Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Camouflage Compensation

What it is:

Camouflage compensation is compensation that is not fully disclosed or is hard to identify.

How it works (Example):

Let's say Company XYZ needs a new CEO. CEOs in the industry typically earn at least $1 million a year in compensation. Company XYZ's board is concerned about disclosing to shareholders that the old CEO made $200,000 and now they have to quintuple the cost.

Accordingly, Company XYZ develops a camouflage compensation plan whereby it offers the new CEO $250,000 a year but throws in $250,000 of deferred compensation, $100,000 of bonuses, and $400,000 worth of stock options. Although these items are all disclosed in the company's annual proxy statement, the compensation is likely to attract less attention because it is disclosed in pieces and because not all of it is cash.

Why it Matters:

Companies often find themselves caught between paying the going rate for good leaders and telling the shareholders that they're paying someone a lot of money. This creates an incentive to offer leaders an artificially low annual salary and add stock options, deferred compensation, expense accounts, phantom stock and other vehicles that bring the leader's pay up without drawing attention to the total amount paid.