Canada: New Rules For Executive Compensation Disclosure - 8-Oct-2008

Canadian securities regulators have published final rules on
executive compensation disclosure, making very few changes to their
February 2008 proposals. The regulators believe that these new
rules will result in better communication of what boards of
directors intend to pay executives, and will also allow investors
to assess how decisions about executive compensation are made. The
new rules are similar – but not identical – to
the SEC's rules on executive compensation disclosure that came
into effect last year.

Transition

The new rules will apply to executive compensation disclosure in
respect of financial years ending on or after December 31, 2008. A
company is not required to restate, for comparative purposes,
disclosure for prior financial years.

To comply with the new rules, most companies will have to
undertake a significant amount of work, involving legal, accounting
and human resource advisers. Companies should therefore get an
early start on their 2009 proxy disclosure, leaving ample time for
review, feedback and comments.

Highlights

• The summary compensation table will disclose total
  compensation, including the dollar value of share and option awards
  (based on grant date fair value), non-equity incentive plan
  compensation and pension compensation amounts.
  
  
  
  


• The identity of the "named executive officers" (NEOs)
  will be based on total compensation (excluding pensions) rather
  than just salary and bonus. Severance and other payments resulting
  from termination of employment are excluded from the calculation
  but other one-time compensation amounts (such as signing bonuses or
  equity replacement awards to new hires) are not.
  
  
  
  


• Retirement benefits will be quantified for each NEO under both
  defined benefit and defined contribution plans.
  
  
  
  


• Companies must disclose potential payments to each NEO on
  termination, resignation, retirement, a change of control of the
  company or a change in an NEO's responsibilities.
  
  
  
  


• A new "compensation discussion and analysis" must
  describe all significant elements of compensation and explain the
  rationale for specific compensation programs and decisions.
  
  
  
  

Objective of the Proposed Rules

The new rules require companies to disclose all direct and
indirect compensation provided to the NEOs and directors,
regardless of the way the compensation is structured or whether it
fits into a particular column of a table.

Compensation and Discussion and Analysis

The current Report on Executive Compensation will be replaced by
a "compensation discussion and analysis" (CD&A) that
puts into perspective the detailed disclosure in the tables. Much
like the detailed analysis in MD&A, the CD&A should
disclose and analyze the significant factors underlying the
company's compensation policies and decisions. For example, if
a company's process for setting executive compensation is very
simple, relying solely on board discussions without any formal
objectives or criteria, this should be clear from the CD&A.

The CD&A must cover all significant aspects of NEO
compensation, including

• the objectives of any compensation program or strategy;
  
  
  
  


• what the program is designed to reward;
  
  
  
  


• each element of compensation;
  
  
  
  


• why the company chooses to pay each element;
  
  
  
  


• how the company determines the amount (and, where applicable,
  the formula) for each element; and
  
  
  
  


• how each element of compensation and the company's
  decisions about that element fit with the overall compensation
  objectives and affect decisions about the other elements.
  
  
  
  

Where applicable, companies must describe any new actions,
decisions or policies that were made after year-end that could
affect a reasonable understanding of an NEO's reported
compensation.

Compensation Benchmarks and Performance Goals

Companies will have to disclose their compensation benchmarks
and explain the relevant components, including the identity of any
companies included in the benchmark and selection criteria.

Performance goals will also have to be disclosed if based on
objective, identifiable measures, such as the company's stock
price or earnings per share. (If goals are subjective, the company
may describe them without providing specific measures.) There is an
exception if disclosure would seriously prejudice the company's
interests, but in that case, disclosure will be required of the
percentage of the NEO's compensation that relates to the
undisclosed information and how difficult it could be for the NEO,
or how likely it will be for the company, to achieve the
undisclosed goal. If any goals constitute non-GAAP financial
measures, disclosure will be required of the way the company
calculates the goals from its financial statements. Companies
should consider these disclosure requirements in formulating goals
and adopting new compensation plans.

Performance Graph

The new rules maintain the requirement that companies provide a
performance graph comparing their cumulative total return over the
past five years with the return of at least one broad equity market
index. (Companies that have been reporting for less than one year
are exempt.) The new rules also require companies to discuss how
the trend shown by the performance graph compares with the trend in
executive compensation.

Option Awards

Companies will have to describe the process used to grant
options to NEOs, including the role of the compensation committee
and executive officers in setting or amending any option program
and whether previous grants are taken into account when considering
new grants.

Summary Compensation Table

The summary compensation table will remain the main vehicle for
executive compensation disclosure. It will 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 will show the total compensation for each NEO. The
elements of the summary compensation table will be as follows:

• salary;
  
  
  
  


• dollar amount of share awards, based on grant date fair
  value;
  
  
  
  


• dollar amount of option awards, based on grant date fair
  value;
  
  
  
  


• non-equity incentive plan compensation, which is sub-divided
  into annual and long-term incentives (bonuses will be reported in
  this column, whether discretionary or non-discretionary);
  
  
  
  


• pension value, which includes compensatory amounts for both
  defined benefit and defined contribution retirement plans;
  and
  
  
  
  


• all other compensation – for example, perquisites,
  tax gross-ups, premiums for certain insurance policies, payments
  resulting from termination, resignation, retirement or a change of
  control, and all other amounts that cannot be properly reported in
  another column.
  
  
  
  

Incentive Plan Awards

In addition to the summary compensation table, the new rules
require two tables disclosing information about equity and
non-equity incentive plan awards. The significant terms of all
plan-based awards will have to be disclosed. The narrative may
include a discussion of performance-based or other significant
conditions, information on estimated future payouts for non-equity
incentive plan awards (threshold, target and maximum amounts), and
the closing market price on a grant date if greater than the
exercise or base price.

Outstanding Option and Share Awards

This table will show all awards outstanding at year-end. For
each option or similar award, the table must show the number of
securities underlying unexercised options, the respective exercise
or base prices and expiration dates, and the dollar value of
unexercised in-the-money options. For each share award, the table
must show the number that have not vested and the respective market
or payout value. (To make the calculations, companies may assume
that an NEO achieved the minimum performance criteria unless his or
her performance for the previous year exceeded the minimum, in
which case the disclosure must be based on a corresponding
assumption.)

Value on Payout or Vesting of Incentive Plan Awards

This table will show the dollar value realized on the exercise
of options or the vesting of share awards. This table will also
show payouts on non-equity incentive plan compensation.

Retirement Plan Benefits

The new rules call for two tables related to retirement
benefits: one for defined benefit plans and one for defined
contribution plans. The defined benefit plans table will show, for
each NEO, the number of years of credited service, the annual
benefits payable at year-end and at age 65, the accrued obligation
at the start of the year, the compensatory and non-compensatory
amounts, and the accrued obligation at year-end. The defined
contribution plans table will show, for each NEO, the accumulated
value at the start of the year, the compensatory and
non-compensatory amounts, and the accumulated value at the year
end.

The requirements for these tables respond to the criticism that
the current pension benefits table provides only general
information on benefit entitlements for selected compensation
levels and years of service but does not disclose the particular
circumstances or entitlements of each NEO.

Termination and Change of Control Benefits

The new rules call for detailed disclosure about incremental
payments or other benefits for each NEO related to the following
triggering events: retirement, resignation, termination, a change
of control of the company or a change in the NEO's
responsibilities. Companies will have to quantify the potential
payments on the assumption that the triggering event occurred at
the end of the most recent fiscal year. (If the event actually
occurred earlier in the year, actual payments and benefits will be
disclosed rather than hypothetical payments.)

These disclosure requirements are consistent with the U.S. rules
but substantially exceed current Canadian requirements and are
intended to prevent investors from being surprised after the fact
by the size of an NEO's severance or other payment package.

Director Compensation

The new rules call for expanded disclosure of directors'
compensation. The table is similar to the summary compensation
table, but requires disclosure for only one year rather than three
years.

Venture Issuers

Although certain elements of the revised disclosure requirements
may not be applicable to debt-only issuers or other companies that
qualify as "venture issuers," the regulators declined to
grant any blanket waivers from the new rules for these issuers. The
regulators did, however, indicate that they are prepared to
consider the merits of applications for exemptive relief on a
case-by-case basis.

SEC Issuers

SEC issuers that fully comply with the U.S. executive
compensation disclosure rules (without taking advantage of any
accommodations for foreign private issuers) will be permitted to
provide their U.S. disclosure in satisfaction of the new Canadian
requirements.

Copies of the new Form 51-102F6, Statement of Executive
Compensation, can be found at:


http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/Part5/rule_20080918_51-102_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.