Changing Perceptions of Pay

Use the CD&A to proactively communicate to key audiences

By
Jack Dolmat-Connell and
Maureen Wolff-Reid

The public, the news media, governance watchdogs, and Congress have
long believed that executive pay is out of control and completely
unlinked to performance. Now, with a global-market meltdown in full
swing, executive compensation has become even more of a lightning rod
for economic frustrations, a pressure point for activist investors, and
fodder for the media in their bid to portray "greedy" executives.

Perception equals reality, and corporate America is doing little to
change the perception of greed and extravagant pay. As a case in point,
consider the Compensation Discussion and Analysis (CD&A) section of
corporate proxy statements, where the Securities and Exchange
Commission has mandated that public companies thoroughly explain their
executive compensation practices. More effective use of the CD&A
could begin to correct the misperceptions about executive compensation,
but few are taking advantage of the opportunity.

The goals of the SEC in mandating CD&As were to have companies
disclose, in plain English, a clearer and more complete picture of the
compensation earned by their senior executives. After the first proxies
with CD&As were issued in 2007, many of which contained little more
than boilerplate language, the SEC sent out comment letters to more
than 350 companies.

The letters asked for greater clarity and better analysis of certain
features of the companies' compensation programs, but the SEC was not
specific in spelling out the expected improvements. A year later, the
advances made in the latest round of CD&As have been modest. Most
boards and executive management still see the CD&A merely as
another new compliance requirement to be satisfied as minimally as
possible.

So, how do we move from viewing the CD&A as a regulatory hurdle
to seeing it as an opportunity to proactively communicate with key
audiences? First, let us consider who accesses the CD&A. It
includes a wide variety of audiences: investors, financial analysts,
competitors, customers, employees, and the media, all of whom have
different points of view and often competing objectives and
perspectives.

Answering Investors' Questions
What is it that
investors want in the CD&A? At the end of the day, they want to
know that executives will be rewarded for taking actions that are in
the best interests of shareholders. Companies that consider themselves
truly interested in transparency should begin by ensuring that their
CD&A answers each of the following questions:

• How were base salary and incentive pay determined?
• Were they based on peer companies? If so, who were the peers and in what way are the peers comparable to the company?
•
Which strategic business areas was the compensation program designed to
address (i.e., retention concerns, growth, need for margin improvement)
and in what ways will the incentives in the plan drive improvements in
these areas?
• What are the specific performance targets? If the
targets will be withheld due to competitive concerns, why are these
concerns justified?
• Why did the board select the metrics used for performance targets?
• How did the key executives actually perform versus their targets?
• How did this year's targets compare to the company's performance in prior years, and how did this affect target payout?
• Who are the key decision-makers involved in developing the compensation program?
• How did each decision-maker contribute to the process?
•
What was the reasoning used to determine change-in-control and
severance benefits and how does the company control "pay for failure?"

Most board-level discussion involving metric disclosure in the
CD&A focuses on "competitive harm." Remember: performance metrics
are critical to the valuation of the company. Stakeholders benefit from
knowing whether management's focus is on top-line growth,
profitability, total shareholder return, or other measures.

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