On September 18, 2008, the CSA issued new requirements for executive compensation disclosure. The new rules are intended to foster clearer communication from issuers to shareholders regarding increasingly complex compensation practices, as well as to help investors more easily understand how much compensation certain executive officers receive and how decisions about compensation are made.
The expanded requirements affect public issuers with a fiscal year end on or after December 31, 2008 and may require significant preparation to implement. The following are some of the more significant changes to the disclosure requirements.
Total Compensation Determines Named Executive Officers (NEOs)
Similar to the previous guidelines, each issuer must provide the requisite compensation information for its Chief Executive Officer, Chief Financial Officer and the three other most highly compensated officers whose total compensation is greater than $150,000 (collectively "NEOs").
Previously, only salary and bonus were used to determine which officers qualified as NEOs. Now issuers must consider total compensation, including salary, incentive payments and certain benefits. In order to provide some stability to the NEO group and facilitate meaningful year-to-year comparisons, certain types of payments triggered by unusual situations or unrelated to performance of the executive's duties, such as severance pay or foreign assignment cost of living allowances, are not included for the purpose of determining NEO status. Total compensation for determining NEO status does not include pension plan value or the value of benefits generally available to all salaried employees.
Disclosure of Total Compensation
The CSA has adopted more expansive language specifying what compensation information is required in an issuer's disclosure documents. The issuer must disclose "all plan and nonplan compensation, direct or indirect pay, remuneration, economic or financial award, reward, benefit, gift, or perquisite" paid or given directly or indirectly to the NEO by the issuer or its subsidiaries. Further, all compensation elements must be disclosed whether or not they are specifically described in the form. Only contributions to government plans and premiums and benefits paid under group life, health, hospitalization, medical and relocation plans that are generally open to all salaried employees are exempt from the disclosure requirements.
New Disclosure Format
As under the previous rules, issuers must report certain compensation information in summary tables and provide investors with a narrative explaining such information. However, the new rules stipulate some important changes. For example, the Summary Compensation table, which details compensation elements for each NEO for the three most recently completed financial years, now provides additional details for investors by requiring that issuers assign a specific dollar value for salary, share-based awards, optionbased awards, non-equity incentive plan compensation, pension value and all other compensation (the previous table required disclosure of only salary, bonus, other annual compensation, long-term compensation and all other compensation). The new table also includes a column where total compensation must be reported.
Reporting of incentive plan compensation has changed significantly as well. In order to show what the board intended to award at the time equity-based options were granted, the new disclosure requires the issuer to provide the grant date fair value of options as well as the number of options granted. Issuers must now include an "Outstanding share-based awards and option-based awards" table describing equity-based compensation and detailing the number and value of share-based and option-based awards outstanding at the end of the applicable fiscal year.
Additional detail is now required regarding defined benefit pension plans and a new table has been provided for detailing the value of defined contribution plans. Issuers are also required to summarize director compensation in a table similar to that required for NEO compensation.
Finally, additional disclosure is also required with respect to change of control payment entitlements. Issuers must now describe the circumstances which trigger the payment of such benefits, estimate the value of benefits resulting from such triggers, and explain how payment and benefit levels are determined.
Compensation Discussion and Analysis (CD & A)
This new requirement, which replaces the Report on Executive Compensation, is meant to explain to investors how compensation is tied to executive performance and to describe and analyze the principles, underlying policies and decisions relating to executive compensation. Issuers must provide a plain-language description of the compensation package for each NEO to help investors more easily understand the details of executive compensation disclosed elsewhere in the report. The analysis should explain what the compensation program is designed to reward, each element of compensation, the rationale for each element, how the company determines the amount (and, where applicable, the formula) for each element, and how each element and the company's decisions regarding that element fit into the company's overall compensation objectives.
The issuer must also describe any applicable benchmarks or performance criteria used to determine pay. Certain performance factors, such as forward-looking targets, may be exempt from disclosure requirements if providing the information would seriously prejudice the company's interest.
As previously required, issuers must provide a line graph comparing total shareholder return over the previous five years with a relevant benchmark index. The new rules however, also require a discussion explaining how the trend in executive compensation compares with the trend in shareholder return shown on the graph.
As under the previous rules, companies reporting in the United States may generally meet disclosure requirements by providing the information required by the SEC. Venture issuers, on the other hand, are afforded fewer exemptions under the new rules. For example, venture issuers are now exempt only from the requirement to provide a performance graph and must include the applicable information required under other items.
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