NEW YORK—March 18, 2015—Effective communication about executive compensation remains a top priority among Boards and management teams, yet there is significant room for improvement. According to Pearl Meyer & Partners’ survey, PM&P On Point: The New Normal of Annual Compensation Disclosure, only 11% of public company respondents rated the effectiveness of their Compensation Discussion and Analysis (CD&A) as excellent.
Make the CD&A easier to understand
Disclosure mandates on executive pay aren’t new, but expectations about the quality and clarity of this information have changed dramatically over the years. The CD&A has grown from a legal document into a communication tool that can outline the connections between compensation and business strategy. Multiple stakeholders are paying close attention to this information and often find the content lacking, as evidenced by recent research from the Stanford Graduate School of Business that stated institutional investors are “deeply dissatisfied with compensation disclosure.”
According to the Pearl Meyer & Partners’ survey, the number one request of the Board to management respective to CD&A content is that it be made easier to understand. Companies who rate their CD&A as excellent or very good are considerably more likely to present information in a reader-friendly format and leverage content trends such as executive summaries, charts and graphics.
“Boards clearly understand the importance of straight forward and effective communication, yet even by their own assessment, they’re falling short,” said Sharon Podstupka, Vice President, Pearl Meyer & Partners and author of the survey. “Disclosure is no longer about following a prescriptive roadmap. Companies are realizing that it is about developing a strategy that positions them to tell their unique story and creating a format that works best for their audiences.”
Timing and teams are important
The schedule for developing CD&As clearly impacts the effectiveness of the final document. Of those who wait until after the close of the fiscal year to start planning, almost half (48%) rated the effectiveness of their CD&As as just fair or needs improvement. Additionally, 30% of those same respondents acknowledge that planning always begins “too late.”
Who is involved in the planning and development also warrants consideration. A majority of companies (79%) who feel confident in their CD&A bring in their internal communications professionals to help tell the story. Approximately 40% also take advantage of external graphic designers and writers.
Can effective CD&As improve Say-on-Pay outcomes?
More than 62% of respondents who rated the effectiveness of their CD&As as excellent or very good noted that Say-on-Pay has influenced the writing style of their disclosure.
The survey indicates that a well-developed CD&A can lead to better Say-on-Pay votes, as almost 70% of those who said that the effectiveness of their CD&As was excellent or very good reported a Say-on-Pay vote of better than 90%. In comparison, only 50% of those who reported the effectiveness of their CD&As as fair or needs improvement achieved the same level of Say-on-Pay voting results.
“The findings related to Say-on-Pay are especially illuminating,” said Podstupka. “This is an excellent example of where the rubber meets the road and it substantiates the benefits of an easy-to-read and well-constructed CD&A. The better shareholders understand pay rationale, the more likely they are to support it.”
Podstupka continues, “We suggest four actions Compensation Committees should take as they develop their next CD&A: leverage specialized resources, allow significant planning time, use plain and concise language and don’t be shy about incorporating graphics to help explain key information.”
About the survey
The 2015 survey PM&P On Point: The New Normal of Annual Compensation Disclosure was conducted between September 24, 2014 and January 23, 2015 and included 93 public company participants. The survey was designed to gain insight into the communication approaches companies use to develop the narratives for their CD&A and gauge the levels of perceived effectiveness of those documents.