As if the Securities and Exchange Commission (SEC) hasn't given us enough to think about with its recently proposed and finalized regulations, they have reminded us that as part of its Disclosure Effectiveness project, they will soon be taking a closer look at what and how compensation and governance information is communicated in proxy statements.
This comes on the heels of research conducted by the Rock Center for Corporate Governance at Stanford University that validates the need for companies to do a significantly better job of explaining their executive compensation programs in their CD&As. Even in our own research, The New Normal of Annual Compensation Disclosure, Compensation Committees overwhelmingly say reader-friendliness is critically important and make it their number one request during CD&A development. And yet only 11.4% currently rate their CD&A effectiveness as excellent.
While many companies have started to take this call to action seriously, the majority continue to take their previous year's document and layer on new content or narrative in the 11th hour. This approach is exacerbating the issues around length and complexity - increasing the risk that investors and/or proxy advisers will misunderstand the design of a program and even more concerning, the rationale behind a Compensation Committee's decision-making process.
So what can you do now? While it is late in the game for major overhauls, there is still time to make meaningful changes that can make a measurable difference in the readability of your CD&A. Here are our top five suggestions:
- Have a succinct Executive Summary that connects your performance results to the pay decisions made by the Compensation Committee.
- Include clear information about your shareholder engagement efforts and any resulting changes to your program.
- Find places to convert text to tables or visuals.
- Use headings and sub-headings to make navigation more intuitive.
- Challenge historic information - if what you are saying is no longer critical to your story, it can probably be deleted.
But don't stop there. After your annual shareholder's meeting, make a commitment to change your CD&A for your future filings. It should be treated like a real project with an implementation team, timeline and budget. With the right team, planning and strategy, you can make a tremendous amount of progress before the end of next year, as well as important headway in front of the imminent rules being finalized from the SEC.
