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3 Ways to Make Executive Compensation Disclosure More Effective

As executive-compensation amounts and internal-pay ratios have risen in visibility with and concern among regulators, investors and the general public, boards of directors must pay more attention to how to communicate these metrics effectively and consistently with a company’s broader disclosure efforts.

That’s the main conclusion of new research by Pearl Meyer & Partners into the approaches that companies and boards are using to develop the increasingly important Compensation Discussion & Analysis (CD&A) section of their annual proxy statements.

“The CD&A has grown from a required chapter in a legal document to a critical communication tool that outlines a company’s executive compensation philosophy and program design and explains how it supports the corporate business strategy,” the firm said.

“Almost 90% of respondents reported that reader friendliness is as important as technical accuracy in CD&A sections.”

As investor activism and federal requirements under the Dodd-Frank Act push executive-compensation practices into higher status, the New York-based board-advisory firm surveyed representatives of 93 publicly held companies and came up with 3 key conclusions about effective CD&A practices.

  1. Reader friendliness is key. Almost 90% of respondents reported that reader friendliness is as important as technical accuracy in CD&A sections. And the No. 1 request by corporate Compensation Committees is to make the CD&A narrative easier to read and understand. Communication effectiveness levels reported as ‘excellent’ or ‘very good’ are better at leveraging content trends such as effective charts and graphs.
  1. Help is probably necessary. Companies reporting excellent or very good communication effectiveness in this area use communication experts to help develop content, Pearl Meyer said. They also plan in advance and start drafting compensation-disclosure documents before the close of the fiscal year.
  1. Dodd-Frank has had a big influence. Disclosure mandates in federal regulations have had a critical impact in the improvement of communications effectiveness, the survey indicated. For example, significantly more companies that reported excellent or very good communication effectiveness with the CD&A documents also saw more than 90% of their shareholders vote “yes” on Say on Pay ballot items at their annual meetings, indicating that transparency begets a desire by shareholders for more transparency. And 60% of those surveyed said they have started planning for future disclosure as a result of the federal government’s pending CEO Pay Ratio rule.

Following these guidelines, boards are less likely to have any surprises come their way with regard to executive pay, and will be more likely to achieve their desired outcomes from all constituents.



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