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By Susan Bokermann
Nov. 19—A good CD&A should “strike the perfect balance between compliance and communication,” according to panelists that spoke Nov. 18 at the National Association of Corporate Directors webinar “Compliance & Communication: The Dynamic Duo of Disclosure.”
Compensation disclosure is a “constantly evolving topic.” This evolution is partly driven by a change from “an audience of largely regulatory people looking at these proxies, to an audience of investors, shareholders and the media,” said Deborah Lifshey, a Managing Director at Pearl Meyer & Partners.
The discussion on executive compensation included how the evolution of disclosure affects compensation discussion and analysis (CD&A) drafting and the impacts of regulatory updates.
The various audiences for disclosure affect the way CD&As are drafted. Say-on-pay results “send signals about the way boards are making decisions about pay,” said Sharon Podstupka, a Vice President at Pearl Meyer & Partners. This provides pressure to do a really good job developing the CD&A. Podstupka said that “boilerplate language simply isn't effective anymore.” This takes the drafting process to a whole new level, she said.
Based on a study conducted by Pearl Meyer & Partners surveying 157 public companies, in 2015 29 percent of companies surveyed plan to add a description of their engagement actions, over 35 percent of companies surveyed plan to do a better job of explaining how they arrived at their pay decisions by including some kind of alternative to the summary compensation table and 38 percent of companies surveyed plan to add graphical descriptions to enhance the understanding of their disclosures.
Because companies are including more content in their CD&A, the drafting process is becoming more complex. Podstupka emphasized that “clear and concise language is critical in this process.”
As the drafting and development process has become more complex, “effectively managing messages about executive pay has become a lot more intricate,” according to Podstupka.
The compensation committee has a much larger role than before. Podstupka explained that thecompensation committee's role is now threefold.
First, it acts as a director for the message being conveyed about executive pay.
Secondly, the compensation committee acts as a referee. When multiple internal groups are involved in the drafting process, including legal, human resources or finance, “turf battles naturally happen.” Podstupka said the compensation committee should lead the process to promote efficiency and minimize conflicts between these internal groups.
Lastly, the compensation committee acts as a managing editor for the entire CD&A drafting process. It ensures that the CD&A is the “voice of the committee.”
The panelists also discussed the Securities and Exchange Commission, with Lifshey noting that the SEC still has not issued final rules for the compensation-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including pay ratio, pay-for-performance, clawbacks, and hedging and pledging. The SEC's 2013 proposed pay ratio regulations offer some guidance for companies trying to effectively manage disclosure requirements, Lifshey said. Lifshey expressed hope that the SEC would issue final pay ratio regulations by the end of 2014.
SEC Chairman Mary Jo White told the Senate Banking Committee in September that it is her “hope and expectation” that the SEC will finish rules on pay ratios before the end of the year.
Lifshey noted that Institutional Shareholder Services, Inc. (ISS) issued its 2015 policy update this month. The big difference is that a company's equity plan is now going to be analyzed under a three-prong test, including plan cost, grant practices and plan features, Lifshey said. This differs from ISS's previous approach of simply assessing the plan cost.
Lifshey also summarized 2015 policy updates for Glass Lewis & Co. LLC; the Public Company Accounting Oversight Board auditing standard recently approved by the SEC, requiring increased auditor scrutiny of executive compensation arrangements; and the SEC's June guidance on investment and proxy advisors.
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The webinar slides will be available at http://www.pearlmeyer.com/Pearl/media/PearlMeyer/Presentations/NACDWebcast-PPT-DisclosureDynamicDuo-DL-SP-11-14.pdf.
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