Plain talk helps 'say on pay' mean something

Think about it: what board wants to oppose a clear expression of shareholders' views? With newfound rights to vote on executive compensation arrangements, investors are making their voices heard as the annual proxy season gets underway.

Think about it: what board wants to oppose a clear expression of shareholders' views?

With the new rights to a vote come new responsibilities for investors to analyze compensation arrangements and inform their perspectives of how well boards act as stewards of their interests. CFA Institute, a global association of investment professionals, polled its members and 74% indicated they regularly use information about executive compensation practices and pay levels in making investment decisions. Since rules were adopted by the SEC in 2006, the Compensation Discussion and Analysis (CD&A) section of the proxy statement has been required of public companies, with the intention to offer investors insights on how executives were paid and how that pay strategy fits with overall corporate strategy.

So much for best intentions. For most companies, the CD&A devolved into a compliance exercise, either offering the scantest treatment of what can be complex issues or burying readers in pages of dense legal boilerplate that said much, but conveyed little. Either communication strategy satisfied the letter of the law, but did not offer useful perspectives on how pay fit with company objectives and strategy. Just 20% of respondents to an October 2009 CFA Institute poll characterized CD&A disclosures as transparent and understandable.

The financial crisis laid bare some of the per- verse compensation incentives that encouraged imprudent risks. As part of the sweeping Dodd-Frank Regulatory Reform Act, Congress instructed the SEC to empower investors with the "say on pay" advisory vote. In recognition of the pending collision of poor quality CD&A disclosure and heightened investor interest, CFA Institute convened representatives from both the investor and securities issuer communities to discuss the goals of current compensation disclosures. From that discussion came the realization that a common template tying together the components of useful disclosure could address many investor concerns over comprehensiveness and comparability of information provided by issuers, while discouraging selective disclosure that avoided the hard issues.

The CFA Institute CD&A Template sets forth the components of pay disclosure that investors say they find important; for example, an overview of the prior year's corporate performance and pay levels, the elements of that compensation, an analysis of compensation decisions related to performance, and consideration of the overall corporate compensation principles and framework. Companies need to include these elements and others that investors value in their disclosures.

Although the framework of common components encourages thorough disclosure, there was also a quick realization that companies needed to be able to set the appropriate con-text and tell their compensation stories in their own way. Every company has a unique industry position and strategy. Preserving a company's ability to put its strategy in perspective in its own words is key. Companies are encouraged to use plain English and approach the issues in a straightforward manner.

The consequences of "business as usual" is evident. Early on in the current proxy season, two companies, Beazer Homes and Jacobs Engineering, have already suffered majority opposition to their executive compensation practices, while Monsanto garnered a significant minority of opposition to its compensation practices. There is no doubt investors are engaged on the compensation issue. IR pros should seize the opportunity to recast rigid disclosure with insightful analysis that positions corporate issuers appropriately, while being responsive to investor priorities.

Companies must speak plainly to the issues in a way that is true to their unique corporate identity and strategy. Regulation alone can't compel this kind of quality of disclosure, as the CD&A experience since 2006 demonstrates. The mutual interests of companies and their shareholders calls for clearer perspectives on compensation strategy that investors can use to justify their confidence in both boards of directors and executive management teams.

Bob Dannhauser is head of advocacy outreach and communications at CFA Institute.

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