In Depth
The Compensation Discussion and Analysis, commonly abbreviated CD&A, is a required narrative disclosure in the proxy statement that provides context and rationale for executive compensation decisions. Unlike the compensation tables, which present numerical data, the CD&A tells the story behind the numbers. It must explain the objectives of the compensation program, what each element of pay is designed to reward, how the committee determined specific pay levels, and how compensation relates to company performance. The SEC introduced the CD&A requirement in 2006, replacing the less detailed "Report of the Compensation Committee" that previously appeared in proxy statements. A well-written CD&A addresses the compensation philosophy (pay-for-performance, retention, competitive positioning), the peer group used for benchmarking, the specific metrics and targets for short-term and long-term incentive plans, the actual performance results against those targets, and how the committee considered the prior year's say-on-pay vote. The CD&A is subject to SEC review, and the Division of Corporation Finance frequently issues comment letters requesting more specific disclosure of performance targets, peer group selection rationale, or the exercise of discretion in determining payouts. Proxy advisory firms like ISS and Glass Lewis closely analyze the CD&A when making their voting recommendations on say-on-pay proposals. A transparent, well-structured CD&A that clearly links pay to performance is more likely to receive a favorable recommendation and high shareholder approval.