Plain Language and CD&As: Turning a Regulatory Requirement into Clear Shareholder Communication

Four factors in the past few years have had a significant affect on how public corporations think about and communicate executive compensation in their proxy statements’ Compensation Discussion and Analysis (CD&A).

First, in 2007, the SEC released a report of its review of proxy statements stating that the Compensation Discussion and Analysis (CD&A) section must help shareholders understand the company’s compensation decisions and policies. In addition, the report emphasized that “the manner of presentation matters — in particular, using plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure.”

Second, in 2008, the SEC cited 320 companies for a lack of transparency in their proxy statements, in general, and many for their Compensation Discussion & Analysis sections, in particular.

Third, in 2010, Dodd-Frank instituted “Say-on-Pay,” which, for the first time in corporate history, meant that shareholders had the right to a nonbinding vote on executive compensation. All proxy statements include the Compensation Discussion & Analysis section in which the corporation must explain, in plain language, how executives are compensated — both the amounts and the process for determining the compensation.

Fourth was the hue and cry from shareholders and the public about what they perceived to be excessive compensation paid to named executives from financial institutions that participated in, or in some cases precipitated, the economic crisis we still face today. As a result, public trust is now at an all time low, and shareholders and the federal government are scrutinizing CD&As with a new lens.

What is the purpose of the CD&A?

The purpose of the CD&A is to

  • Increase transparency of your company’s compensation and governance
  • Disclose compensation and governance that contribute to risk
  • Include compensation information for employees
  • Disclose information to evaluate potential for conflict of interest for compensation consultants
  • Disclose information in a clear and straightforward manner

Your CD&A is one of your primary means of communicating with your shareholders. What you communicate is not only compensation, but also the overall health of your corporation. Because all communication with shareholders is a form of “marketing,” your CD&A is an opportunity to tell your corporate story about:

  • How your compensation program works
  • How the program is aligned with corporate goals
  • How compensation is tied to profit (and loss)
  • Why you deserve your shareholders’ vote

What are the problems with many CD&As?

After many years of “translating” proxy language into plain language, we discovered that CD&As are racked with similar problems. Far too many

  • Have sentences that are too long (more than 40 words)
  • Have dense paragraphs that look difficult to read and understand
  • Lack specific details about some processes
  • Contain excessive wordiness
  • Lack a sufficient number of headings
  • Contain an illogical organizational structure
  • Lack a design that aids readability
  • Lack tables where needed
  • Include incomplete information
  • Contain information that is inconsistent

For example, the following “before and after” shows the difference that just design and visual appeal can make. Which do you think your shareholders would rather read?

Before After


What are the plain language concepts and strategies that help you achieve your goals?

Concepts: Two concepts provide a foundation for the use of plain language in disclosure documents:

  1. Disclosure does not equal communication. If the reverse were true, there would be no need for laws and regulations to require the use of plain language. One example of over-writing is a 45-page CD&A that used 33 pages to explain compensation for the named executives. The document was written at a 35th grade level (which is what? Two PhDs?), was filled with impenetrable jargon, contained sentences that were more than 50 words long, and lacked cohesion. Did it disclose what it needed to disclose? Yes. Did it communicate well? No.
  2. Accuracy does not equal understanding. Obviously, all CD&As must contain accurate information. The numbers must add up, the decision-making process must be explained, and the information must be true. But including accurate information does not mean shareholders will understand it. Only by delivering accurate information in a manner that makes it easy for shareholders to understand can we turn data into knowledge and understanding.

Strategies: Plain language is the use of proven writing and designing strategies that enables the reader to find, understand, and use information. According to the SEC Plain English Handbook: How to Write Clear Disclosure Documents, as well as best practices in the field of plain language, there are 12 to 15 writing and designing strategies that constitute plain language. Among these are knowing your audience; understanding multiple purposes; using the active voice; including pronouns; eliminating jargon (or defining it); decreasing wordiness; making the organizational structure clear; and using tables, lists, headings, white space, and other design elements.

In other words, creating a document that makes it easy for your shareholders to understand. If you want their vote and their confidence, they need to understand your CD&A.

What opportunities do plain language CD&As present?

Three recent studies help make the argument that you can use your CD&A not only to meet regulatory requirements, but also as a “marketing” tool to showcase your company.

  1. Drs. Tim Loughran and Bill McDonald of the Mendoza College of Business at the University of Notre Dame, in their paper Plain English, Readability, and 10-K Filings, determined that corporations using plain language in shareholders communication increased stock purchases by investors.
  2. Drs. John Geppert and Janice E. Lawrence of the University of Nebraska, in Predicting Firm Reputation through Content Analysis of Shareholders’ Letter, reported that firms with high corporate reputations use less varied, shorter, and more concrete words than firms with lesser reputations.
  3. Dr. Glenn R. Urban, of MIT Sloan School of Management, wrote in The Emerging Era of Customer Advocacy, that companies that advocate for customers find that customers reciprocate with trust, loyalty, and purchases; and that loyalty comes when companies provide open, honest, complete information.
  4. You should think of your CD&A as not just a document required to meet regulations, but as one that can help you:
  • Market your company
  • Build shareholder trust
  • Manage risk


  • Maintain corporate integrity
  • Increase numbers of investors
  • Improve the bottom line


How can you create a “user-friendly” CD&A?

  1. Understand your audience. Keep in mind whom your shareholders are, what their needs are, and how you can best influence their attitude toward your company. What are their areas of concern? What is their voting history? Knowing to whom you are writing is critical.
  2. Include an executive summary. The executive summary should be a mini-version of the entire CD&A. Highlight your business goals, your compensation process, and your compensation packages. An executive summary may be the only part of the CD&A that shareholders read, so take advantage of this opportunity to present your case.
  3. Use plain language and design choices to make the document “user friendly.” Easy-to-understand language helps ensure shareholders will believe that you mean what you say. Tables can help readers grasp complex information.
  4. Make it clear how your executive compensation program supports your corporate goals. Be sure to emphasize the relationship between meeting these goals and executive compensation. Shareholders want to know that executives share in the upside, as well as the downside, of the financial life of a company.
  5. Use the CD&A as an important part of your shareholder communications. Convince shareholders why they should support your compensation program.

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