Title: Readability of compensation discussion and analysis: the impact of the Plain English initiative

Authors: Xuan Huang; Sudha Krishnan; Ping Lin

Addresses: College of Business Administration, California State University, Long Beach, CA, USA ' College of Business Administration, California State University, Long Beach, CA, USA ' College of Business Administration, California State University, Long Beach, CA, USA

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.

Keywords: compensation discussion and analysis; CD&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&A; CEO compensation; litigation theory; legitimacy theory.

DOI: 10.1504/IJSS.2016.076969

International Journal of Services and Standards, 2016 Vol.11 No.1, pp.20 - 42

Received: 01 Jun 2015
Accepted: 12 Nov 2015
Published online: 09 Jun 2016 *

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