The CD&A is a required part of a public company’s annual proxy statement. Its stated purpose is to give shareholders material information about a company’s compensation objectives and policies for the named executive officers (NEOs). It also provides perspective for investors about the compensation numbers and narrative that follow. As such, the CD&A’s real purpose is to explain the “compensation numbers.” As everyone knows, this has become increasingly important in the last few years, primarily due to the mandatory “say on pay” shareholder vote on executive compensation. While the vote is not binding, it can get very embarrassing if shareholders do not approve executive compensation practices and policies.
We believe the CD&A provides an excellent opportunity to educate shareholders about the company’s business strategy and to highlight how stated compensation practices best support the company’s goals.
So this year, let your CD&A tell your story by using some of these helpful tips:
- Year in Review – explain the decisions made during the year and the resulting payouts, if any; describe the context for decision making;
- Business Strategy — describe strategy and how compensation practices support it;
- Executive Summary — include succinct “summary” of good governance and best practice policies upfront and early in the document;
- Charts & Graphs — use lots of these to illustrate elements of pay, mix of pay, variable vs. fixed, and to chart performance against goals;
- Simple Direct language — use simple plain English and write from the investor’s perspective; assume your reader knows nothing about executive compensation;
- Financial Performance – ensure the company’s performance story frames the discussion of executive compensation; don’t keep the reader guessing how performance impacts executive pay – show them how through a chart or graph; and
- Realized or Realizable pay – consider using if appropriate (e.g., if TSR or say –on- pay support are low)
Finally, keep it short (but be thorough) so that shareholders and proxy advisory firms may easily understand how your compensation programs support your business strategy.