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In the midst of proxy season and facing new disclosure requirements as well as a more-powerful and better-funded SEC, companies can easily feel overwhelmed when deciding what information needs to be disclosed. Keeping the following practical tips in mind can help companies create proxies that provide the appropriate level of insight into the Boardroom without overstating unnecessary information. Conversations with general counsel and corporate governance gurus suggest the following five tips for putting together effective compensation disclosures:
1) If you plan to exclude certain performance target information, proactively explain why: In the past, the SEC has offered “suggestions for improvement” when its staff considers a company to have skimped on its performance target information. This year, the SEC has publicly said that if performance target disclosures do not meet their standards, it will generate a requirement to amend for the offending company. Even though this is not required in many cases, companies that proactively explain how non-disclosed targets qualify as competitive information or are not material to understanding the compensation plan as a whole can save themselves the headache of having to file an amendment.
2) Even if you have an uncomplicated plan, you should enhance your compensation disclosures: Whilefinancial services companies recognize their risk and compensation disclosures are under a microscope, companies in other industries are struggling to understand how their comparatively simple plans could result in adverse risks. However, even companies with straightforward compensation plans should take this opportunity to enhance their CD&A-- being a leader in transparency now can provide a company some leeway if faced with more onerous regulations in the future.
3) Include a plain-English, business-focused introduction to the CD&A: Companies should consider including a short paragraph that discusses the strategic and environmental factors that are most important to the business as an introduction to the CD&A. Investors and regulators want to see a clear connection between the state of the company, the business environment, and the compensation philosophy.
4) If you reviewed best practices or benchmarked your compensation plan, say so: An explanation of the various compensation plans the company considered before deciding on the current structure provides transparency and helps build investor and regulator confidence in the company’s practices. This kind of explanatory section also provides a good opportunity to address current compensation practices proactively that are typically not considered best practices (e.g., golden parachutes), and why the company believes they remain essential.
5) Consider a policy affirming the independence of your compensation consultant: For companies that hire consultants to help set their compensation packages, it may be worth including a policy in the proxy that defines the relationship between the hired firm and the Compensation Committee and/or Board. For instance, the policy might state that management is banned from using the same consulting firm for any services outside of that firm’s responsibilities to the Board. SEC rules require additional disclosures in certain circumstances where a compensation consultant is retained for additional work by the company.