Obtaining Compensation Comparability Data
From Publicly Traded Companies
Where can valuation professionals find compensation data? In this article, Stephen Kirkland discusses leading sources to find compensation of publicly traded companies.
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Publicly traded companies file financial information with the United States Securities and Exchange Commission (SEC).Â The SEC then publishes some of that information, including compensation amounts for each companyâ€™s top officers, on its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.Â Each companyâ€™s compensation information is presented in a Summary Compensation Table that can be accessed by anyone, without charge.
Compensation amounts available through EDGAR can be helpful for benchmarking, although publicly traded companies tend to be larger, more diversified, and have more layers of management than private companies.Â Also, the officers at publicly traded companies may have narrower areas of focus than their private company counterparts.Â In addition, compensation is usually structured differently at publicly traded companies than it is at smaller companies.Â For example, stock options, stock awards, and other forms of equity can be conveniently used by public companies to incent their officers.Â Section 162(m) of the Internal Revenue Code can limit a publicly held corporationâ€™s tax deduction for compensation paid to a â€ścovered employeeâ€ť to a maximum of $1,000,000 per year, which is another reason that public companies use stock options and creative pay structures.Â Changes in the value of the underlying stocks then affect their officer compensation amounts.Â Therefore, a public companyâ€™s officer compensation may be affected as much by the performance of the stock as it is by the performance of any individual officer.
Even with these differences, officer compensation amounts paid by publicly traded companies may be helpful for reference.Â To locate this information, begin by identifying companies that are in the same industry as your client.Â Go to SEC.gov and click on Company Filings in the upper right corner.
Next, scroll down to the “Standard Industry Classification” field and enter the SIC code for your client. Â (A list of SIC codes can be found by clicking on the question mark next to the words â€śStandard Industry Classification.â€ť)
Click on SEARCH and links to financial statements of potentially comparable companies will be displayed.
You can see filings for an individual company by clicking on its Central Index Key (CIK) number that appears in red on the left of the screen.Â The companyâ€™s filings will be listed on the left of the next screen.
Officer compensation is typically shown in Form DEF 14A (definitive proxy statement), so you may disregard companies that did not file a DEF 14A.
Click on the word â€śDocumentsâ€ť to the right of the DEF 14A that was filed shortly after the year you want to see.Â Then click on the red numbers below the word â€śDocument.â€ťÂ Scroll down to the Summary Compensation Table.
By looking at the Form 10-K (annual report), you can screen out companies with sales amounts far greater or far less than those of your client. Â You can also screen out companies serving dissimilar industries.Â The 10-K can be lengthy, but using the key word search function (clicking Control F and entering a key word in the search box) gets you right to helpful information.Â For example, searching â€śfootageâ€ť may take you directly to a table showing total square footage of stores and sales by square foot.
At the screen with the list of company filings, the 10-K may have the words â€śInteractive Dataâ€ť next to the word â€śDocuments.â€ťÂ If so, click on Interactive Data to see comparative financial statements in table format.Â Then click View Excel Document to see a spreadsheet you can work with or copy from.Â You may need to click on the Excel icon in the lower left corner of your screen to open the file.Â Then notice the financial statements listed on tabs across the lower part of the Excel spreadsheet.Â This is a convenient way to review financial information to help you determine whether a company is similar enough to your client to be relevant.
Stephen D. Kirkland, CPA, CMC, CFC, CFF, is a compensation consultant for privately owned companies and non-profit organizations. He serves as an expert witness in court cases involving potentially unreasonable compensation. He can be contacted and found through www.ReasonableComp.biz.
Mr. Kirkland can be contacted at (803) 724-1414 or by e-mail to Stephen.Kirkland@AECG.biz.