Five Obstacles That Undermine Executive Pay Disclosures

Nearly all compensation-related disclosures contain many of the same elements when describing the compensation committee’s pay decisions, particularly in the Compensation Discussion & Analysis (CDA) portion of the annual proxy statement. What separates mediocre disclosures from the most effective ones? The best compensation disclosures provide a clear discussion of pay decisions, while lower-quality disclosures often include barriers to understanding. Here are five obstacles when writing CD&As that prevent readers from fully understanding pay program decisions.

Leaving out key details or answers to common questions

Pay disclosures should answer all obvious questions an institutional investor or proxy advisor might have about any meaningful aspect of the pay program. Some typical examples that fall short include failing to contextualize performance in the incentive programs (i.e., not detailing past performance on short- or long-term performance program metrics), making readers do calculations (e.g., presenting only absolute numeric values when readers would want to know percentages), and using terms or phrases not common to most executive compensation disclosures.

Failing to include essential information or rely on other disclosures

Without a doubt, proxy readers will want to have all relevant and useful information at their fingertips when evaluating executive compensation. Avoid the temptation to simply reference previous 8-K or 10‑K filings when describing things like Item 5.02 events (e.g., executive team changes). Be aware that proxy advisors will cross-reference the content of these other filings to guarantee that the fact patterns match between disclosures. Instead of relying on cross-references, repeat relevant information and clear up any discrepancies between a previous filing and the newly presented information. You want readers to have confidence that the proxy presents a clear and complete picture of all pay decisions during the year, regardless of whether they are described elsewhere.

Including unnecessary or irrelevant information

While proxy readers generally appreciate significant details about pay decisions and compensation program design, superfluous details about broad-based employee compensation or notes on shareholder engagement on matters unrelated to executive compensation will leave readers wondering whether the company understands the purpose of the CD&A. For example, general details on broad-based diversity, equity, and inclusion efforts might fit better in the company’s sustainability report rather than the CD&A.

Using charts or graphs that have no clear linkage to pay decisions

This one can be tricky. Many companies use charts of financial performance (e.g., revenue or total shareholder return) to illustrate that compensation levels link back to how well the company has been doing broadly. While the intent seems logical, the reality is that anyone seriously scrutinizing the pay program will look for details on the performance of metrics used in the incentive programs. Said differently, proxy readers want to know how well the company did on the key measures that relate to decisions about executive compensation outcomes made by the compensation committee. Moreover, if your CD&A includes charts on general performance but does not provide graphical illustrations of pay program measures, readers will likely wonder whether you are trying to hide something.

Failing to recognize who reads your proxy and what information they need for making proxy voting decisions, particularly the Say-on-Pay vote

Many drafters new to the proxy have only a vague notion of who is reading the disclosure. Proxy drafters need to recognize that, for most companies, proxy advisors and proxy voting groups at institutional investors are the primary audience for the CD&A and related executive compensation disclosures. So, while the proxy will need to meet SEC regulatory requirements and address stakeholders such as the news media and retail investors, the pay disclosures also must satisfy the needs of the institutional investor audience.

Farient’s Viewpoint

While it takes effort and patience for proxy readers to better understand why the compensation committee made the decisions it did, removing disclosure obstacles can ensure that investors have a clear picture of how pay works. To that end, enhanced clarity should help investors and other stakeholders better understand the pay program. In turn, the best CD&As reinforce the company’s case when voting for directors and Say on Pay.

By Trey Poore

 

About Trey Poore

Director, Farient Advisors

Trey Poore is a Director with Farient Advisors.  In this capacity, he manages client relationships, supports Farient’s business development efforts, and oversees project teams.

In his client work, Trey provides strategic guidance on pay program design and the linkage between compensation strategy and performance measurement. He is responsible for supporting the development of client solutions and is a dedicated resource to several of Farient’s Fortune 500 and mid-cap company clients. Trey has multi-industry experience,  especially those with unique operating or financial situations.

Prior to joining Farient, Trey was at ISS Corporate Solutions (ICS), the Institutional Shareholder Services business unit that works directly with corporate issuers on executive compensation, corporate governance, and sustainability matters. At ICS, Trey advised companies on equity plan proposals, CD&A drafting, governance benchmarking, ISS policy, and proxy matters. In addition, he developed customized reporting, built modeling tools, and generated thought leadership materials for all ICS clients.

Trey holds a BS in International Business from Auburn University.