It’s been a year since the Securities and Exchange Commission began to require companies to say more about executive pay — including details about perks, severance packages, stock options, pension gains, and retirement benefits — in the Compensation Discussion and Analysis (CD&A) section of their proxy statements. And it’s been more than three months since the SEC blasted companies for doing a poor job of it. Criticizing everything from confusingly written reports to the use of illegible typefaces, the SEC has suggested that reports should be “shorter, crisper, and clearer.”
According to its 10-page report on management’s faulty performance regarding CD&A during the 2007 proxy season, the SEC sent 350 separate letters to deficient companies. “We encourage companies to continue thinking about how executive-compensation information — from the big picture to the details — can be better organized and presented for both the lay reader and the professional,” it wrote.
Oddly enough, shareholders have not joined the chorus of complaints. Why so little investor reaction? According to Mark Borges, a principal with compensation consulting firm Compensi, it may simply be too early for most such feedback to be reported.
Companies seem relatively complacent about the new disclosure requirements, viewing them as just one more administrative chore, says Randy Ramirez, regional practice leader for the Compensation & Human Capital Consulting Group of BDO Seidman LLP. Most of his clients, ranging from start-ups to Fortune 100 companies, hardly noticed. “It seemed like such a big deal when it first came out,” he notes. But when companies got past the seemingly intimidating level of detail sought by the SEC, they realized it was just another rule.
Shareholders Are Watching
Not everyone reads the SEC’s reaction as a dig at business. “Those comment letters and the subsequent interpretations from the SEC make it clear that companies did [make] a good faith effort for the first year,” says Myrna Hellerman, senior vice president at Sibson Consulting. The SEC, however, felt companies’ efforts fell short and that many danced around the issues it had wanted them to attack directly. As John W. White, director of the SEC’s Division of Corporation Finance, explained in one speech, often missing was “a discussion of how and why those philosophies and processes resulted in the numbers the company presented.”
Still, Borges predicts that dozens more so-called say-on-pay proposals, giving shareholders a nonbinding, advisory vote on executive compensation, will pepper this proxy season. More are expected when investor confusion about what’s being said in the CD&A abates.
Insurer Aflac is one company that decided to give investors such an advisory vote this May. President and CFO Kriss Cloninger says he is confident about Aflac’s compensation structure, although he is concerned that the quantities of information now required might confuse investors. “Some of the information probably will receive more attention than it warrants, and some may receive less,” he says.
One likely result of the additional information required in the CD&A is that CFOs will be sharing the spotlight with CEOs. “The fact that people want to know what the CFO is making is a reflection of the importance of the CFO’s role,” says Eileen Kamerick, finance chief at executive search firm Heidrick & Struggles. Investors will take more interest in the remuneration for both the CEO and the CFO if it appears high, or if it seems complex in design. For that matter, investors will take more interest in CFOs, in general, because the new rules require companies to disclose compensation for their CFOs regardless of whether they are among the company’s five highest-paid executives, as was the case in the past.