Five Ways to Improve Your Compensation Disclosure

As preparation for the 2018 proxy statement season commences, companies should take a fresh look at their compensation disclosure, including a review of the entire Compensation Discussion and Analysis (“CD&A”) for comprehensiveness, cohesion and consistency. After multiple years of ad hoc revisions, the CD&A can read as disjointed or inconsistent and include stale or repetitive disclosure. Getting an early start to reviewing the CD&A as a whole, focusing on why each element of disclosure is included and how it helps investors understand the company’s compensation programs and philosophy, will help ensure that the CD&A clearly communicates the information that investors are seeking. In addition, companies looking for specific ways to improve the effectiveness of their disclosure as a tool for investor communication should consider the following suggestions.

1. Shareholder Engagement. Discussion of shareholder engagement in the CD&A should describe: (i) the company’s practices with respect to shareholder engagement on compensation matters and the most recent shareholder outreach process, (ii) the feedback received from shareholders, including general messages and/or any specific examples, and (iii) how the compensation committee took that feedback into account, whether by making design changes or determining that changes are not necessary, and why. For investors to fully appreciate a company’s engagement efforts, the CD&A should demonstrate that investor feedback was sought, heard and considered. For companies that have not conducted meaningful shareholder outreach this year, it is not too late to solicit shareholder feedback in advance of establishing a 2018 compensation program.
2. Pay Ratio Disclosure. As companies craft their initial pay ratio disclosure and determine which methodologies to apply in light of the flexible framework emphasized in the SEC’s recent guidance, they should consider the sustainability of the approach and the impact of future changes on the ability of investors to make a year-over-year comparison, keeping in mind that the median employee determination may be used for up to three years if there has been no change in the employee population or compensation arrangements that the company reasonably believes would result in a significant change to the pay ratio disclosure and that a company must describe any significant change in methodology or assumptions previously used, including the reasons for the change. Is the selected methodology easily applied each year? Are there anticipated changes in the company’s business, operations, compensation programs, or employee population that may favor a different approach in the coming years?
3. Performance Metrics and Performance Goal Rigor. The company has the opportunity in the CD&A to tell the story of how its performance metrics are designed to be appropriately rigorous and to further company strategy, and how short-term and long-term metrics relate to one another and drive the best outcomes for shareholders. Companies should take advantage of this opportunity and avoid leaving shareholders wondering about the rationale and drawing their own conclusions. For example, ISS has highlighted concern about the perceived lack of rigor of performance goals set below the prior year’s target or actual performance level; in this circumstance, including an explanation of the compensation committee’s analysis and reasoning may preempt criticism.
4. Peer Group Determination. Companies should consider augmenting their disclosure in the CD&A regarding the criteria (e.g., industry, market cap, revenue, competitiveness for talent) used to select the company peer group. An explanation of why the compensation committee determined that both the relevant criteria and the resulting group are appropriate may help minimize critiques of so-called escalatory benchmarking practices.
5. Executive Summary. Given the increase in the overall length of CD&A disclosure, executive summaries are now standard practice, as they are a useful way to convey key messages to investors quickly. But in order for the executive summary to serve its intended purpose, companies should be thoughtful about what is included and take care that it does not become an abbreviated reiteration of the full CD&A.