Readability of Executive Compensation Disclosures

DESPITE rules that say they must be in plain English, the average executive pay report filed by U.S. companies so far this year is as hard to read as an academic paper, a survey by IR Web Report has found.

Under U.S. Securities and Exchange Commission (SEC) rules passed last year, companies must for the first time include compensation discussion and analysis (CD&A) sections in their proxy statements. The SEC says these sections must be written using plain English techniques.

However, IR Web Report’s analysis of 40 companies’ CD&As filed with the SEC in preliminary and final proxy statements shows all fall far short of accepted standards of readability. We find that most fail to even meet the readability standards that many U.S. states require for insurance forms.

The median length for CD&As in the group is 5,472 words. The shortest is around 1,500 words and the longest more than 13,500 words. The average section uses complex words — words of three syllables or more — 29% of the time.

Using the Juicy Studio online readability tester, we analyzed the CD&A sections using three common readability metrics. They include the Gunning-Fog Index, Flesch Reading Ease, and Flesch-Kincaid readability algorithms.

Gunning-Fog Index Scores

Developed by American businessman Robert Gunning in 1952, the Gunning-Fog index measures readability based on sentence length and how many complex words are used.

Writing meant to be read by the average person should have a score below 12. Articles in the Wall Street Journal typically have an index of 11 to 12, while those in Readers Digest score 8.

In our tests, the average Gunning-Fox index for the CD&As was 16.45, about the same as an academic paper.

The readability test we used calculates the Gunning-Fog index up to a maximum of 17. Fifteen of the 40 companies (38%) met or exceeded this level. That means the average score across the 40 CD&As is even higher than stated.

Whole Foods Market Inc. has the most readable CD&A with a Gunning-Fog Index of 14.02. It is followed by LaSalle Hotel Properties with 15.19, Ametek Inc. with 15. 47 and Merck & Co. Inc. with 15.48.

Flesch Reading Ease

Lawyer and author Rudolf Flesch earned a PhD at Columbia University for developing this readability algorithm. It computes readability based on the average number of syllables per word and the average number of words per sentence.

Scores range from 0 to 100, with higher-scoring writing being more readable. Standard writing, such as that of Readers Digest, averages about 60 to 70.

According to Wikipedia, most states in America require insurance forms to score between 40 and 50 on the test.

In our tests, the average CD&A has a Flesch Reading Ease score of just 34.86.

That is about the same as the Harvard Law Journal. Only about one-third of American adults can read to this level, according to the Accessibility Institute at the University of Texas at Austin.

Once again, Whole Foods Market Inc. had the most readable CD&A by this measure, scoring 44.39. Merck & Co. Inc followed with 40.73 and next was Baker Hughs Inc. with 40.02.

Flesch-Kincaid Grade Level

This test translates the Flesch Reading Ease 0–100 score to a U.S. grade level, or a measure of how many years of schooling someone needs to understand the text. Writers should target their writing to below grade nine level.

The 40 CD&As we reviewed have a high average Flesch-Kincaid Grade Level of 11.41. Since the test we used only goes up to grade 12, the true average is likely higher because 13 CD&As reached the highest grade level possible on the test.

The best score on this test is 9.45 by Whole Foods. It was followed by LaSalle Hotel Properties with a grade of 10.22 and Frederick County Bancorp Inc. with 10.39.

What does it all mean?

Readability tests provide only a rough guide to how easy text is to read and understand. They also cannot tell if the CD&As are complete and transparent.

However, after reviewing the CD&As qualitatively, it’s clear that many companies have made little effort to apply basic plain English principles in their writing. Many CD&As are full of legalese, meaningless jargon and technical language.

In other cases, it’s clear that companies have made some effort to explain themselves clearly, but have missed the mark in the writing. These companies’ CD&As could easily be improved in a couple hours by a qualified copy editor.

All of the CD&As we reviewed, and their readability scores, are posted online at http://plainproxywatch.blogspot.com/. To test the readability of any web page, you can use the free Juicy Studio readability test.

This article’s readability

According to the Juicy Studios Readability Test, this article should be an easy read for most people. Here are the results:

Total sentences: 160
Total words: 1,020
Average words per sentence: 6.38
Words with 1 syllable: 619
Words with 2 syllables: 247
Words with 3 syllables: 102
Words with 4 or more syllables: 52
Percentage of words with three or more syllables: 15.10%
Average syllables per word: 1.60
Gunning Fog Index: 8.59
Flesch Reading Ease: 65.42
Flesch-Kincaid Grade: 5.72

 

By Dominic Jones

Also by this author:
Credibility on the Web: A Timely Refresher