CD&As Now Important Tool To Communicate Companies' Pay Decisions

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By Yin Wilczek  

Aug. 1 — In the wake of greater shareholder engagement resulting from say-on-pay, the Compensation Discussion & Analysis (CD&A) section of corporate proxy statements has become an important tool for reaching out to shareholders on pay matters.

In the 2014 proxy season, companies enhanced their disclosures in CD&As to provide information about their compensation practices and decisions that shareholders requested, said Michael Hermsen, a partner at Mayer Brown LLP in Chicago.

“More companies are using their CD&A as an opportunity to reach out to all shareholders and tell their compensation story the way they want to tell the story, rather than only complying with specific disclosure requirements or otherwise waiting to react from a recommendation from a proxy adviser,” he said at a July 31 teleconference sponsored by his law firm. “Much of this new disclosure is not required.”

Additional Disclosures

Hermsen noted that not only are companies increasing the amount of information in their CD&A, they also are focusing on how the information is presented. Examples of the new disclosures include an executive summary on the high points of the previous year and a discussion of the company's pay practices, he said. The information often is presented in an easy-to-read chart.

In addition, more companies are including charts or tables on realized pay showing how they make compensation decisions, Hermsen said.

In other trends, Hermsen noted that there continues to be movement by companies toward adopting clawback policies that apply more broadly than the requirements of Section 304 of the 2002 Sarbanes-Oxley Act.

“However, it is important to note that there is no real uniformity among companies among the provisions that have been adopted,” he said. “What is clear is that many companies have put in place a provision that requires a clawback of certain types of compensation under specific circumstances.”

Similarly, more and more companies have put in place policies limiting the use of company stock in various hedging strategies and the pledging of company stock as collateral for a loan or margin account, Hermsen said. Again, as with the clawback policies, there is no real uniformity in the anti-hedging and anti-pledging policies that have been adopted, he said.

“And consistent with the shareholder outreach changes that I discussed earlier, companies are including disclosure of their clawback, anti-hedging and anti-pledging policies in their proxy statements,” Hermsen added.

SEC Pay Ratio Proposal, Other Proposal Trends

In other discussions, Laura Richman, counsel in Mayer Brown's Chicago office, suggested that even if the Securities and Exchange Commission were to adopt a pay ratio rule this year, it is unlikely that the disclosure will be required in the 2015 proxy season.

To implement a Dodd-Frank Wall Street Reform and Consumer Protection Act requirement, a divided SEC in September 2013 proposed a rule that would require public companies to disclose the ratio of the median pay of their employees to that of their chief executive officers.

Richman noted that according to the proposing release, the SEC contemplates that the pay ratio disclosures would be required with respect to compensation for the full fiscal year beginning after a final rule is adopted. “So if the SEC adopts a final rule in 2014, using the transition timing” laid out in the proposal, pay ratio disclosures for “calendar year companies would first be required in the 2016 proxy season, and that would be with respect to 2015 compensation,” she said.

As to shareholder proposals, Richman said that the “vast majority” of resolutions in 2014 did not win majority shareholder support. However, a significant percentage of shareholder support—even if falling short of majority support—may be influential and sway board opinion, she said. In addition, high support may impact proxy advisers and governance rating organizations, as well as public opinion, she said.

Although she warned that the numbers vary, some commentators suggest that proxy access shareholder proposals average around 39.4 percent this year, Richman told Bloomberg BNA Aug. 1 after the teleconference. About three or four proxy access proposals were adopted in 2013 and 2014, she said.

Although very few companies have received such resolutions, they nonetheless should be taken seriously, Richman said. “This is particularly important if the proposal uses” the thresholds the SEC adopted for its vacated rule “because that is the type of proxy access proposal that is more likely to achieve majority support,” she told Bloomberg BNA.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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