I just finished up a couple of Compensation Discussion and Analyses, and have been reflecting on ways to try to scale back on some of the narrative prose that inevitably ends up filling out the body of the document. In particular, I’m thinking of the sections where the three principal compensation elements — base salary, annual incentives, and long-term incentive compensation — are addressed. In my experience, these sections tend to start with an introductory paragraph or two (at least) before getting into the specifics of how the compensation committee made its design choices and pay decisions for the last completed fiscal year. Often these introductions tend to be too long or repetitive of points made earlier in the CD&A, or both. I’ve played around with a variety of alternative approaches, but I’ve never come up with something that I really liked — until now.
For the past couple of years, NetApp, Inc. has employed an interesting little technique in its Compensation Discussion and Analysis for beginning the discussion of each of its three primary compensation elements. Instead of inserting in each section a lengthy (and often very general) narrative of somewhat interesting (but not necessarily material) information about the pay element, the company just asks — and answers — three simple questions: What is it, how is it set, and why is it important?
For example, here’s the lead-in to the discussion of base salaries:
What is it? Base salary provides a fixed level of cash compensation designed to be commensurate with an executive’s performance, qualifications, experience, responsibilities, potential and tenure.
How is it set? The Compensation Committee reviews base salaries at least annually with the aim of paying market-competitive base salaries to attract and retain key executive talent. Annual salary increases are at the discretion of the Compensation Committee and are not automatic or guaranteed.
Why is it important? Base salaries promote excellence in day-to-day management and operation of our business. Base salaries also serve as the basis for Annual ICP and change of control severance benefits.
This information is immediately followed by a table, which sets out the base salaries of the named executive officers for the last completed fiscal year and the percentage increase (if any) that amount represents from the prior fiscal year. And, that’s it.
It’s a bit more complicated when discussing and analyzing incentive compensation, but in each section, the company asks and answers the same three questions. For example, after describing how it determines long-term incentive award values and setting out the equity award mix for each named executive officer, here’s the beginning of the discussion of one of the two equity award vehicles used in its LTI program — performance-based restricted stock unit awards:
What are they? PBRSUs provide an opportunity for each NEO to earn shares of our common stock based on achievement of performance goals approved by the Compensation Committee. In fiscal 2020, NEOs were granted PBRSUs subject to the achievement of goals based on 3-year cumulative AOI and TSR performance relative to the companies in a performance peer group.
How are they set? The Compensation Committee determines the eligibility of each NEO for PBRSUs annually at the beginning of the fiscal year when it approves the performance goals, performance periods, compensation and performance peer groups and target share amounts that can be earned. The Company does not guarantee PBRSU grants or minimum payouts to any executive.
The Compensation Committee certifies the level of performance achieved and resulting payouts shortly after the end of the performance period.
Why are they important? Performance-based, long-term equity compensation aligns the interests of our NEOs with the interests of our stockholders, rewards executives for delivering long-term performance, serves as an important retention tool and aligns the contributions and efforts of NEOs with NetApp’s future success.
These questions are followed by a thorough discussion of the specific features of the PBRSUs, including the different aspects of the relative and absolute portions of the awards. But, again, the lead-in to this section of the CD&A has been considerably shortened by serving up the questions before getting into the details.
At first, I viewed this approach as a way to take the conventional compensation elements table and “trifurcate” it into smaller, more easily digestible pieces. But NetApp includes a compensation elements table in its CD&A as well (immediately following the Executive Summary). Instead of using it to cover this general “what, how, and why” information, however, it focuses on the key design features of each primary compensation element.
Admittedly, it’s gotten more difficult over the years to come up with creative ways to shorten the CD&A. However, I like the “three questions” approach. It’s straightforward, concise, and it gives a reader the background that they may need before presenting the specific details of the pay element to be discussed. Take a look and see if you don’t agree with me.
-Mark Borges, CompensationStandards.com August 5, 2020
