Template Offered for Compensation Discussion and Analysis

CFA Institute has released the Compensation Discussion and Analysis Template, a report that provides guidance for public companies wishing to improve the CD&A portion of their proxy statement.

The report and template were produced in collaboration with issuer and investor advocates, and in time for the upcoming 2011 proxy season.

“CFA Institute’s member investors tell us that they actively look for and try to use compensation information when making investment decisions, but the current state of disclosure is woefully insufficient,” said Kurt Schacht, managing director of the Standards for Financial Market Integrity division at CFA Institute.  “In a May 2009 CFA Institute member survey, 74 percent of respondents told us that they regularly use compensation practices and/or pay level information. In a later survey of more than 2,300 CFA Institute members, only 20 percent of respondents said that U.S. company CD&A disclosures are both transparent and understandable.”

In July 2006, the Securities and Exchange Commission adopted changes to its existing compensation disclosure requirements. These changes, in part, created the Compensation and Disclosure Analysis, requiring issuers to share the most important factors of their compensation policies and disclosures. 

However, as the Compensation Discussion and Analysis Template states, “The CD&A report, in its current format, has often resulted in frustration due to its length and complexity and because such reports often focus on regulatory compliance to the detriment of conveying the company’s compensation story in a concise and understandable manner.”

The Compensation Disclosure and Analysis Template is a first step for issuers who wish to make compensation communication clearer and more relevant to investors. It was developed by a CFA Institute-led working group of issuers, investors and associations concerned about this issue.

They wanted to help companies tell a story about their compensation policies, practices, and decisions. The template should guide issuers in creating a CD&A that can be read and understood by average retail investors.

The Compensation Disclosure and Analysis Template provides guidance and structure on typical CD&A contents, including an overview of previous year performance and compensation; elements of compensation for the past fiscal year; performance targets; compensation decisions; a compensation framework, including compensation policies and process and risk considerations; and employment and termination agreements.

“The working group also believed that the Compensation Disclosure and Analysis Template should include examples of companies that are complying with the spirit as well as the letter of the SEC regulation,” said Schacht.  “Issuers today know that investors large and small are keeping a close eye on the correlation between compensation and performance, and investors realize that some issuers are acting with shareowners’ interests in mind.  The Template will allow more issuers to join this group all the while complying with SEC regulation.”

The template can be downloaded here.