In a nutshell, 10Ks, 10Qs, and proxy statements are usually anything but simple. Instead, they're often dozens (or even hundreds) of pages written in some variation of English that I like to think of as accounting-speak mixed with lawyer-speak. So you can imagine my surprise -- no sheer delight -- when I recently came across the 10K filed by Costco (COST), the giant warehouse club.
Unlike a lot of other people, I don't consider myself a Costco fan (I was surprised to find both an ilovecostco.com site and a fan page on Facebook) simply because the company has no store within a reasonable driving distance. But I've become a fan of its filings, which are easily accessible from the comfort of my home. Not only is the annual report about half the size of those many other retailers publish but the employment contract with CEO and President Jim Sinegal is one of the easiest to read that I've ever seen.
Trust me -- employment contracts with CEOs don't come any simpler. Just compare Sinegal's contract with that for the CEO and president of Costco competitor BJ's Wholesale (BJ), Laura J. Sen. Sinegal's contract is one page; Sen's contract is eight. Yet both documents cover the same basic things: title, salary, benefits, term of employment. And believe it or not, Sen's contract, while longer than Sinegal's, is actually a lot simpler than many others.
Just look at the employment contract for new Freddie Mac (FRE) CFO Ross J. Kari that we wrote about earlier this month. That also covered much of the same ground as Sinegal's, but it took 18 pages to get everything in there. The section that covers Kari's relocation benefits alone is about the same size as Sinegal's entire contract.
A Few Buck the Trend
So when did employment contracts for top executives get so extensive? Probably around the time that the attorneys who negotiate them started charging $1,000 or more an hour to negotiate the deals. In many executive employment contracts, it's not uncommon to have a clause that reimburses the executive for the attorney fees incurred in negotiating the contract. Those fees can run $25,000 or more.
A few companies have decided to buck the trend by not offering any employment contracts. Bank of America (BAC) did that earlier this decade, and as a result, outgoing CEO Ken Lewis (and other top executives) doesn't have an employment contract. Still, the overwhelming majority of publicly traded companies do offer them, and we're guessing that's because an overwhelming number of top execs (and their lawyers) ask for them as a condition of employment.
We don't expect the SEC to tackle this issue anytime soon, though it probably should if it's really serious about educating ordinary investors. After all, average investors aren't likely to sit down and read an 18-page contract. Nor should they have to. But if Costco and Sinegal can come up with such a simple agreement, is it too much to ask others to do the same?