The U.S. Securities and Exchange Commission (SEC) recently adopted new rules1 that will require many U.S. reporting companies to disclose in a clear manner the relationship between executive compensation actually paid and the company's financial performance. However, the rules generally will not apply to Canadian companies that report under the Multijurisdictional Disclosure System (MJDS), foreign private issuers, registered investment companies and emerging growth companies2. Smaller reporting companies are subject to scaled back disclosure requirements.
What you need to know
- Companies must show how management pay aligns with corporate results. Although many companies have been including a description of the pay-for-performance elements of their executive compensation arrangements in their disclosure, companies subject to the new rules will have to disclose how the compensation actually paid to their principal executive officer (PEO) and other named executive officers (NEOs) over the previous five fiscal years relates to the performance of the company and its peers over that period
- Changes apply as early as January 2023. The rules will apply to any proxy and information statement that is filed with the SEC on Schedule 14A or 14C in respect of a fiscal year ending on or after December 16, 2022, where shareholders will vote on the election of directors or executive compensation. Accordingly, pay versus performance disclosure will be required beginning in 2023 for companies with a calendar-year-end fiscal year. However, the SEC has adopted transitional relief so that, in the first year disclosure is required, companies may provide the required disclosure for three years instead of five, with an additional year of disclosure added in each of their two subsequent proxy or information statements.
- Canadian SEC issuers that follow U.S. rules. The rules also will apply to Canadian SEC issuers 3 that have elected to comply with the U.S. compensation disclosure rules in lieu of the Canadian disclosure requirements.
- Canadian companies that voluntarily align disclosure with U.S. rules. Canadian companies that are not required to comply with the new rules but that, historically, have presented pay-for-performance disclosure for their NEOs, or provided supplemental disclosure, in line with U.S. disclosure rules, may wish to consider aligning their disclosure going forward with some or all of the SEC's new disclosure requirements.
Three new disclosure elements
The new SEC disclosure rules require companies to disclose the following three new elements:
- Prescribed tabular disclosure: A company subject to the rules will be required to disclose the total compensation paid to its PEO and average total compensation paid to the other NEOs for its five most recently completed fiscal years compared to total shareholder return, peer group shareholder return, net income and, if applicable, an additional measure specific to the company and chosen by it as the company's most important measure of financial performance. In addition, companies will be required to disclose the compensation actually paid to those individuals, calculated using a prescribed formula that takes into account, among other matters, the fair value of equity awards as at year-end (versus the estimated value at grant). This "actually paid" amount could be different from the amounts of "realized pay" that some companies have been disclosing voluntarily.
- Additional comparative disclosure: Companies will be required to disclose a clear description of the relationship between each of the financial performance measures included in the tabular disclosure and the compensation actually paid to the NEOs during the five most recent fiscal years. For example, this disclosure could include a graph showing executive compensation actually paid and change in the financial performance measures on parallel axes and plotting compensation and such measures over the required time period.
- Tabular list of financial performance measures: Each company subject to disclose a clear description of the relationship between each of the financial performance measures included in the tabular disclosure and the compensation actually paid to the NEOs during the five most recent fiscal years. For example, this disclosure could include a graph showing executive compensation actually paid and change in the financial performance measures on parallel axes and plotting compensation and such measures over the required time period.
1. Click here to read the final rules.
2. By contrast, the SEC's new compensation clawback rules apply to all U.S.-listed companies, including, among others, U.S.-listed Canadian companies that report under the MJDS and foreign private issuers. Read Torys' bulletin on the SEC's compensation clawback rules here.
3. "SEC issuer" is defined in National Instrument 51-102 Continuous Disclosure Obligations to mean an issuer that (a) has a class of securities registered under section 12 of the U.S. Securities Exchange Act of 1934 or is required to file reports under section 15(d) of that Act; and (b) is not registered or required to be registered as an investment company under the U.S. Investment Company Act of 1940.
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.