In light of the new executive compensation disclosure rules for public companies that went into effect in early 2007, the letters sent by the Staff of the Securities and Exchange Commission to 350 corporations that critiqued compliance with those rules, and the SEC’s October 9 report on such compliance, as described in the October 12, 2007 edition of Corporate and Financial Weekly Digest, RiskMetrics Group (formerly ISS) has published a study designed to promote best practices in compensation disclosure and to stimulate further thought and discussion. The report focuses on various aspects of disclosure.
As it relates to style and readability, the report stressed that the key audiences of investors, corporate directors and executives should be kept in mind; writing should be in plain English, executive summaries should be included in disclosure with an emphasis on material information; text should be well organized with subtitles; and formatting should be designed to convey information in a meaningful way.
With respect to content, analysis is the key component for compensation disclosure and it is essential for the companies to illustrate the connection between a company’s business strategy and its compensation incentives, and to include analyses of performance links to compensation, target pay levels, the reasons for the pay mix, and CEO performance as it relates to predetermined targets.
All disclosure should be put together in a “holistic” manner so all key elements are included; missing information raises unwanted questions including whether certain omissions were deliberate. According to RiskMetrics, better disclosure should lead to better compensation practices within the company which in turn leads to better long-term corporate and stock performance. (RiskMetrics Group, Proposed Best Practices In Executive Compensation Disclosure, October 2007).