Executive compensation has become a complex and often highly technical topic. To gauge investor understanding and support for their programs, most U.S. companies annually hold Say on Pay votes, which—while not binding—are not inconsequential. Companies also need shareholder approval of equity compensation plans and their amendments. These and other compensation-related topics are discussed throughout the proxy, including:
In evaluating this often voluminous disclosure, investors and their proxy advisors focus on many sub-topics including:
While compensation practices have many common elements, they also can vary widely. Some programs may include features or practices that management and the board believe are appropriate for the company and beneficial for its shareholders, but that don’t fit neatly into proxy advisor or investor voting guidelines or models. If misunderstood, these “outlier” practices can lead to negative Say on Pay and other votes. At that point, companies can either a) abandon such underappreciated practices (i.e., take the path of least resistance), or b) explain more clearly why these practices—though perhaps non-standard—make sense in their particular situations and are therefore deserving of shareholder support.
In evaluating how to best convey and even sell your compensation story, bear in mind that many investors’ top level question is: “How does pay support strategy?” Some proxies provide much detail surrounding this question, but most do not tackle and effectively answer it head on. However, this much is clear: Merely meeting SEC proxy disclosure requirements does not mean you are meeting the informational needs of a broad range of your investors.
Also, bear in mind that the voters at many of the large, heavily indexed institutional investors are not portfolio managers or otherwise experts about your company or industry. These individuals report that including some overview about your company and industry in the proxy will help them better understand the environment in which you operate and make decisions, and thus will help them to vote more thoughtfully. Many report that they have neither the time nor staff to also review the annual report, IR disclosures or research reports that typically contain this context, so building some of it into the proxy is helpful to them.
Consider adding voluntary and contextual information in the following areas:
Consider including “at-a-glance” graphs and other visual elements including:
Often such visual elements are used to supplement text. On other occasions, such visual elements can actually replace text. In either case, we think the inclusion of relevant visual elements is a win-win situation.
Other important tips include reviewing your peer company proxies to see how your peers are evolving and telling their stories. Often your peers are setting the bar for investor expectations regarding such disclosure. In addition, one of the most important things boards can do throughout the year is engage with investors, learn firsthand what they think of your current disclosures, and discuss what would make these disclosures more useful to them.
Ron Schneider is the Director of Corporate Governance Services for Donnelley Financial Solutions. He can be reached at ronald.m.schneider@dfsco.com.
The issue of tying pay to strategy isn’t new—some companies successfully addressed this issue years ago. Consider the following example from Ross Stores’ 1996 proxy. The disclosure can be found at the opening of the proxy on EDGAR: bit.ly/2nCckKB.
Relevant portions of the proxy statement’s robust, contextual cover letter included detailed information on compensation philosophy and the company’s restricted stock plan. The cover letter itself was not standard practice in proxy statements, so the additional discussion of these compensation issues was even more unusual. The company referred to a particular voting issue that included approval of amendments to various equity compensation programs which, at the time, represented investors’ primary opportunity to have a “say on pay” in the late 1990s.