The Advisors' Blog

– Lynn Jokela

Back in December, I blogged about a member’s quest for a “more rationale” CD&A. That conversation continued with a few other members chiming in our Q&A Forum (#1294). First:

Kudos to planning in advance and thinking this way. I think that a good, compliant CD&A should be able to be drafted in about 10 to 12 pages. Instead of long, narrative paragraphs and generic, multiple-year boilerplate, why can’t nearly all of the material information be provided in basic bullet points or charts/tables?

The “what” could be provided very concisely in charts/tables (think salary, bonus and LTI information), and the “why” could be provided in brief bullet points. I also think the other standard narratives (i.e., philosophy, objectives, management/consultant involvement, elements of pay, pay mix, impact of SOP vote, etc., etc.) could be provided in bullet points, or a chart, or other graphic elements.

The original poster responded:

Thanks very much for response. I think that it would be helpful if the SEC mimicked a high school English teacher, as in, “Please write an essay no longer than 2,500 words explaining to shareholders how your executive compensation program works, why your named executive officers received the compensation they did for the performance year, and how that compensation reflects your pay for performance philosophy.” Let’s be honest- virtually no one reads a CD&A, even if they claim to do so (cf. Finnegan’s Wake). Certainly an institutional investor voting 4,000 positions on say on pay is not, your Uncle Joe is not, and the proxy advisory firms, if they read a CD&A at all, only extract certain information necessary to complement their quantitative screens. Because of the involvement of lawyers, compensation consultants, HR personnel, corporate governance experts, and endless “best practices” suggestions, the typical CD&A has become a bloated document that brings to mind the description of a camel as a horse designed by a committee. Not that I mind having a job.

Then Liz recently chimed in by alerting people to this recent Equilar survey (available for purchase):

Maybe some people are taking your advice. Equilar just published a study showing that the average CD&A word count dropped for the first time in 5 years. Looks like companies may be relying more on graphs of alternative pay calculations to tell their stories:

– 75.8.% of Equilar 100 companies used a proxy summary in the annual proxy in 2018

– The word count of Equilar 100 companies’ CD&A portion saw a decline for the first time in five years, dropping to an average of 9,359 words in 2018

– The number of companies that included a pay mix graph fell six percentage points from 2017 to 2018, down to 78.8% of companies

– After hovering around 77.0-79.0%, the number of companies that included a compensation program checklist decreased by 3.3 percentage points from 2017 to 2018, down to 74.5%

– In 2018, 46.5% of Equilar 100 companies included a graph displaying an alternative pay calculation different from those displayed in the summary compensation table, such as realized or realizable pay

Personally, I think one issue is that moving from what most companies produce now to a shorter, condensed CD&A would be considered out of the ordinary and to a certain degree, groundbreaking. And who is willing to be the first to try this really short, concise approach given the risk of SEC comments, plaintiff litigation, and negative votes or recommendations? It’s encouraging to see that there may be a trend in the right direction.