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The CD&A gives investors a better view of executive pay. It could also give CFOs a raise.
Kate Plourd, CFO Magazine
February 1, 2008
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.
A Silver Lining for CFOs
A larger question, though, is how CFO pay levels will evolve during this period of increased disclosure. According to a recent analysis of S&P 500 companies done by compensation research firm Equilar Inc., CFO pay (including bonus, stock options, and other compensation) increased by 11 percent in 2004, the first full year after Sarbanes-Oxley added greater responsibilities to the CFO position. For 2007 — with the SEC's new rules increasing the pool of CFO salaries publicly disclosed by companies — median salaries likely will decrease somewhat from the prior year.
In the view of Borges and others, the enhanced public information available about compensation represents "good news for CFOs." He explains that, in much the same way disclosure of CEO salaries led to higher pay for chief executives, the revelation that CFO X isn't compensated as well as CFO Y may put X in line for a raise.
Further, CFO pay could get a boost because the SEC is requiring companies to discuss and analyze the philosophy behind their compensation practices. Since most companies — in theory anyway — hold to the philosophy that their CFO should be extraordinary, pay levels may rise to underscore the point.
Bentley College assistant accounting professor Rani Hoitash says that when companies provide the reasoning behind CFO pay, the information benefits their peer companies, too, as a particularly good approach by one spreads to others.
Borges expects the growing public exposure to lead companies to become more analytical about CFO pay. "Now," he says, "companies are armed with all this new information [about one another]." That knowledge may "enable companies to be more deliberate about this process."
What about potential embarrassment for CFOs from having everyone know their pay levels? That's old hat for most of them. "Once you've worked in a public company, you're used to everyone knowing exactly how much you make," says Heidrick & Struggles's Kamerick, whose total annual compensation of $1.7 million was disclosed for the first time last year.
Kate Plourd is a reporter at CFO.