Compensation Discussion and Analysis (CD&A) Guidelines

The Compensation Discussion and Analysis (CD&A) section is one of the most important parts of the proxy statements that public companies must file with the Securities and Exchange Commission. It provides a detailed narrative that outlines how executive compensation decisions are made and describes how these decisions align with shareholder interests. As companies face increasing pressure from regulators and investors for transparency and accountability, crafting a thorough,  regulatory compliant and investor focused CD&A proxy section has become essential.

In this guide, we’ll walk through the essential elements of an effective CD&A, including what it is, key components, and best practices for creating an effective CD&A. We’ll also discuss its role within a company’s proxy statement.

What is the CD&A?

CD&A, or Compensation Discussion and Analysis, is a critical proxy statement section public companies use to explain how executive compensation is determined. It provides shareholders with insights into the company’s pay practices and compensation policies, ideally making the case that executive pay aligns with company strategy and performance. For investors, the CD&A offers an essential resource for evaluating how the company’s leadership is incentivized and rewarded.

Key Components of an effective CD&A

An effective CD&A includes several key components that offer a comprehensive view of the company’s approach to executive compensation.

1. Compensation Philosophy

The compensation philosophy outlines the company’s guiding principles for compensating its executives. This section explains the overall approach to pay and provides a rationale for why certain compensation structures are in place. Companies often detail how they balance short-term and long-term incentives, what type of compensation is used (e.g., salary, bonuses, stock options, other equity vehicles), and how their philosophy and the program administration align with their business strategy and shareholder interests.

2. Performance Metrics

This section of an effective CD&A specifies any performance metrics the company uses to evaluate executive performance. Metrics may include financial measures — such as revenue, profit and earnings per share (EPS) — as well as non-financial metrics, such as sustainability initiatives or diversity and inclusion efforts. Disclosure of performance metrics provides transparency for determining how executive compensation is linked to company success.

It is critical to explain why these specific metrics were chosen and how they drive long-term value for shareholders. Transparency in this area allows investors to gauge whether executives are rewarded for genuine performance improvements.

3. Risk Considerations

Compensation structures must be designed with risk management in mind. This section of the CD&A explains how the company’s compensation policies are structured to avoid excessive risk-taking by executives. For example, compensation packages that overly emphasize short-term gains might encourage risky behaviors that could harm the company in the long run. Companies must demonstrate how their compensation practices promote sustainable growth while managing potential risks.

Regulatory Requirements for CD&A

The SEC has strict guidelines for CD&A’s, and companies must comply with these regulations to ensure they provide adequate disclosure. Some of the key requirements include:

1. Clear Explanations of Executive Pay Decisions

The SEC requires that companies provide clear, concise explanations of how executive compensation decisions are made. This includes explaining the rationale behind the choice of performance metrics, the balance between fixed and variable compensation, and how pay aligns with performance.

2. Disclosure of Performance Metrics

Companies must disclose the specific performance metrics used to assess executive performance and how those metrics influence pay decisions. This is critical for ensuring transparency and helping shareholders understand the company’s approach to compensation.

3. Evolution of Regulatory Expectations

The landscape of executive compensation is continually evolving, and companies need to stay up to date on regulatory changes. For instance, the SEC has updated its guidance on disclosing the link between executive pay and environmental, social, and governance (ESG) factors, requiring companies to be more transparent about how these factors influence compensation decisions.

Best Practices for Crafting a CD&A

Creating an effective CD&A is about more than just meeting regulatory requirements — it’s about communicating clearly with investors. Here are some best practices:

1. Clarity and Transparency

Use plain language to explain the company’s compensation decisions. Avoid jargon and overly technical language that could confuse investors. A transparent CD&A builds trust and ensures that shareholders can easily understand the company’s executive pay practices.

2. Use of Visuals

To make complex information easier to digest, consider using charts, tables and graphics. Visual aids can help break down intricate compensation structures, making it easier for shareholders to grasp key points. For example, a graph showing the correlation between executive pay and company stock performance over time can effectively illustrate the company’s pay-for-performance philosophy.

3. Shareholder Engagement

Aligning CD&A content with shareholder expectations is key to gaining support during shareholder votes. Address any concerns raised by shareholders in previous years and demonstrate how the company’s compensation practices reflect their input. Proactive communication with investors can help secure approval for compensation packages during the “say on pay” vote.

4. Compensation Consultants

Many companies employ third-party compensation consultants to ensure that their executive pay packages are competitive within the industry. The CD&A should explain the role of these consultants and how their expertise was used to design compensation packages that are fair and aligned with shareholder interests.

CD&A’s Role in Proxy Statements

As a central part of the proxy statement, CD&A provides investors with a detailed look at the Board’s thinking in developing and approving executive compensation practices. This transparency helps investors evaluate whether executive pay aligns with company performance and strategic goals. CD&A also plays a key role in the “say on pay” vote, where shareholders weigh in on executive compensation packages. Companies can gain shareholder support by crafting detailed and transparent CD&A reports that reflect responsible pay practices.

DFIN offers a wide range of proxy statement solutions, as well as the latest edition of our proxy guide.

Adhering to CD&A guidelines is crucial for transparent communication with investors. By clearly explaining executive compensation decisions and aligning them with shareholder interests, companies can build trust and ensure regulatory compliance. For expert guidance on creating a compliant and investor-aligned CD&A report, contact DFIN today.