Canada: Amendments To Executive Compensation Disclosure Requirements

The Canadian Securities Administrators (the "CSA") are adopting amendments to Form 51-102F6 Statement of Executive Compensation ("Form 51-102F6") which will come into force on October 31, 2011 and will apply in respect of financial years ending on or after October 31, 2011. The amendments range from drafting changes to clarify existing disclosure requirements to new substantive requirements, particularly in the Compensation Discussion and Analysis ("CD&A") section of Form 51-102F6.

Background

The amendments arise as a result of the CSA's targeted compliance review of executive compensation disclosure following the adoption of the new Form 51-102F6 effective December 31, 2008. The results of that review were reported by the CSA in November 2009. In addition, there have been a number of international developments in the area of executive compensation, namely the U.S. Securities and Exchange Commission's adoption of rules amending compensation and corporate governance disclosure requirements for U.S. companies for the 2010 proxy season and the United States Congress' passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which came in force for the 2011 proxy season.

Summary of Key Amendments

Key amendments to Form 51-102F6 include the following:

Definition of  Named Executive Officer Clarified

• The definition has been clarified to include the three most highly compensated executive officers (in addition to the CEO and CFO) of the company, including any of its subsidiaries.

Scope of Compensation to be Disclosed Clarified

• The scope of the compensation to be disclosed has been clarified to include all plan and non-plan compensation, direct and indirect pay, remuneration, economic or financial award, reward, benefit, gift or perquisite paid, payable, awarded, granted, given, or otherwise provided to the named executive officer or director for services provided and for services to be provided, directly or indirectly, to the company or a subsidiary of the company.

New Plain Language Explanation

• The CSA have clarified that the disclosure must provide a reasonable person, applying reasonable effort, with an understanding of how decisions about named executive officer and director compensation are made and how specific named executive officer and director compensation relates to the overall stewardship and governance of the company.

CD&A – Changes to Disclosure relating to Performance Goals

• The exemption from the requirement to disclose performance goals or similar conditions has been clarified to provide that a company's interests are not considered to be seriously prejudiced solely by disclosing performance goals or similar conditions if those goals or conditions are based on broad corporate-level financial performance metrics which include earnings per share, revenue growth, and earnings before interest, taxes, depreciation and amortization. Moreover, the exemption does not apply if the company has publicly disclosed the performance goals or similar conditions. If a company relies on this exemption, it has to state so and explain why disclosing the performance goals or similar conditions would seriously prejudice the company's interests.
• Companies are required to disclose whether the board of directors can exercise discretion, either to award compensation absent attainment of the relevant performance goal or similar condition or to reduce or increase the size of any award or payout. Companies must also disclose if they exercised such discretion and whether it applied to one or more named executive officers.

CD&A – New Disclosure regarding Risks

• Companies are required to disclose whether or not the board of directors, or a committee of the board, considered the implications of the risks associated with the company's compensation policies and practices and if so, disclose:
• • the extent and nature of the board of directors' or committee'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 encourage a named executive officer or individual at a principal business unit or division to take inappropriate or excessive risks; and
  • any identified risks arising from the company's compensation policies and practices that are reasonably likely to have a material adverse effect on the company.
• The CSA has provided a non-exhaustive list of examples of situations that could potentially encourage an executive officer to expose the company to inappropriate or excessive risks, including:
• • compensation policies and practices at a principal business unit of the company or a subsidiary of the company that are structured significantly differently than others within the company;
  • compensation policies and practices for certain executive officers that are structured significantly differently than other executive officers within the company;
  • compensation policies and practices that do not include effective risk management and regulatory compliance as part of the performance metrics used in determining compensation;
  • compensation policies and practices where the compensation expense to executive officers is a significant percentage of the company's revenue;
  • compensation policies and practices that vary significantly from the overall compensation structure of the company;
  • compensation policies and practices where incentive plan awards are awarded upon accomplishment of a task while the risk to the company from that task extends over a significantly longer period of time;
  • compensation policies and practices that contain performance goals or similar conditions that are heavily weighed to short-term rather than long-term objectives; and
  • incentive plan awards that do not provide a maximum benefit or payout limit to executive officers.

CD&A – New Disclosure regarding Financial Instruments

• Companies are required to disclose whether or not a named executive officer or director is permitted to purchase financial instruments, including prepaid variable forward contracts, equity swaps, collars, or units of exchange funds, that are designed to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the named executive officer or director.

CD&A – Disclosure relating to Benchmarking

• If the company used any benchmarking in determining compensation or any element of compensation, the benchmark group must be disclosed and the company must describe why the benchmark group and selection criteria are considered by the company to be relevant.

CD&A – Disclosure of Changes in the Next Financial Year

• Companies are required to disclose whether the company will be making any significant changes to its compensation policies and practices in the next financial year.

CD&A – Discussion of Process for Granting Share-Based Awards

• Companies are required to describe the process the company uses to grant both option-based and share-based awards to executive officers.

CD&A – New Compensation Governance Disclosure

• Companies are required to describe any policies and practices adopted by the board of directors to determine the compensation for the company's directors and executive officers.
• If the company has established a compensation committee, it must describe/disclose:
• • the name of each committee member and whether or not each member is independent or not independent;
  • whether or not one or more of the committee members has any direct experience that is relevant to his or her responsibilities in executive compensation;
  • the skills and experience that enable the committee to make decisions on the suitability of the company's compensation policies and practices; and
  • the responsibilities, powers and operation of the committee.
• If a compensation consultant or advisor has, at any time since the company's most recently completed financial year, been retained to assist the board of directors or the compensation committee in determining compensation for any of the company's directors or executive officers, the company must describe/disclose:
• • the name of the consultant or advisor and a summary of the mandate the consultant or advisor has been given;
  • when the consultant or advisor was originally retained;
  • any services to the company, or to its affiliated or subsidiary entities, or to any of its directors or members of management, if provided by the consultant or advisor (other than or in addition to compensation services provided for any of the company's directors or executive officers), with a brief description of the work; and
  • whether the board of directors or compensation committee must pre-approve other services the consultant or advisor, or any of its affiliates, provides to the company at the request of management.
• For each of the two most recently completed financial years, companies must disclose:
• • under the caption "Executive Compensation-Related Fees", the aggregate fees billed by each consultant or advisor, or any of its affiliates, for services related to determining compensation for any of the company's directors and executive officers; and
  • under the caption "All Other Fees", the aggregate fees billed for all other services provided by each consultant or advisor, or any of its affiliates and include a description of the nature of the services comprising the fees disclosed under this category.

Changes to Tables

• Tables and columns can continue to be added to the disclosure generally, however, to a reasonable person, a table, column or other information cannot detract from the information required for the Summary Compensation Table and, in particular, columns cannot be added to the Summary Compensation Table.
• The "All Other Compensation" column in the Summary Compensation Table must include any company contribution to a personal savings plan like a registered retirement savings plan made on behalf of the named executive officer.
• The Outstanding Share-Based Awards and Option-Based Awards Table has an additional column in which companies must disclose the aggregate market value or payout value of vested share-based awards that have not yet been paid out or distributed.

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