Pay Disclosures Still Miss the Mark

More than 15 years after say-on-pay became mandatory in the U.S., executive compensation disclosure still leaves many investors wanting more. Proxy statements have grown longer and more detailed, yet one core concern persists: too many companies still do not clearly explain how the compensation committee arrived at its pay decisions.

That gap matters. Even when shareholder support remains high, investors, proxy advisors, and other governance stakeholders can struggle to understand the judgment, trade-offs, and context behind pay outcomes—especially in periods of volatility, transformation, or uneven performance.

As say-on-pay matures, the quality of narrative disclosure is becoming a differentiator. Companies that continue to treat the proxy as a compliance document risk eroding their credibility over time, even when pay outcomes are defensible. Those who use it as a governance communication tool are better positioned to build and sustain shareholder trust.

The Disclosure Gap Persists

Despite years of refinement, three disclosure shortcomings continue to surface each proxy season. These gaps matter because they can leave shareholders and proxy advisors guessing—or worse, drawing the wrong conclusions—about how pay decisions were made.

Most CD&As do a reasonable job of describing pay elements, incentive design, and performance metrics. What they often lack is a clear explanation of how the compensation committee exercised judgment within those frameworks.

Too often, disclosures describe what happened, but not why it made sense in the context of the business, its performance, and the overall pay program. As a result, shareholders are left without a clear view of:

• How the committee weighed competing performance outcomes
• How business conditions influenced pay decisions
• How discretion was considered, applied, or deliberately constrained

When that context is missing, pay decisions can appear mechanical or preordained. That perception gap can lead investors to question whether the committee exercised the level of oversight and judgment that effective governance requires.

Limited Insight into Goal-Setting Rigor

Disclosure around goal-setting rigor remains one of the most common sources of investor frustration. While proxies typically disclose performance metrics and payout results, they often provide limited context on:

• How challenging goals were at the time they were set
• How targets aligned with internal plans or external benchmarks
• Whether and why any adjustments were made

Disclosure that focuses primarily on outcomes makes it harder to assess whether payouts reflect strong performance or conservative calibration. Over time, ambiguity around goal-setting and metric selection can weaken confidence in pay-for-performance alignment—even when a given year’s results appear defensible.

Discretion and One-Off Decisions

Special awards, retention grants, and off-cycle equity awards remain among the most closely scrutinized elements of executive compensation. These actions are not inherently problematic—but they do require disciplined, decision-oriented disclosure. In many cases, proxies rely on generalized rationales without addressing:

• Why existing incentive programs were insufficient
• What alternatives were considered
• How the decision aligns with long‑term shareholder interests
• Whether the action is intended to be exceptional or repeatable

When discretion is exercised but not fully explained, shareholders may infer weak governance or precedent risk—even when the board acted thoughtfully and deliberately.

Strengthening Disclosure

Improving executive compensation disclosure does not require longer proxies or more technical detail. It requires a shift in mindset—from describing programs to explaining decisions. Based on Farient’s work with boards and compensation committees, several practices consistently improve disclosure quality and shareholder understanding.

1. Frame Pay Outcomes as the Result of Active Decision‑Making

The most effective disclosures explicitly acknowledge the committee’s role as a decision‑maker, not just a program administrator. Strong proxies:

• Highlight the key questions the committee debated
• Explain how competing performance signals were balanced
• Describe how judgment was applied within the incentive framework

This reinforces that pay outcomes reflect governance oversight, not automatic formula execution.

2. Provide Context Around Goal‑Setting Rigor

Shareholders are increasingly focused on whether goals were demanding when established, not simply whether they were achieved. Boards can improve disclosure by:

• Describing goal difficulty in directional terms
• Explaining how targets reflected business conditions at the time they were set
• Clearly articulating the rationale for any adjustments

The objective is not to disclose proprietary targets but to give investors confidence that the goals were set with appropriate rigor.

3. Treat Discretion as a Governance Decision Worth Explaining

When boards exercise discretion, the proxy should reflect the seriousness of that decision. Effective disclosure:

• Explains why discretion was necessary
• Describes alternatives considered
• Clarifies how the decision supports long‑term value creation
• Addresses whether the action sets a precedent

The more unusual the decision, the more important it is to articulate the board’s reasoning.

4. Engage Shareholders Proactively—Not Only After Failed Votes

High say‑on‑pay support does not eliminate the need for engagement or improved disclosure. Many investors vote in favor while still expecting evolution. Boards strengthen credibility when they:

• Summarize key themes from shareholder feedback
• Explain how engagement influenced disclosure or design
• Demonstrate responsiveness even in strong vote years

This positions say on pay as an ongoing dialogue rather than a periodic test.

5. Treat the Proxy as a Strategic Communication Tool

The proxy statement remains one of the board’s most important investor communications.

Leading disclosures:

• Use executive summaries to highlight key decisions and changes
• Avoid repetitive boilerplate that obscures what is new or different
• Present a coherent narrative linking strategy, performance, and pay

Clarity, Not Length, Builds Credibility

A decade and a half into say-on-pay, expectations of boards have evolved. Investors want more than a record of what executives were paid; they want to understand how and why those decisions were made. Boards that invest in clear, candid disclosure put themselves in a stronger position to earn shareholder trust and reinforce confidence in their oversight. In executive compensation, credibility depends not only on outcomes but on the quality of the explanation behind them.

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By Trey Poore, Director