Compensation Discussion & Analysis (CD&A) template
produced late last month by the Chartered Financial Analysts Institute. By no means is it the only option for building an effective CD&A.
If you are a regular reader of this blog, you may remember back in June when I had a post about something called a “compensation placemat” that was presented by Janet M. Clarke, a compensation committee chair with ExpressJet Holdings and Asbury Automotive Group at The Conference Board-sponsored 2010 Executive Compensation Conference: Everything Directors and Senior Executives Need to Know About Effective Risk and Reward Sharing.
True, the placemat option is not meant to be a CD&A. But the one-page document that fits into a board book can be used as tool to help write that CD&A. (To see an example of a placemat, click here
. To read my June 11, 2010 post, click here
It’s a quick read of a company’s executive compensation plan complete with the executive pay strategy; a list of peer group revenue, earnings and market value; the company’s officer compensation, a description of the annual incentive and long term incentive plans; the company’s run, or burn, rate; share ownership guidelines; termination provisions; and director compensation, including retainers, chair premiums and long term incentives.
The CFA Institute decided to set up a working group and produce the template as it noticed the plethora of complex and lengthy (some have averaged more than 40 pages) CD&A’s filed with the SEC. It also wanted to make compensation communications clearer and more relevant to investors.
Its working group, which included Catherine Dixon, a partner at Weil, Gotshal & Manges; Jeff Morgan, president and CEO of the National Investor Relations Institute; and Anne Sheehan, director of corporate governance at CalSTRS among its 12 members, agreed that “the template should guide issuers in creating a document that can be read and understood by average retail investors.”
The report cites the high level of frustration investors have with the current state of disclosures. It found that 74 percent of its members who responded to its survey regularly use information about compensation practices in their investment decision processes.
As for the CFA Institute template, many are looking at the 20-page report as a form of best practice for companies subject to Regulation S-K Item 402 (executive compensation disclosure). And some are critical of it being a “one-size-fits-all” approach.
The CFA Institute, in the introduction to its report, states “the template is intended to comply with SEC requirements concerning CD&A disclosures.” However, it does address the fear of companies using such a template to create boilerplate disclosure.
“Recognizing that this is not a 'one-size-fits-all' approach, the working group nevertheless believes that issuers should include, in their own style, all topics raised in the Model CD&A and address them in an order similar to the one proposed in this document,” the report states.
It also suggests companies include hyperlinked section headers in the disclosure and some XBRL tagging.
The template breaks a CD&A into six sections as follows:
- Section I. Overview of Previous Year Performance and Compensation
- Section II. Elements of Compensation for the Past Fiscal Year
- Section III. Performance Targets for Past Year/Performance Period
- Section IV. Compensation Decisions Made in Past Fiscal Year/
- Performance Period
- Section V. Compensation Framework: Policies, Process, and Risk
- Section VI. Employment and Termination Agreements
The template devotes the most space to the framework section, which isn’t surprising since the SEC either has specific rules tied to compensation risk and plans to issue rules related to compensation consultants and compensation committees.
In addition to the template, the CFA Institute includes two appendices: examples of CD&A disclosures consistent with the CFA Institute’s model CD&A and the list of elements the SEC requires for Rule 402 (b).
While many law firms have issued client memos on CD&A’s since 2006 (when the new rule was approved), there was one from Davis Polk & Wardwell LLP
issued this past September in anticipation of a transitional 2011 proxy season that had a simple message to general counsel and corporate secretaries.
“Ensure that your proxy statement clearly tells your compensation story,” a section of the memo read. “The noticeable bloat in Compensation Discussion and Analysis sections in recent years has tended to obscure that real change is underway: most companies are reviewing and revising their compensation programs to align them more closely with desired performance. Particularly in 2011 the emphasis should be on communication, not just compliance. Don’t overestimate the reader’s stamina: preface your CD&A with an executive summary that hits the highlights in bullet points:
- pay-for-performance for senior executives
- recent changes that may respond to the evolving expectations of advocates
This sort of summary might be especially compelling as the supporting statement for the say-on-pay vote.”
- defenses of sensitive pay practices, such as gross-ups
If you are a corporate secretary, compensation committee member or compensation consultant, most likely you heard about the