Readability of compensation discussion and analysis: the impact of the Plain English initiative. (2016)

• Record Type: Journal Article
• Authors: Huang, Xuan; Krishnan, Sudha; Lin, Ping
• Is Part Of: International journal of services and standards. Volume 11:Number 1(2016)
• Page Start: 20
• Page End: 42
• Publication Date: 2016
• Subjects: compensation discussion and analysis -- CD&amp -- #38 -- A -- proxy documents -- SEC -- Securities and Exchange Commission -- USA -- United States -- clarity -- executive compensation -- Plain English -- readability -- annual reports -- letter to shareholders -- management discussion and analysis -- MD&amp -- #38 -- A -- CEO compensation -- litigation theory -- legitimacy theory; Standardization -- Periodicals; Customer services -- Standards -- Periodicals; 389.605
• Languages: English
• ISSNs: 1740-8849

Abstract

After the initial requirement of compensation discussion and analysis (CD&A) in proxy documents, SEC reviewed 350 companies' CD&A in 2007 and reported lack of readability and clarity in this document. Hence we examined the readability measures of CD&A from 2007 to 2013. We also compared the CD&A to the 'letter to the shareholders' and the management discussion and analysis (MD&A) of annual report in 2012 for the differences in readability. As expected, the CD&A was less readable than the letter to shareholders, but more readable than MD&A. We also found that although year-to-year change in readability was small, readability of CD&A had improved significantly over the years. In addition, we found that the higher the excess CEO compensation, the more readable the CD&A, providing evidence for the litigation and legitimacy theories.