The rise and rise of the CD&A

In the five years since public companies were first required to create and publish a compensation 
discussion and analysis (CD&A), this section 
has quickly become the rock star of disclosure 
documents. ‘For most investors, unless they have a specific issue or concern about a particular company, the CD&A is the most important and most carefully scrutinized section in the proxy statement,’ contends Ron Schneider, director of corporate governance 
services at RR Donnelley’s financial services group. He notes that in a recent RR Donnelley survey, investors rated the CD&A executive summary as more important than even the proxy summary, and it’s therefore typically the first section they read.

Schneider adds that while some public companies continue to struggle with how to craft a meaningful CD&A, this disclosure section has improved 
dramatically in a relatively short period of time.

Sharon Podstupka, vice president at Pearl Meyer & Partners, agrees. While the best CD&As typically come from Fortune 100 companies, others are making vast improvements, too. ‘The challenge of say on pay, starting back in 2010, pushed many companies to think creatively about their CD&As,’ Podstupka says. ‘And the laser focus on executive pay has become so hot over the last two years that it’s made the CD&A a source of interest not just for investors but also for the media and the public at large.’

Public companies keen to experiment with graphics, tables and some nifty design elements have also helped elevate the CD&A. ‘A lot of these proxy statements are starting to look like magazines: they are designed and drafted to tell a story and capture the attention of the readers,’ says Mark Borges, 
principal at Compensia, a San Francisco-based 
compensation consultant. ‘Companies are using the same types of messaging techniques you see in advertising as a way to communicate key messages to investors. That didn’t happen five years ago.’

The bottom line, says Borges, is that public 
companies are recognizing the value of creating an appealing CD&A that’s written in plain English. ‘If you have something that looks like an insurance policy, nobody’s going to read it,’ he warns.

What’s working – and why

Crafting a stellar CD&A is no mean feat: 
compensation is a complicated topic to cover in 
bullet points and pie charts. Trickier still, public companies need to explain their compensation 
policies in a way that will resonate with a broad range of audiences, from mom-and-pop investors to proxy advisory firms like ISS and Glass Lewis.

Clint Williams, director of sales and business development at Labrador, an Atlanta-based firm specializing in SEC disclosure, urges companies to begin work early on their CD&As. He points out that this section tells an extremely important story about how pay for executives is aligned with performance – yet this message may be difficult to articulate.

Getting a jump-start is especially important because the cast of characters involved in putting together the CD&A is so large. Williams notes that a first-rate CD&A may require input from finance, human resources and specialists hired to build a company’s equity and compensation plans. What’s more, the task of writing the CD&A is growing more demanding simply because the document itself is becoming lengthier. Equilar studied recent CD&As from the S&P 100 in its survey ‘Innovations in CD&A design: a proxy disclosure analysis’, and found that CD&A length has increased 17.6 percent over the past five years, from an average of 7,773 words in 2009 to 9,142 words in 2013.

Almost everyone concurs that while design is important, what matters most is the message being expressed. ‘Particularly for institutional investors, content is absolutely number one,’ says Schneider. ‘If  there’s been poor performance or pay does 
not appear aligned with performance, you’re not going to design your way out of that story.’

He also emphasizes that while it’s worthwhile to read the proxies of peers and governance leaders, borrowing too much from others can be a mistake. ‘Draw inspiration from what others are doing,’ he says. ‘But then you need to say: What is our story? And how can we tell it most effectively?’

Key messages

Borges believes there are a few key messages all public companies want to emphasize in their CD&As. First, he says, it’s important to show that there’s a strong alignment between pay decisions and corporate performance – or that pay goes up only when performance is improving. Second, companies want to show that they have a comprehensive 
process that touches all of the various corporate 
governance practices promoted by investor advocates.

Third, Borges encourages public companies 
to provide a glimpse into how the compensation 
committee functions. Ideally, he says, a company will be able to show that the compensation committee is looking out for the interests of shareholders. It  will also want to illustrate efforts to provide 
compensation opportunities that ‘motivate management to take appropriate risks and drive forward to 
meet the company’s objectives’.

Behind every compensation message is the 
looming specter of the say-on-pay vote that will take place during proxy season. Rhonda Brauer, senior managing director of corporate governance 
at Georgeson, points out that many companies 
consistently publish high-caliber CD&As because they aspire to be corporate governance leaders. Others decide to focus on and enhance their CD&A disclosure after ‘they have had a problem with their say-on-pay votes and realize their compensation 
stories were not understood very well and/or 
they need to make changes to their executive 
compensation programs.’ Examples of companies Brauer identifies as good models for CD&As include Prudential, Coca-Cola, McDonald’s and H&R Block.

Finally, Schneider views expressing a strong message in a well-executed CD&A as a form of insurance against negative recommendations from the proxy advisory firms. If, for example, ISS issues a negative vote recommendation, ‘you want to use 
a good, convincing CD&A to give investors the ammunition they need to vote differently from the proxy adviser’s recommendation,’ he says.

Navigation and design

Ron Warren, senior adviser at Labrador, points out that neither the proxy advisers nor most investors have time to read all disclosure documents word for word. ‘If you want to take advantage of all the good news you have, information has to be easy to find and very accessible,’ he says.

Schneider agrees. ‘Given that 50 pages is a short proxy statement these days, I think navigation is a very close second consideration for content,’ he observes. That said, he finds it surprising that many companies fail to include a table of contents in 
their proxies. He notes that in a 2013 RR Donnelley investor survey, only 6 percent of respondents say they read proxies front to back, while 60 percent say they skip to a specific section, usually the CD&A 
or its executive summary.

In a new trend, some companies are including a separate table of contents designed exclusively for the CD&A at the very beginning of that section, thereby eliminating the need to jump back and forth within a lengthy document. ‘The rationale for this is that if investors are going to be looking for a road map inside the C&DA, why not put that road map 
at the front of the CD&A?’ says Schneider. Wherever the table of contents is placed, he believes it’s 
important to be very specific in listing the pages where different types of compensation information are being discussed.

After content and navigation, Schneider maintains that design is the next most important element of a good CD&A. ‘You don’t want to shoehorn important content within a design framework,’ he says. Instead, the goal should be to use only those design elements that aid the reader. He also notes that 
certain design decisions help make the CD&A appear more approachable. ‘If you combine truly plain English content with a sans serif typeface, it makes a document look less legalistic,’ he says.

Some design elements come down to personal preference. Podstupka, for instance, thinks ‘words are more important than the look and feel of a 
document, but there definitely is a link.’ In terms 
of design, she favors crisp headers and content 
that flows appropriately.

Oversharing

One pet peeve for Podstupka is firms that provide too many business highlights. In general, she advises corporate secretaries and others to check the impulse to over-inform in the CD&A. Generally, she believes it’s never a good idea to discuss compensation for executives too far below the named officers.

Borges appreciates short sentences and plenty of graphics. ‘If you can tell a story with a picture rather than a dense narrative paragraph, that’s always good,’ he says. ‘Use contrasting colors, lots of space, bullet points, call-outs and lists – all things that make the discussion less threatening to the reader.’

Borges praises ExxonMobil for publishing a 
separate booklet solely devoted to executive 
compensation. As the booklet is supplementary, it’s not subject to the technical disclosure requirements of the CD&A and can present the topic in an informative style that isn’t tied to regulatory mandates.

Another hot design element is the executive summary. ‘Executive summaries are a bit of a 
misnomer,’ explains Brauer. ‘They’re really a 
checklist of the important points that companies’ investors and the proxy advisory firms will be 
looking for when it comes to evaluating executive compensation in the CD&A.’

Recently, says Schneider, some companies have begun writing executive summaries for their CD&As  as well as for the proxy as a whole. ‘Having a proxy summary, or that and a CD&A executive summary, can contribute to repetition,’ he acknowledges. ‘But I tell people that a little bit of repetition isn’t fatal because at least your information is being read.’

Finally, while charts and graphs are appealing, public companies need to be careful that these design flourishes don’t confuse shareholders. In a recent RR Donnelley survey, 52 percent of participating investors said they have seen graphs or images in CD&As 
that weren’t clear. Borges recalls that a few of the respondents noted that ‘when they saw a confusing graph, they thought it was an effort – perhaps even a deliberate effort – to mislead.’

The moral of the story, says Schneider, is that report design ambitions can backfire if companies are not careful enough.

What the future holds

While some companies have upped their CD&A game in response to an approaching say-on-pay vote, many are trying to improve simply because they don’t want to lag behind their peers. Increasingly, notes Borges, a compelling CD&A is seen as 
part of a company’s investor relations and 
branding activities. In other words, he says, ‘it’s 
yet another way for the company to promote 
its image in a positive light.’

Borges adds that many of the graphs and design elements pioneered in the CD&A are now migrating to the proxy statement, altering that document for the better. For instance, he points out that General Electric has begun using icons and graphics to 
demonstrate how many of its board members are independent. ‘The origins of a lot of these techniques go back to the CD&A,’ he explains. ‘The CD&A 
has really become a forerunner.’

Podstupka points out that the CD&A will 
need to continue to evolve once rules about 
CEO-to-median-employee pay ratio disclosures are finalized. She believes these new rules will 
compel companies to tell their stories in even more individualized ways. ‘Soon, having a boilerplate CD&A might be a practice of the past,’ she 
concludes. ‘And I think that’s a very good thing.’