Most companies are getting ready to file their 2013 proxy statements and telling the story of their 2012 compensation. Effective proxies share a clear and compelling alignment between performance and pay. For most energy companies, however, compensation does not boil down to a simple formula. The influence of commodity prices and economic activity and the prominent role of discretion in evaluating performance can create challenges in telling a simple and objective story to shareholders.
The keys to an effective energy industry CD&A include:
- State the facts: What business metrics or achievements did the Committee focus on to evaluate performance – whether the company had a stated goal or not? Be specific:
- Operational — e.g., production, efficiency, capital management
- Financial — e.g., earnings, returns, share price
- Strategic — e.g., M&A activity, new exploration prospects, new service lines
- Connect the dots: How did those metrics or achievements directly relate to pay outcomes for 2012, e.g., salary increases, bonus amounts, long-term incentive grants or payout levels?
- Share investor feedback: What did you hear from investors about executive pay and how did that influence your actions?
- Make it visual: Incorporate these key points into bullets, summarize them in tables, or illustrate them in charts to help tell your story quickly and clearly.
The CD&A is an opportunity for the company to “sell” the compensation decisions made during the year. Shareholders will understand and “buy” the story when it’s told with facts and clarity.