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.


  • 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:

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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