More Advice on How to Read a Proxy

This, in turn, might mean a CEO whose best years are in the rearview mirror could stay at the helm too long. Of course, no one complains -- and rightfully so -- that Warren Buffett is both chairman and chief executive of Berkshire Hathaway (BRK.A - commentary - Cramer's Take).)

Executive Compensation

The last item in Disney's proxy I want to check is executive compensation. As even the most casual reader of the business pages knows, executive compensation -- specifically, how much money Eisner is paid -- has been a source of hand-wringing for the last several years.

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And for good reason. According to The Wall Street Journal's Shareholder Scorecard, Disney's compound annual return for the five years ended Dec. 31, 2002, was minus-12.4%, the second-worst performer in the 30 Dow Industrials. (AT&T (T - commentary - Cramer's Take) was the caboose, with a minus-13.1% annual performance.) In dollars, that means if you invested $10,000 at the beginning of 1998, you would have had $4,520 at the end of 2002.

Eisner's compensation plan has three parts: a base salary, a performance-based annual bonus and periodic grants of stock-based compensation. In 2002, Eisner's base salary was $1 million. He also received a $5 million bonus in the form of stock units that vest over the remaining term of his employment agreement (ending September 2006). How is this bonus calculated?

According to the SEC filing, the "performance target(s) may be based on one or more of the following business criteria, or any combination thereof, on a consolidated basis: net income or adjusted net income; return on equity or adjusted return on equity; return on assets or adjusted return on equity; earnings per share (diluted) or adjusted earnings per share (diluted)."

Got that? There's more.

The report explains that the "plan generally contemplates that if 'adjusted net income' is selected as the applicable business criterion, adjustments will be made to eliminate, in whole or in part, the impact of the following items: (1) changes in accounting principles that become effective during the performance period; (2) extraordinary, unusual or infrequently occurring events reported in the Company's public filings, excluding early extinguishment of debt, and (3) the disposition of a business, in whole or in part.

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Hewitt Heiserman has been a financial analyst for 15 years and has worked for Fidelity Investments, Simplex Time Recorder, American Holdco and Breakaway Solutions. He is now writing a book on the Earnings Power Box, an analytical model he created to gauge the quality of a firm's profits. (The Earnings Power Box is a trademark of Hewitt Heiserman.) At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].