How You Can Dig Up a Company's Secrets

You probably already know about the controversial bonuses at AIG. But what about the compensation being doled out at companies you care about like your employer or your investments?

Now that many big corporations are gearing up for their annual shareholder meetings, you've got a chance to see all of the other perks and payments top executives received last year — from thousands of dollars in tax-preparation services (we're not kidding) to regular use of a company jet.

Just take a few moments to read through the company’s proxy statement. If you’ve never actually pored over a company’s proxy statement, it’s a valuable experience for investors at any level. Publicly-traded companies have to file these forms with the Securities and Exchange Commission in advance of their annual shareholder meetings. Known as form DEF 14A, the proxy lists the names and bios of the people running for the company’s board of directors and discloses the compensation of its top five executives and its board members. (Search for a company's DEF 14A form at the SEC web site here.)

If you own shares of a specific company, the proxy statement can do much more than satisfy your voyeuristic cravings. It also serves as a voting ballot for the company’s board of directors and for any proposals that will be brought up at the shareholder meeting.

Here are four key things to look for in a proxy statement — and how to interpret them.

1. Executive pay — and perks

Probably the most enticing part of a proxy statement is the Executive Compensation section, where companies describe in detail how much they paid their top five executive officers, and in what form.

The Summary Compensation table is a good place to start. This table lists the salary, bonus, stock awards and other compensation that each executive received. But things really get interesting when you dive into the All Other Compensation tables, which list the dollar value of company perks received that are worth $10,000 or more and an explanation of what these perks entail. “A CEO who insists on all the bells and whistles – financial planning, country clubs, home security systems – has too much time on his hands,” says Nell Minow, editor of The Corporate Library, a corporate-governance research firm.

To get a sense of whether these executives are overcompensated, compare the total compensation they received to the operating profit, listed on the income statement (part of a company’s annual statement, or Form 10-K), says Paul Larson, an equity strategist at research firm Morningstar. "If a quarter or a third of the operating profit is going directly to two or three top executives, that’s a red flag,” he says.

2. Board of directors – background, compensation

As a shareholder, you don’t have a say on executive compensation. But you do have a say on who ends up on the board of directors -- and they're the ones who decide what to pay the executives.

So it’s in the shareholders’ interest that independent directors who have a lot of experience and few close-knit affiliations with the company are well represented. “You don’t want too many insiders or too many people associated with company founders, like founding family members. You want a good, independent, diverse board,” says Larson.

Most board members are paid handsomely for their role, which often entails attending a handful of meetings per year. But it's how they're paid that should matter most. Board members who are paid in stock have a vested interest in the company's success. “The single indicator on how effective a board is how much stock they’ve got,” Minow says. “If they’re not willing to put their money where their mouth is, you don’t want them working on your behalf.”

3. Golden parachutes, severance payments

Golden parachutes, or contracts that stipulate what type of severance pay executives will receive if they are terminated, have come under scrutiny lately, with many top executives departing troubled financial firms. The American Recovery and Reinvestment Act of 2009, in fact, prohibits golden parachute payments to senior executive officers or any of the next five most highly-compensated employees at companies getting TARP money. Yet, golden parachutes still exist at many other companies and are worth looking through, says Wayne Guay, associate professor of accounting at the University of Pennsylvania's Wharton School. If a CEO turns out to be a bad fit for the company and leaves it worse off than before, do you really want that person to get paid handsomely for getting fired?

4. Shareholder proposals

The proxy statement describes each of the shareholder proposals that will be put up for vote at the annual meeting and often includes a recommendation from the board in support of or against the proposal. If you're having a hard time deciding how to vote, look for proposals that are endorsed by large institutional investors, says Minow. After all, who's better at looking after a shareholder’s interest than those who own a significant chunk of the company?

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