Canada: Changes to Executive Compensation Disclosure in Canada

Last Updated: November 26 2010
Article by Christina Medland

The CSA (Canadian securities administrators) has proposed changes to executive compensation disclosure to take effect for the 2012 proxy season. Companies should be taking steps now, so that they will be prepared to make favourable disclosure under the proposed new rules.


The proposed changes will require companies to disclose

  • how their compensation practices take risk into account;
  • the level of compensation expertise that the Compensation Committee members have;
  • whether executives and directors are permitted to hedge their equity-based compensation and other securities; and
  • fees paid to compensation consultants for executive compensation and other work.

The proposed changes also

  • require enhanced disclosure of the fair value of share-based awards; and
  • limit the circumstances in which companies can avoid disclosing performance targets.


The proposed rules are open for comment until February 17, 2011 and are expected to be implemented for the 2012 proxy season, applicable to companies with a year-end on or after October 31, 2011.

Five Key Steps to Take Between Now and the 2012 AGM Season

  1. Review the adequacy of the executive compensation education provided to your Compensation Committee members and consider whether the Compensation Committee has the appropriate level of experience and expertise in executive compensation.
  2. Focus on risk adjustments to compensation, such as aligning deferral periods with the period that risks are realized and including performance metrics that take risk into account.
  3. Consider adding clawbacks and forfeiture provisions that address excessive risk taking.
  4. Consider prohibiting employees and directors from hedging their equity-based compensation awards and securities held under share-ownership requirements.
  5. Ensure that compensation consultants to the board are not in a position of conflict based on other services they provide to the company.

Key Changes

Risk-Adjusted Compensation

Compensation programs that encourage excessive risk taking are being held partly responsible for the recent economic crisis. This belief has spawned a number of responses to deal with the link between executive compensation and excessive risk. For example, the Financial Stability Forum introduced Principles for Sound Compensation Practices; the Basel Committee delivered a Report on Risk and Performance Alignment; the U.S. Congress enacted the Dodd-Frank Act;1 and the Securities and Exchange Commission introduced changes to U.S. executive compensation disclosure.

The CSA is following suit with a proposed requirement to disclose whether the board "considered the implications of the risks associated with the company's compensation policies and practices." If the board did consider the relationship between compensation and risk, the company is required to disclose

  • the extent and nature of the board's role in the risk oversight of the company's compensation policies and practices;
  • any practices the company uses to identify and mitigate compensation policies and practices that could potentially encourage a named executive officer (NEO) or individual at a principal business unit to take excessive risks;
  • any identified risks arising from the company's compensation policies and practices that are likely to have a material adverse effect on the company.

We expect that companies will want to provide disclosure on the basis that they recognize that there is a relationship between risk and compensation. Accordingly, companies should now start the process of assessing how their compensation plans deal with risk, and should consider introducing policies that better integrate risk and performance.

The proposed commentary provides examples of compensation policies or practices that could encourage excessive risk taking, including

  • policies that are heavily weighted toward short-term objectives or that pay out before the risks associated with the performance are likely to materialize;
  • policies that are significantly different for a particular business unit or particular executives or that vary from the company's overall compensation structure;
  • programs in which the compensation expense is a significant percentage of the company's revenues;
  • policies that do not include risk management and regulatory compliance as part of their performance metrics.

Companies should consider changing compensation policies that would be similar to these examples, in the absence of a strong business and risk-management case to retain them. In addition, we expect that compensation policies will increasingly address excessive risk taking by including (i) clawback policies that require repayment of compensation earned by taking excessive risks; (ii) "malus" policies that allow forfeiture of unvested compensation in similar circumstances; and (iii) deferred vesting provisions that align the time of payment with the period during which the risks associated with the performance will be realized.

Competence of the Compensation Committee

Given the significant effect of compensation on the performance of, and risks undertaken by, a business, it is not surprising that the Compensation Committee is becoming scrutinized the way Audit Committees were a few years ago. The first step in what may become a requirement that Compensation Committee members be "compensation literate" is the proposal that companies disclose

  • whether any of the committee members have direct experience relevant to their responsibilities in executive compensation;
  • the skills and experience that enable the committee to make decisions on whether the company's compensation policies and practices are consistent with the company's risk profile.

We anticipate that this proposal will encourage Compensation Committees to focus on education to increase compensation literacy and to appoint members who have compensation expertise or experience.

The amendments will also require disclosure about the Compensation Committee's responsibilities and composition, including whether the committee members are all independent (according to the standard applied to Audit Committees). This information currently appears in the company's governance disclosure.

Executive Hedging

The new rules will require companies to disclose whether NEOs or directors are permitted to hedge their equity-based compensation awards or the value of the securities they hold.

Hedging an equity-based award or securities held under a share-ownership program to protect the NEO or director against a decrease in share price seems contrary to the purpose for which these awards and requirements are introduced. Consequently, companies may introduce explicit policies prohibiting hedging of equity-based compensation awards and securities held under share-ownership requirements, rather than disclose that hedging is permitted.

Other Changes

Grant Date Fair Value of Share- and Option-Based Awards

The proposed rules will require companies to disclose the methodologies used to calculate the grant date fair value of share- and option-based awards, including the assumptions and estimates used and why the company chose the methodology. Under the existing rules, this obligation is limited to circumstances under which the grant date fair value is not the same as the accounting fair value reported in the company's financial statements.

Fees for Compensation Consultants

Not surprisingly, Canadian regulators are following the lead of U.S. regulators and are requiring expanding disclosure of the role of, and fees paid to, compensation consultants (some of which has previously been covered by the company's governance disclosure). In particular, the proposed rules will require

  • a summary of the consultant's mandate;
  • the original date on which the consultant was retained;
  • whether the consultant performed any non–executive compensation work for the company, the nature of this work and whether the board or Compensation Committee must preapprove services the consultant performs at the request of management;
  • for the two most recent years, the executive compensation–related fees" and the "other fees" paid to the consultant with a description of the services provided for the other fees.

Disclosure of Performance Targets

Disclosure of performance targets was one of the most controversial changes to the executive compensation rules in the last set of changes. Many companies did not disclose performance targets on the basis that disclosure would seriously prejudice the company's interests. The regulators have responded to this by proposing three changes to this rule:

  1. Companies relying on the prejudice exemption must state that they are relying on the exemption and explain why disclosure would seriously prejudice the company's interests.
  2. Disclosure of targets based on broad corporate financial metrics such as earnings per share, revenue growth and EBITDA is deemed not to seriously prejudice the company.
  3. Disclosure is required of whether the board can exercise, or has exercised, discretion to increase or decrease performance compensation for NEOs.

Miscellaneous Changes

The new rules propose a number of other changes in response to the disclosure made by companies over the last two years:

  • Companies cannot add columns to the summary compensation table and can only add tables or information that would not detract from the prescribed information in the summary compensation table.
  • There is a new requirement that the form be written in plain language to provide an understanding of
    • how decisions about compensation for NEOs and directors are made;
    • how specific compensation for NEOs and directors relate to the overall stewardship and governance of the company.
  • Disclosure is required of any board discretion to increase or decrease performance compensation.
  • Disclosure is required about whether the company will be making significant changes to its compensation policies and practices in the next year.
  • Company RRSP contributions are to be disclosed as "other" rather than as pension compensation.
  • Compensation can be disclosed in Canadian currency or in the currency used for the company's financial statements.
  • Disclosure is required of the market or payout value of vested share-based awards that are not paid out or distributed.
  • There are changes to the method of quantifying the annual lifetime pension benefit payable to an NEO.
  • Change-of-control and termination benefits may be disclosed in a table.
  • Disclosure is required of all the compensation that an external management company paid to an NEO or director for services provided to the company, its parent or a subsidiary.

Christina Medland is the head of Torys' Executive Compensation Practice. Her practice focuses on executive arrangements, incentive compensation and compensation governance, as well as on pensions, benefits and employment.

A significant part of Chris' practice is the implementation of codes of conduct, executive contracts, changeof- control agreements and retention arrangements for senior management. She also advises Compensation Committees and boards on public company disclosure requirements and governance obligations concerning compensation, including director and officer insurance.

Chris also advises on the establishment and implementation of incentive compensation arrangements for public and private companies, including stock option, phantom stock, share appreciation rights, deferred share unit plans, pension and supplemental pension plans, cash incentive plans and phantom plans.

Chris is recognized by Chambers & Partners as a leading employment lawyer in Canada.


1 The Dodd-Frank Wall Street Reform and Consumer Protection Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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