Unlocking The Power Of Your CD&A

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Done well, a company’s explanation of its compensation practices and policies is an opportunity to champion its pay and performance narrative to key stakeholders.

Over the past two decades, the structure of the Compensation Discussion & Analysis (CD&A) in companies’ proxy statements has ebbed and flowed—both in terms of content and length. During this evolution, the importance of the CD&A has increased, as it has become a primary medium through which companies can communicate with shareholders, proxy advisory firms, employees and other key stakeholders. However, to this day, some companies still view the CD&A as primarily a compliance exercise and present the minimum information required by the SEC. The CD&As of those that have never encountered Say-on-Pay-related issues may have remained static for many years with only minor updates made when necessary. Companies using those approaches without evolving them risk losing an opportunity to engage with key stakeholders.

The CD&A should be more than a regulatory compliance document. Companies need to develop their CD&A from a storytelling perspective to unlock the true power of the disclosure and make it a strategic marketing asset. To achieve this, the focal point should be around how the SEC-required information is positioned and described in the context of the company’s business strategy and performance. It is an opportunity for the company to champion its executive pay and performance narrative as well as anticipate and answer investors’ and other key stakeholders’ questions.

While laying out your company’s compensation story may seem like a daunting task, there are some guiding principles that provide a blueprint for success:

1. Less is more. Succinct, easy-to-read narratives that prioritize key components of the year’s compensation and performance story— especially at the beginning of the CD&A—will promote easy absorption of key themes and important facts by investors and other key stakeholders.

2. A picture (or list, table and/or graph) is worth 1,000 words. Presenting data and other key information in these manners can often be more effective than even the best written narrative—and graphics can help to amplify the less-is-more benefits alluded to above.

3. The “why” and the “what” are both important. When discussing annual and long-term incentive plan designs and payouts, describing the rationale underlying the vehicles, metrics and weightings used and connecting them to the business’s strategy and performance is paramount. This linkage is vital to promote cohesion in the company’s pay-for-performance story so that it will be well-received by the various audiences reading the CD&A.

4. A sculptor’s mentality needs to be applied. In nearly all cases, the current year’s performance and compensation story differs materially from those of the prior year. As a result, the CD&A should be approached like a newly commissioned sculpture that needs to be molded, edited and refined to address specific needs and appeal to applicable audiences. Understanding relevant viewpoints from top investors, proxy advisors and employees will allow the company to anticipate the issues that are important to each group and provide sufficient context and rationales along with the SEC-required information. Although the disclosure and format were done a certain way in prior years, they should not necessarily be done exactly the same way in the current year. Approaching the disclosure from this strategic perspective will allow the company to better manage the narrative and preemptively answer many questions from external stakeholders.

By applying these foundational approaches to the CD&A, a company’s executive pay and performance story can be brought to life and become much more tangible to the various readers of the proxy statement. Shareholders and other key stakeholders are increasingly expecting additional interaction with companies, and by developing and positioning the CD&A from a storytelling perspective, a company can enhance its overall engagement experience with these interested parties.


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