Companies and boards should focus on "the What, the How and the Why" of executive compensation when drafting disclosures, said Charlie Tharp, the Center's Senior Advisor for Research and Practice, in a recent interview with TK Kerstetter on "Inside America's Boardrooms." Dr. Tharp discussed the reasons behind the increasing complexity of pay plans and expanding disclosures, noting that "companies are trying to address the concerns of many different stakeholders and critics of pay" in their proxies, which often leads to frustration on the part of investors seeking to understand company plans quickly.
In order to make this simpler, Dr. Tharp suggests that companies "take each element of pay and provide a road map" of why that element is used and how it compares to financial performance over time. In particular, Dr. Tharp recommended the "judicious use of graphics" to show how pay and performance vary over time, and warned against total reliance on the Summary Compensation Table definition of pay, which "tells an accounting-expense story" rather than a pay for performance story.
Dr. Tharp noted that Johnson & Johnson, Coca-Cola and General Electric all provide excellent disclosures with innovative approaches to the three most important questions a board must consider with regard to executive compensation: pay versus whom (peer groups), pay in what form (form of pay) and pay for what (metrics and targets).
Dr. Tharp concluded by stating that in his view, "companies will eventually realize there is a way to simplify pay."