Q: It being August, I'm naturally thinking about our 2020 CD&A, which is not the way things should be. Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations. Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC's rules and explaining an issuer's executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can't there be? Thanks very much.
RE: Levi-Strauss comes to mind, as does PPG. Mark Borges blogged about both companies' comp disclosures and you should check out some of the other companies that he highlighted in his blog.
-John Jenkins, Editor, CompensationStandards.com 8/6/2019
RE: Thanks very much for the quick reply. Will definitely do so. Much appreciated, as always. -8/6/2019
RE: 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.
I think the real issue is that moving from what most companies produce now to a disclosure like that (really short, sweet) would be out of the ordinary and groundbreaking. And who is willing to be the first to try this really short, concise approach (i.e., risk of SEC comments, risk of plaintiff litigation, etc.)?
-9/12/2019
RE: 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.
-9/12/2019
RE: 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
-Liz Dunshee, Editor, CompensationStandards.com 12/5/2019
RE: Thanks, Liz. Are you aware of any CD&A that includes a Q&A section? It seems that approach would be a good way to concisely convey the information of most interest to the proxy advisory firms and major shareholders. This is especially true when an issuer is trying to summarize the shareholder feedback received during engagement calls, how the comp committee responded to it, and where more detailed disclosure can be found.
Best wishes for a very happy 2020.
-12/30/2019
RE: I haven't seen that format specifically, but it does strike me as more user-friendly than a long narrative, and maybe some of our other members will chime in with their experiences.
DFin's annual "Guide to Effective Proxies" also gives many examples of CD&A TOC layouts and executive summaries that are often used to highlight this type of info. Although, here's what Dave Lynn had to say about CD&A summaries in the latest edition of our print newsletter, "The Corporate Executive"
Is a Summary of the Summary Really Necessary?
While proxy statement summaries have become a fixture of the modern-day proxy statement, one continuing area of debate is whether a company needs to include a summary of CD&A in the proxy statement as well. CD&A summaries could be the product of too much CD&A in general, and issuers that employ a CD&A summary should consider whether they could achieve the same objective by just making CD&A shorter and more effective.
A CD&A summary seems like such an anathema because the CD&A disclosure itself was intended to be a summary discussion. When adopting the CD&A requirement, it is unlikely that the SEC anticipated the ten thousand word behemoth that CD&A has become. We believe that a more focused discussion and analysis, when combined with appropriate graphs and charts that demonstrate key principles, would likely obviate the need for a separate CD&A summary that is intended to highlight only the most salient points.
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019
RE: Thanks again, Liz. I completely agree with David on the dubious benefits of a CD&A "summary", which often turns into a five-page drafting exercise that repeats information found in the CD&A. My point with the Q&A suggestion was that it could replace much denser and difficult to find information on one page right up front. The Baltimore Catechism always worked for me.
-12/30/2019
RE: Yes, I share your view that a Q&A done right would be much easier to navigate than a summary - just haven't seen that highlighted as a trend (yet). I will let you know if I come across any companies who are doing it...
-Liz Dunshee, Editor, CompensationStandards.com 12/30/2019
RE: CVS Health used a Q&A format as part of its 2017 CD&A summary. It got some love from the proxy design gurus, but the company seems to have gone back to a more traditional format in more recent proxies.
-John Jenkins, Editor, CompensationStandards.com 1/1/2020
RE: Thanks very much, John. I checked out the CVS CD&A and it's extremely helpful. Best wishes for a very happy new year to you, Liz, and your colleagues.
1/2/2020