Canada: Canadian Securities Regulators Propose New Rules For Executive Compensation Disclosure

Last Updated: June 6 2007
Article by Cornell Wright

Canadian securities regulators have proposed an overhaul of the disclosure rules for executive compensation to improve the quality and transparency of executive compensation disclosure. The proposed rules would require significant changes in disclosure and compensation-setting practices in Canada.

The proposed rules would replace the current requirements, introduced in 1994, which the regulators say have not kept pace with evolving disclosure practices and result in fragmented compensation information, making it difficult for investors to assess the total compensation paid to executive officers and to evaluate a key aspect of a company’s corporate governance.

Although the proposals are similar in substance to the rules recently adopted by the U.S. Securities and Exchange Commission, the proposed Canadian rules depart from the SEC rules in several important respects in an attempt to clarify and simplify those elements of the SEC rules that have been criticized as being confusing or overly complicated as well as to maintain the more principles-based approach favoured by the Canadian regulators.

The Canadian securities regulators intend the proposed rules to apply to the 2008 annual proxy season for companies with a financial year ending on or after December 31, 2007. To comply with the new rules, most companies would have to undertake a significant amount of work, involving legal, accounting and human resources advisers. We recommend that companies start their planning early to ensure that both management and the board of directors have the time to ensure an orderly transition. To assist companies in getting a head start on planning next year’s disclosure, Torys will be hosting a client seminar on executive compensation disclosure on September 18, 2007.

Highlights

  • The summary compensation table would have a column for total compensation (including the dollar value of stock, option and similar incentive awards, based on the compensation cost of these awards as reflected in a company’s financial statements).
  • The "named executive officers" (NEOs) would be determined by total compensation, rather than just salary and bonus.
  • A new "compensation discussion and analysis" would explain the rationale for specific compensation programs and decisions for executives.
  • More specific disclosure would be required of potential payments to NEOs on termination of their employment, including quantification of the total amounts payable in various scenarios.

Summary Compensation Table

The summary compensation table would remain the main vehicle for executive compensation disclosure. It would be accompanied by a narrative description of any material factors that are necessary to understand the information in the table. A new column at the end of the table would present the sum of the other columns and would therefore show the total compensation of each NEO. The elements of the summary compensation table would be as follows:

  • annual salary and bonus (the proposed rules define bonuses to mean purely discretionary payments not based on any predetermined performance criteria);
  • the dollar value of stock, option and similar equity-based incentive awards, based on the amount recognized for financial statement reporting purposes;
  • the dollar value of all other amounts earned through non-equity incentive plan awards and earnings on any outstanding awards (including performance-based bonuses);
  • increases in the actuarial present value of the accumulated benefits under all defined retirement benefit plans (including supplemental plans); and
  • all other compensation, such as amounts paid to an NEO at or after termination, tax gross-ups and similar payments, contributions to defined contribution plans, and perquisites and other personal benefits.

The Canadian securities regulators have designed the new summary compensation table to eliminate the perceived shortcomings in disclosure under the current requirements. For example, whether someone is an NEO would depend on total compensation (other than increases in the value of benefits under retirement plans), rather than just salary and bonus. Further, companies would no longer have the discretion to ignore an unusually large one-time cash payment in determining which executives qualify as NEOs.

The proposed rules maintain the current requirement that perquisites and other personal benefits must be disclosed unless they represent less than $50,000 and 10% of the NEO’s annual salary and bonus. However, because fewer payments would qualify as bonuses, companies may have to disclose a greater number of perquisites.

Equity-Based Awards

In addition to the summary compensation table, the proposed rules call for two other tables: one showing grants of equity awards made during the year and the other showing any amounts realized during the year from exercising option awards and from the vesting of stock and similar equity-based awards. The purpose of these tables is to give investors information about the position of outstanding options (both in- and out-of-the money), as well as the value accrued to and realized by NEOs during the year.

Plan-Based Awards

The proposed rules would require companies to explain, in narrative form, the material terms of all awards, both equity and non-equity. In addition, for non-equity incentive awards, companies would be required to include information on estimated future payouts (threshold, target and maximum amounts).

Compensation Discussion and Analysis

The current Report on Executive Compensation would be replaced by a "compensation discussion and analysis" (CD&A) that puts into perspective for investors the detailed compensation numbers and accompanying narrative. Much like the overview that companies are encouraged to provide with their management’s discussion and analysis (MD&A) of financial condition and results of operations, the CD&A would provide discussion and analysis of the material factors underlying compensation policies and decisions reflected in the data presented in the tables. The CD&A would also have to indicate (i) how the compensation levels for the period might have been different under various performance scenarios; and (ii) what compensation levels for future periods might be expected under various performance scenarios.

The CD&A would have to answer the following questions:

  • What are the objectives of the company’s compensation program?
  • What is the program designed to reward?
  • What are the elements of compensation?
  • Why does the company choose to pay each element?
  • How does the company determine the amount (and, where applicable, the formula) for each element? and
  • How do each element and the company’s decisions regarding that element fit into the company’s overall compensation objectives and affect decisions regarding other elements?

The CD&A should be prepared with the same rigour as MD&A, reflecting the company’s specific facts and circumstances, and avoiding boilerplate disclosure.

The proposed rules would require companies to identify target levels for specific quantitative or qualitative performance-related factors and disclose targets that are based on objective, identifiable measures (e.g., stock price or earnings per share) unless that disclosure would result in competitive harm to the company. For targets that are subjective or based on internal processes, companies could describe the target without providing specific measures. If companies do not disclose targets, they would have to state what percentage of an executive’s total compensation relates to the undisclosed targets. Companies should consider this disclosure requirement in formulating targets and adopting new plans.

The proposed rules identify other items for discussion in the CD&A. For example, if companies use any benchmark in determining compensation, they would have to identify the benchmark, who was included in the benchmark and what criteria were used. If the benchmark uses a peer group, companies would also have to explain how the peer group sample was formed and why certain companies were included and excluded from the group. In addition, in response to concerns regarding the backdating of options, companies would be required to disclose their practices related to granting stock options and management’s role in determining who is awarded options.

The proposed rules maintain the requirement that companies provide a performance graph comparing their cumulative total return over the past five years with that of at least one broad equity market index. However, these rules would also require companies to discuss how the trend shown by this graph compares with the trend in the compensation paid to executives over the same period.

Retirement Plan Benefits

The proposed rules call for a new table disclosing the details of all defined retirement benefit plans, including the present value of the accumulated benefits. The requirement for this table responds to the criticism that the current form provides general information on benefit entitlements for specified compensation levels and years of service but does not disclose the particular circumstances and entitlements of each executive.

Post-employment Compensation and Benefits

The proposed rules call for detailed disclosure of post-employment compensation and benefits, including amounts payable upon retirement, termination or a change of control of the company. Companies would have to disclose the material terms of any written or unwritten agreements that provide for payments to an NEO at termination and quantify the payments and benefits that NEOs would receive under each termination scenario, with assumptions disclosed where necessary. The amount of detail would substantially exceed current requirements and is intended to prevent investors from being surprised by the size of an executive’s severance package, after the fact.

Directors’ Compensation

The proposed rules call for expanded disclosure of compensation for directors. This compensation would have to be disclosed in tabular format similar to the summary compensation table, but for one year rather than three years.

Companies Reporting in the United States

The proposed rules continue to allow SEC issuers to satisfy the requirements of the Canadian executive compensation form by providing the information they are required to file with the SEC. However, this is not available to companies that qualify as foreign private issuers in the U.S.

Copies of the request for public comment, proposed Form 51-102F6, Statement of Executive Compensation, can be found at:

www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part5/rule_20070329_51-102_rfc-pro-repeal-f6.pdf

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions