author, suggests that say-on-pay can have a restraining impact on executive compensation under certain circumstances.
Another provision of the Dodd-Frank banking bill, which has not yet been implemented by the Securities and Exchange Commission, is the requirement that companies disclose the ratio of CEO compensation to that of the company’s median employee. This disclosure, which has been opposed by companies, also has the potential to embarrass corporate boards and CEOs, and if put into place, has the potential to restrain executive compensation.22.
But looking back, a reasonable question might be whether mandatory disclosure and tax penalties have worked to restrain compensation. In this author’s lifetime, the first big change in proxy statement disclosure was made in 1993. This disclosure, which dramatically increased the amount disclosed, inadvertently led to increased compensation, as executives at one company were able to more clearly assess what executives at their competitors were making. Section 280(g) of the Internal Revenue Code caused companies to forfeit deductions and imposed penalties on the recipient, if change-in-control payments (i. e., “golden parachutes”) were higher than allowed by the section. This Internal Revenue Code section did little, if anything, to curtail those payments, as companies without change-in-control payments added them, while those with change-in-control payments in excess of that allowed added the now-infamous tax gross-ups, whereby the shareholders would provide additional compensation to pay the executive’s tax penalty as well as the tax on that additional compensation. The same holds true for Section 162(m). Harris and Livingstone (2002) suggest that inadvertently, Section 162(m) may have encouraged increases in cash compensation for executives earning less than $1 million. Balsam and Ryan (2008) find that Section 162(m) resulted in increases in stock option compensation for executives earning more than $1 million in cash compensation. And although stock options were in favor amongst the political class when Section 162(m) was adopted, by the time the 21st century rolled around, the shine had worn off. In discussing the effect of Section 162(m) on the increased use of stock options, a 2006 Wall Street Journal article (Maremont and Forelle 2006) quoted Christopher Cox, the then-chairman of the Securities and Exchange Commission, as saying it deserves a “place in the museum of unintended consequences.”
The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well.
— EPI would like to thank the Stephen Silberstein Foundation for supporting its work on executive compensation.
— Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory , as well as published in the top academic and practitioner journals in accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting . He has been widely quoted in the media and has given expert witness testimony on executive compensation to the U. S. Senate Committee on Finance.
1. Covered individuals were originally defined as the chief executive officer plus the next four highest paid executive officers, as disclosed in the corporate proxy statement. However, in late 2006 the Securities and Exchange Commission changed the proxy statement disclosure requirements, so that corporations had to disclose compensation for the chief executive officer, chief financial officer, and next three highest paid executive officers. Since Section 162(m) does not specify the chief financial officer, covered individuals are now the chief executive officer plus the next three highest paid executive officers.
2. A change in control payment, also known as a golden parachute, is a payment to an executive that occurs when his or her company experiences a change in ownership.
3. For purposes of proxy statement reporting, awards pursuant to a written plan have been incorporated under the heading of “non-equity incentive plan compensation” since the end of 2006. It is common to combine the two categories of bonus and non-equity incentive plan compensation for other purposes.
4. This may not always be the case; even when there is a written plan, the plan may not meet Section 162(m) requirements. In a private letter ruling (irs. gov/pub/irs-wd/0804004.pdf) the IRS informed the company in question that compensation paid under its incentive plan would not qualify as performance-based, because the plan allowed for payments in the event of termination regardless of whether the performance conditions were met.
5. When the compensation is earned over a multiple year period, e. g., a two - or three-year performance period, the deduction would be taken in the last year of the period.
6. Sometimes rather than granting shares, companies grant units, which are then turned into shares upon vesting.
7. In most cases, meeting performance conditions is not a yes/no proposition. Typically, the percentage of shares that vest vary based upon performance, with a lesser number of shares vesting if performance meets the pre-established minimum threshold, the full grant vesting if performance meets the pre-established target, and possibly additional shares being earned if performance exceeds the target, up to a maximum that is usually defined as 200 percent of the original grant.
8. Normally a stock grant is not taxable to the recipient or deductible by the grantor until the restrictions expire. However, under tax code Section 83(b) the recipient may elect to have the grant taxed at the time of grant. Discussions with practitioners confirm these elections are rare in public companies.
9. Companies do not always clearly disclose whether their compensation qualifies as performance-based, nor do they disclose the amounts of deductions forfeited.
10. This discussion ignores Section 422 (tax-qualified or incentive) stock options. A Section 422 stock option provides benefits to its holder, as the tax event is not exercised, but rather the later sale of the shares is acquired upon exercise. Further, if certain conditions are met (for example, the shares are held from two years from the date of grant to one year from the date of exercise), the income is taxed as a capital gain and not ordinary income. While these options are beneficial to their holder, they are costly to the company, because if the holder meets the conditions for capital gain treatment, the company does not receive any tax deduction. However, because these options are limited to $100,000 in nominal value vesting per year and are considered tax-preference items at the time of exercise for purposes of the alternative minimum tax, they are not very useful (or used) in executive compensation. Thus we can safely ignore them in our discussion.
11. While pensions and deferred compensation need to be recognized as financial accounting expenses and disclosed in proxy statements in the year earned, for tax purposes they receive deferred recognition. Consequently, if deferred until the executive is no longer covered by Section 162(m) (e. g., post-retirement), they will be fully deductible for tax purposes.
12. This decrease is consistent with the decrease in publicly traded companies as documented in Stuart (2011). See cfo/article. cfm/14563859.
13. Since 2007, the Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals.
14. In theory, each company should have a CEO, but not all companies identify an individual as such in their filings. Consequently, the number of CEOs is slightly less than the number of companies in each year.
15. Capital IQ collects and we analyze the values as reported by companies in their proxy statements.
16. But do not have to, as illustrated by the excerpt from the Intel proxy statement above.
17. For example, Balsam and Ryan (2007) show that Section 162(m) increased the performance sensitivity of bonus payments for CEOs hired post-1994.
18. For more discussion on the forfeiture of deductions, see Balsam and Yin (2005).
19. This analysis only incorporates federal taxes. Incorporating state income taxes would increase the benefit associated with compensation deductions.
20. The 39 percent tax rate is intended to remove the benefits associated with the 15 percent and 25 percent rates.
21. In the first two years of say-on-pay, more than 98 percent of companies have had their executive compensation approved by shareholders, with the typical firm receiving a positive vote in excess of 80 percent. However, some well-known companies have had their executive compensation rejected by shareholders, including Hewlett-Packard in 2011 and Citigroup in 2012.
22. While the disclosure only applies to CEO compensation, compensation of other executives is often tied to that of the CEO.
Referências.
Balsam, Steven, and David Ryan. 2007. “Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m).” Journal of Accounting, Auditing and Finance , vol. 22, no. 4, pp. 599–621.
Balsam, Steven, and David Ryan. 2008. “The Effect of Internal Revenue Code Section 162(m) on the Issuance of Stock Options.” Advances in Taxation , vol. 18, pp. 3–28.
Balsam, Steven, and Qin Jennifer Yin. 2005. “Explaining Firm Willingness to Forfeit.
Tax Deductions under Internal Revenue Code Section 162(m): The Million-dollar Cap.” Journal of Accounting and Public Policy , vol. 24, no. 4, pp. 300–324.
Capital IQ Database. 2012. Standard and Poor’s Financial Services LLC. capitaliq/home. aspx.
Duhigg, Charles, and David Kocieniewski. 2012. “How Apple Sidesteps Billions in Taxes.” New York Times , April 28. nytimes/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations. html.
Graham, John R. 1996. “Proxies for the Corporate Marginal Tax Rate.” Journal of Financial Economics , vol. 42, no. 2, pp. 187–221.
Grassley, Chuck. 2006. “Executive Compensation: Backdating to the Future/Oversight of Current Issues Regarding Executive Compensation Including Backdating of Stock Options; and Tax Treatment of Executive Compensation, Retirement and Benefits.” Closing statement of Senator Chuck Grassley at a hearing of the U. S. Senate Finance Committee, September 6. finance. senate. gov/imo/media/doc/090606cga. pdf.
Graham, John R., Mark Lang, and Doug Shackelford. 2004. “Employee Stock Options, Corporate Taxes, and Debt Policy.” Journal of Finance , vol. 59, no. 4, pp. 1585–1618.
Graham, John R., and Lillian Mills. 2008. “Simulating Marginal Tax Rates Using Tax Return Data.” Journal of Accounting and Economics , vol. 46, no. 2–3, pp. 366–388.
Harris, David, and Jane Livingstone. 2002. “Federal Tax Legislation as a Political Cost Benchmark.” The Accounting Review , vol. 77 (October), pp. 997–1018.
Maremont, Mark, and Charles Forelle. 2006. “Bosses’ Pay: How Stock Options Became Part of the Problem – Once Seen as a Reform, They Grew Into Font of Riches And System to Be Gamed Reload, Reprice, Backdate.” The Wall Street Journal, December 27. online. wsj/article/SB116718927302760228-search. html.
Stuart, Alix. 2011. “Missing: Public Companies: Why Is the Number of Publicly Traded Companies in the U. S. Declining?” CFO, March 22. cfo/article. cfm/14563859.
U. S. House of Representatives. 1993. Fiscal Year Budget Reconciliation Recommendations of the Committee on Ways and Means. U. S. Government Printing Office.
Total deductible compensation (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
Copy the code below to embed this chart on your website.
Sign up to stay informed.
Track EPI on Twitter.
EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. EPI’s research helps policymakers, opinion leaders, advocates, journalists, and the public understand the bread-and-butter issues affecting ordinary Americans.
Follow EPI.
1225 Eye St. NW, Suite 600.
Washington, DC 20005.
&cópia de; 2018 Economic Policy Institute.
The Perkins Project on Worker Rights and Wages.
Tracking the wage and employment policies coming out of the White House, Congress, and the courts.
State of Working America Data Library.
Authoritative, up-to-date data on the living standards of American workers.
Inequality. is.
Interactive tools and videos bringing clarity to the national dialogue on economic inequality.
Affiliated programs.
Economic Analysis and Research Network (EARN)
A network of state and local organizations improving workers' lives through research and advocacy.

Reporting incentive stock options on w-2

Compra de compra em PDF.
Research in International Business and Finance.
Destaques.
Examinamos o efeito da estratégia de negócios no nível da empresa sobre o risco futuro de crash das ações.
Também investigamos até que ponto a supervalorização da equidade modera essa relação.
As empresas que seguem estratégias de negócios inovadoras (prospectores) são mais propensas a futuros riscos de acidentes.
Os garimpeiros são mais propensos à supervalorização da eqüidade, o que, por sua vez, aumenta o risco futuro de colisão.
Fornecemos evidências que aumentam nossa compreensão dos determinantes subjacentes do risco de colisão.
Este artigo examina empiricamente o efeito das estratégias de negócios no nível da empresa sobre o risco futuro de crash das ações e o grau em que a supervalorização da equidade modera essa relação. Ao explorar até que ponto as empresas que seguem determinadas estratégias de negócios são mais ou menos propensas a experimentar risco de colisão, fornecemos evidências que aumentam nossa compreensão dos determinantes subjacentes do risco de colisão. Usando uma pontuação de estratégia composta desenvolvida por Bentley, Omer e Sharp (2013) e aplicando duas variantes de risco de acidente, documentamos que as empresas que seguem estratégias de negócios inovadoras (prospectores) são mais propensas a futuros riscos de colisão do que os defensores. Também descobrimos que os garimpeiros são mais propensos à sobrevalorização da eqüidade, o que, por sua vez, aumenta o risco futuro de colisão.
Classificação JEL.
Escolha uma opção para localizar / acessar este artigo:
Verifique se você tem acesso através de suas credenciais de login ou de sua instituição.