Canada: New Executive Compensation Disclosure Requirements Come Into Force On December 31, 2008

In September of 2008, the Canadian Securities Administrators (the "CSA") released the finalized version of the new Form 51-102F6 - Statement of Executive Compensation (the "New Form"). The New Form will replace the existing Form 51-102F6 (the "Old Form") on December 31, 2008. This publication covers some of the specific changes to the disclosure requirements and suggests some steps companies should be taking to prepare their new disclosure for the Spring 2009 proxy season.


Canadian public companies have prepared executive compensation disclosure based on the Old Form since 1994. With the evolution of executive compensation practices and increased scrutiny on the corporate governance of public companies in recent years, the CSA, following in the footsteps of the Securities and Exchange Commission in the United States, have revamped disclosure requirements for executive compensation in the New Form. The CSA have indicated that the New Form is intended to provide a suitable framework for disclosure as compensation practices change over time. The New Form applies to all reporting issuers, including venture issuers.


The CSA have indicated that the purpose of the New Form is to improve the quality of executive compensation disclosure, which will allow investors to assess how decisions about executive compensation are made. The New Form indicates that the objective of the disclosure is to communicate the compensation the board of directors intended the company to pay, make payable, award, grant, give or otherwise provide to certain executive officers and directors. This disclosure is intended to provide insight into executive compensation as a key aspect of the overall stewardship and governance of a company and will help investors understand how decisions about executive compensation are made. These objectives are set out in the New Form and disclosure made under the New Form is required to satisfy these objectives.

Scope of Disclosure

The New Form requires that all direct and indirect compensation provided to certain executive officers, directors and their associates for, or in connection with, services they have provided to the company or a subsidiary of the company be disclosed. This means that all compensation, regardless of its form and whether it falls within an identified table or other requirement in the New Form, must be disclosed.

The disclosure under the New Form continues to revolve around the named executive officers ("NEOs") and the directors. The definition of a NEO has changed to some extent. In particular, the financial threshold of $150,000 no longer applies to just salary and bonus, but now applies to total compensation with some exclusions.

Aside from tables that build on the tables previously required under the Old Form, the New Form requires more narrative disclosure in a number of areas. In addition, rather than requiring the board of directors or its compensation committee to prepare a "Report on Executive Compensation", the New Form requires the inclusion of "Compensation Discussion and Analysis" or "CD&A".

Compensation Discussion and Analysis

The CD&A, similar to Management's Discussion and Analysis or MD&A, is required to provide enough analysis to allow a reasonable person, applying reasonable effort, to understand the disclosure elsewhere under the New Form. In the CD&A, the company is required to describe and explain all significant elements of compensation awarded to, earned by, paid to, or payable to NEOs for the most recently completed financial year, including the objectives of the compensation, what the compensation is designed to reward, each element of compensation and why the company chooses to pay each element, how the company determines the amount of each element and how each element fits into the overall compensation objectives and affects decisions about other elements.

The CD&A must also discuss benchmarks, including components and companies included in benchmark groups and selection criteria, as well as both objective and subjective performance goals. The company is not required to disclose specific quantitative or qualitative performance-related factors if a reasonable person would consider that disclosing them would seriously prejudice the company's interests. However, the New Form imposes further disclosure requirements if such information regarding performance goals is not disclosed.

The New Form sets out commentary on the preparation of the CD&A. The CSA stress that disclosure that merely describes the process for determining compensation or compensation already awarded, earned, paid or payable is not adequate. Rather, a description of the significant principles underlying policies and an explanation of the decisions relating to compensation are required. The key is to give readers a sense of how compensation is tied to the NEO's performance. Even if the company's process for determining executive compensation is very simple (e.g. the company relies solely on board discussion without any formal objectives, criteria or analysis), this must be made clear in the disclosure.

The CD&A disclosure also includes a performance graph, similar to that which was required under the Old Form. Venture issuers are still not required to include the graph in their disclosure, but note that all other requirements of the New Form apply to venture issuers. Companies that have distributed only debt securities or that have not been reporting issuers for at least 12 months in certain circumstances are not required to include the graph in their disclosure either. The New Form requires a narrative discussion of how the trend shown by the graph compares to the trend in the company's compensation to executive officers over the same period.

The CD&A in the New Form also specifically requires discussion of the process the company uses to grant option-based awards to executive officers. The role of the compensation committee of the board of directors and the executive officers in setting or amending any equity incentive plan under which an option-based award is granted must be included in the discussion, as must whether previous grants of option-based awards are taken into account when considering new grants.

Summary Compensation Table

The Summary Compensation Table in the New Form has been modified from the Old Form. Changes include the following:

  • The key column additions are pension values and the totalling of the compensation for each NEO for each year. The bonus column is now effectively included in a non-equity incentive plan compensation column which covers both annual and long-term incentive plans.

  • Another key change is the requirement to value share and option-based awards. The valuation is based on the "grant date fair value" which is determined in accordance with Section 3870 of the CICA Handbook.

  • Also, if a NEO receives compensation for services as a director, that compensation must be included in this table with a footnote explaining which amounts relate to the director role.

  • Finally, a narrative discussion explaining any significant factors necessary to understand the information in this table is required. This discussion must include the significant terms of each NEO's employment agreement or arrangement, any repricing or other significant changes to the terms of any share-based or option-based award program and the significant terms of any award reported in this table, including the formula or criterion to be applied in determining the amounts payable and the vesting schedule.

As was the case with the Old Form, the New Form outlines in detail how each column in this table is to be completed with commentary on items to include. Companies will need to review these provisions carefully to make sure that all compensation is being disclosed. For example, the list of perquisites/personal benefits has been expanded to cover off jewellery, clothing, artwork, housekeeping services, theatre tickets, security at personal residences or during personal travel and reimbursement of taxes owed with respect to perquisites or other personal benefits. More generally, if an item of compensation is not specifically mentioned or described in the New Form, it is to be disclosed in the "All Other Compensation" column of this table.

The new Summary Compensation Table must be prepared for each of the company's three most recently completed financial years that end on or after December 31, 2008. The New Form states that companies are not required to disclose comparative period disclosure in the Summary Compensation Table under either the Old Form or the New Form in respect of years ending before December 31, 2008. However, in particular circumstances, if comparative period disclosure is necessary to satisfy the overall objectives of the New Form, consideration will need to be given as to how to best reflect such comparative period disclosure.

Incentive Plan Awards

The tables under the Old Form regarding long-term incentive plan (LTIP) awards, options and share appreciation rights (SARs) have been recast in the New Form to focus on share and option-based awards and non-equity incentive plans. For reference, share-based awards are defined as awards under an equity incentive plan of equity-based instruments that do not have option-like features, including common shares, restricted shares, restricted share units, deferred share units, phantom shares, phantom share units, common share equivalent units and stock. Differences between the Old Form and New Form relating to incentive plan awards include the following:

  • The New Form requires the inclusion of all share and option-based awards outstanding to NEOs (not just those granted in the previous year) and the values vested or earned during the year by the NEOs.

  • The table on option and SAR repricings in the Old Form no longer exists. In the New Form, repricings are accounted for in the Summary Compensation Table.

  • In the New Form, the table covering the outstanding share and option-based awards includes: (a) with respect to share-based awards, the number of shares that have not vested and the market or payout value of share-based awards that have not vested; and (b) with respect to option-based awards, the number of shares underlying the unexercised options, the exercise price, the expiry date and the value of the unexercised in-the-money options. As a result, as of the end of each financial year, companies will be presenting a snapshot of all of the awards outstanding for each NEO, some of which may have never been disclosed before if the individual was previously not a NEO.

  • The table covering the value vested or earned during the year, includes both the values vested during the year for share and option-based awards, as well as the value of non-equity incentive plan compensation earned during the year. Note that for the vesting of options, it is the value that would have been realized if the options had been exercised on the vesting date that is included in the table. Actual values realized upon the exercise of options are not disclosed in this table.

  • Finally, a narrative discussion is required explaining the significant terms of all plan-based awards, including non-equity incentive plan awards, issued or vested, or under which options have been exercised, during the year, or outstanding at year end, to the extent not already discussed in the CD&A or the narrative section of the Summary Compensation Table.

Pension Plan Benefits

The Pension Plan Table in the Form has been split into two tables, one for defined benefit plans and one for defined contribution plans. The key requirements relating to pension plan disclosure are as follows:

  • For defined benefit plans, the number of years credited service, the annual benefits payable (both at year end and at age 65), the accrued obligation at the beginning of the year, any compensatory and non-compensatory changes and the accrued obligation at year end must be disclosed.

  • For defined contribution plans, the accumulated value at the beginning of the year, compensatory and non-compensatory changes and the accrued obligation at year end must be disclosed.

  • Finally, a narrative discussion explaining any significant factors necessary to understand the information disclosed in the tables is required, including information relating to terms and conditions of payments under the plans, normal and early retirement provisions, benefits and contribution formulae, elements of compensation including in the formulae and company policies on granting extra years of credited service.

The Pension Plan Benefits section of the disclosure must also discuss any significant terms of any deferred compensation plan relating to each NEO, including, among other things, the types of compensation that can be deferred and any limitations, significant terms of payouts, withdrawals and other distributions and measures for calculating interest or other earnings.

Termination and Change of Control Benefits

The New Form requires detailed disclosure with quantitative analysis (i.e. estimates of payments under several scenarios) and triggers for each contract, agreement, plan or arrangement that provides for payments to a NEO, at, following or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, change of control of the company or change in the NEO's responsibilities. The minimum threshold contained in the Old Form for disclosure of payments amounting to more than $100,000 is not contained in the New Form.

The New Form does not require disclosure of the employment contract itself in this area of disclosure as the Old Form required. Rather, the picture of the entire employment arrangement is expected to come through the disclosure in the Summary Compensation Table and related narrative.

Director Compensation

The New Form now requires the inclusion of a Director Compensation Table which includes columns relating to fees earned, share and option-based awards, non-equity incentive plan compensation, pension values, all other compensation and total compensation. All forms of compensation to directors are to be included in this table in a manner similar to that required for the corresponding column in the Summary Compensation Table for the NEOs. However, director compensation for only the company's most recently completed financial year is required. A narrative discussion explaining any factors necessary to understand the information disclosed in the table is required, including any compensation arrangements for a director that are different from the standard arrangements. Directors who are also NEOs will be included in the Summary Compensation Table and not the Director Compensation Table. Finally, the same disclosure for directors that is required regarding incentive plan awards for NEOs (see above) must be provided.

Transition Provisions

The New Form comes into force on December 31, 2008 and applies to a company in respect of a financial year ending on or after December 31, 2008. The Old Form does not apply to a company in respect of a financial year ending on or after December 31, 2008.

Next Steps

Companies with a December 31 year end should start working on their disclosure under the New Form as soon as possible, in particular, the CD&A and the other narrative disclosure that will accompany the new and expanded tables. For much of the disclosure, it will not be necessary to wait for year end numbers.

Most companies would have scheduled one meeting for the compensation committee of the board of directors to approve the Statement of Executive Compensation under the Old Form, however, more than one meeting to prepare, review and approve the disclosure under the New Form will likely be necessary this year. Management should raise the New Form requirements with the chair of the compensation committee as soon as possible and start co-ordinating the information required from both management and the committee to prepare the disclosure under the New Form.

Gowlings has prepared a template containing the requirements (including headings and tables) under the New Form. For more information on this template and for assistance with the preparation of disclosure under the New Form, please contact a member of our National Corporate Finance, Securities and Public M&A Practice Group.

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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