Interview with Sharon Podstupka from Pearl Meyer
In a recent blog post, Sharon Podstupka tackled the continuing hot topic of communicating effectively on Director compensation. We sat down with her to ask a few questions about her expectations and recommendations for the upcoming proxy season.
As we enter the 2020 proxy season, why does director compensation disclosure continue to be a hot topic?
As with executive pay, stakeholders want to be reassured that the board members who are responsible for setting NED pay are doing so in the best interests of shareholders. Your company’s narrative must demonstrate that decisions about director compensation have been made in a holistic framework that ensures board members are being paid competitively, appropriately, and responsibly based on the unique and high value they bring to the boardroom.
Companies have to demonstrate that the dots can be connected between the traditional SEC-tabular disclosures found in “Director Compensation” sections of the proxy statement and the directors’ qualifications, responsibilities, and experience. Robust narratives should also be developed around board responsiveness and diversity in “Corporate Governance” sections of the proxy statement.
What are some tips for companies to improve their disclosure?
Today’s most impactful CD&As have evolved into useful communication tools that strike the right balance between marketing an executive compensation program and satisfying critical SEC reporting rules. Think of your director pay disclosure in similar terms. Building out the narrative to support your director pay tables is pretty straightforward. Follow the core guidelines you’ve been using for your CD&A:
- Outline the philosophy, guiding principles, and objectives that drive the program design;
- Provide an overview of the pay mix structure and explain why it aligns with shareholder interests;
- Summarize the compensation governance features of the program (e.g., “what we do/what we don’t do”); and
- Explain how decisions are made.
How important is it to include more visuals in this section?
Applying the same core guidelines as CD&A narrative development to the content development of your Director Compensation narrative should naturally lead to more graphics, bullets, checklists and tables. I know that according to Labrador’s most recent annual benchmark survey, less than 10% of the companies surveyed currently include a pay mix graphic to illustrate their director pay structures. However, my expectation is that over time, more companies will start to build common, simple types of visuals, such as these, into their narratives as the spotlight on director pay continues to increase.
What else do companies need to be doing in this area?
It’s increasingly important to appropriately articulate these messages beyond the proxy to investors and other stakeholders. The role of board members grows more complex annually and so do their responsibilities and visibility. With that increased visibility comes the need for increased dialogue and disclosure about director pay.
***
Interest in what and how companies are using their “compensation dollars” has moved beyond CEO pay. Companies need to be thoughtful about how they communicate about their compensation practices ─ not just in their CD&As, but also now in the Director Compensation section of the proxy statement. We encourage companies to take an extra step by looking at their disclosure from the stakeholder’s perspective. Ask yourself if you have answered the “what” and the “why” questions to respond to this expectation.