It's the Math, Stupid

When does 1+1=5?

Apparently, when an alarming number of companies file director compensation totals with the Securities and Exchange Commission.

During the 2007 proxy season, 126 firms out of 2,000 failed to do the simple math when filing director compensations totals, according to a new study published by The Corporate Library, an independent research firm.

Discrepancies ranged from $1 dollar — companies may have been rounding up in these cases — to $125,000, the report adds.

"The discrepancies are due to bad mathematics and inattention to detail," Paul Hodgson, a senior researcher at The Corporate Library, told Portfolio.com.

Missing columns, ignoring certain data points, and transposing figures all accounted for the fuzzy math, it seems. Compensation totals for California Water Service Group's seven-director board should add up to $620,686, for example, the report notes. Instead, the company reported a total of $488,806, a difference of $18,840 per director.

Companies were as likely to report high totals as they were to report low ones, which suggests firms had no corrupt motives when filing their reports.

"The numbers indicate there were no nefarious goings on," said Hodgson.

This is the first year that firms were required to prepare and file director compensation tables with the S.E.C., Hodgson pointed out, which may account for the cloudy calculations.

"Companies may have pushed this to the bottom of the pile and not given it the attention you would expect," said Hodgson.

Nonetheless, the report comes away with some clear questions.

"Why, in an age when you can key numbers into a spreadsheet and use a simple formula to add them with perfect accuracy, did 126 companies have total compensation columns that did not accurately reflect the sum of its table components?" asked the report's author, Greg Ruel. "How could such basic addition mistakes go unnoticed and uncorrected?"

The report's conclusion underlined the need for improved diligence and higher levels of scrutiny for board financial disclosures, noting the vulnerability of important data by which pay policies are evaluated and critiqued.

by Alfonso Serrano F.