Canada: New Rules On Executive Compensation Disclosure - 20 Oct 2008

The CSA has introduced new rules regarding the disclosure of
executive compensation which are intended to improve the quality of
such disclosure and provide the market with comprehensive
information on the value of the total compensation payable to an
issuer's executive officers and how such compensation is
determined. The new rules are reflected in amendments to National
Instrument 51-102 – Continuous Disclosure
Obligations and Form 51-102F6 – Statement of
Executive Compensation (the "New
Rules").

The new disclosure requirements will apply in respect of
financial years ending on or after December 31, 2008. Issuers with
financial years ending on or after December 31, 2008 will be
required to make disclosure in accordance with the New Rules in the
upcoming proxy season.

Highlights

New requirements introduced by the new executive compensation
disclosure regime include:

• disclosure in the summary compensation table (SCT) of a total
  compensation figure for each named executive officer (NEO)


• a discussion and analysis of the issuer's compensation
  policies and objectives which supplements the issuer's
  compensation figures by explaining the rationale for specific
  compensation programs


• comparison of trend in securityholder return and in the
  issuer's executive compensation over the same period


• disclosure of grant date fair value of all share and
  option-based awards


• disclosure of dollar value of non-equity incentive plans and
  pensions


• enhanced disclosure of potential termination payments to NEOs,
  including retirement and change of control benefits and
  entitlements under pension plans


• enhanced disclosure of directors' compensation in tabular
  form

Total Compensation Disclosure

The New Rules provide that an issuer must disclose in the
management information circular prepared for its annual meeting all
compensation payable to its NEOs. While the general requirement to
provide an SCT currently exists, the disclosure prescribed in the
SCT has been amended. Issuers will be required to present
comparative information for each of the last three financial years
in the SCT. To allow for a smooth transition to the New Rules, an
issuer will not be required to make disclosure in respect of
financial years ending on or before December 31, 2008.

The New Rules clarify that all compensation paid, granted or
otherwise payable to the NEOs by an issuer or any subsidiary,
either directly or indirectly, must be disclosed. Plans of
compensation available generally to all employees, such as CPP or
group health or life insurance plans, need not be disclosed.

The definition of NEO has not been amended and includes the CEO,
CFO and each of the three most highly compensated executive
officers (or persons acting in a similar capacity) whose total
compensation exceeds $150,000. For the purpose of determining
whether this threshold has been reached, all compensation, other
than the value of pension benefits, overseas living allowances and
change of control or termination benefits relating to events that
occurred in the last financial year, must be included. Individual
disclosure of the compensation of each NEO is required.

The New Rules clarify that compensation paid by an external
management company rather than by the issuer directly must also be
included. In addition, non-corporate issuers must disclose
compensation paid to persons acting as CEO, CFO or other NEO even
where such issuers do not themselves have any executive
officers.

Compensation Discussion And Analysis

The SCT must be accompanied by a discussion and analysis of
executive compensation (CD&A). CD&A is not intended to
merely provide boiler-plate disclosure of the elements of
compensation, but rather should outline the underlying principles
of the issuer's compensation plan. The New Rules provide six
principles which must be addressed in an issuer's CD&A:

• the objectives of the compensation program or strategy;


• what the program is designed to reward;


• each element of compensation;


• why the issuer chooses to pay each element;


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


• how each element and the issuer's decision regarding that
  element fit into the overall compensation objectives of the
  issuer.

The CD&A must discuss actions taken with respect to
executive compensation after the end of the most recently completed
fiscal year if they could affect a reasonable person's
understanding of an NEO's compensation. The CD&A must also
identify target levels for quantitative or qualitative
performance-related factors in compensation. Where such targets are
subjective, they must still be described without providing specific
measures. Disclosure of a target need not be made where it would be
seriously prejudicial to the issuer's interests. If a target is
not disclosed, the issuer must still disclose how difficult it
could be for the NEO, or how likely it will be for the issuer, to
achieve such undisclosed targets. Finally, if quantitative targets
are not disclosed, the percentage of an NEO's total
compensation related to such targets must be stated.

Performance Graph

The New Rules require that issuers, other than debt-only and
venture issuers, include a graph comparing the issuer's
securityholder return over the past five years to the cumulative
total return of at least one broad equity market index. An issuer
who believes there are other relevant performance goals should
disclose such goals. In order to allow readers to review the amount
of executive compensation in light of the issuer's performance
in the market, the New Rules require the issuer to discuss how the
trend shown by this graph compares to the trend in executive
officer compensation over the same period.

Summary Compensation Table

Key changes to the disclosure required in the SCT include the
following:

Option And Share-Based Compensation

The New Rules require that an issuer disclose in its SCT the
grant date fair value of share and option-based awards. Share-based
awards include common and restricted shares, restricted share units
(RSUs), deferred share units, phantom shares or units, common share
equivalent units and stock. Option-based awards include options,
stock appreciation rights and similar equity-based compensation
with option-like features. The method used to determine the grant
date fair value of such awards should be disclosed, together with
an explanation of why the method was chosen. If the grant date fair
value is different from the accounting fair value, a note should be
added to the table which explains and reconciles the
difference.

Non-Equity Incentive Plan Compensation

The non-equity incentive plan compensation column of the SCT
must show the dollar value of all other amounts earned through
non-equity incentive plans. This disclosure must be presented in
two columns. The first column must include all annual non-equity
incentive plan compensation and will include bonuses and other
discretionary amounts. The second column must include all
non-equity incentive plan compensation relating to a period longer
than one year.

Perquisites

Issuers must disclose in the SCT perquisites provided to an NEO
if the aggregate amount of such compensation is $50,000 or more or
represents 10% or more of the NEO's total salary for the year.
Each perquisite exceeding 25% of the NEO's total perquisites
must be specifically identified in a footnote to the table. Whether
or not something will be considered a perquisite will generally
depend on whether it is directly related to the NEO's
responsibilities; however, an item which is not directly related to
such responsibilities will be a perquisite if it provides the NEO
with a personal benefit.

Pension Value

The New Rules require disclosure in the SCT of the value of each
NEO's accumulated benefit under all defined benefit and defined
contribution pension plans. The value will include the service
costs and other compensatory elements.

Incentive Plan Awards

Issuers will be required to complete two tables in respect of
incentive plan awards, one disclosing the details of outstanding
share and option-based awards and a second disclosing the value
earned by each NEO under incentive plan awards. The first table
will disclose, by NEO, the number of securities underlying options,
the exercise price(s) and expiration date(s) of such options, the
value of unexercised "in the money" options, the number
of shares or units of shares that have not vested and the market or
payout value of share-based awards that have not vested. The second
table will disclose the value of option-based awards (assuming such
options had been exercised on their vesting date during the last
financial year), the value realized on vesting of share-based
awards and the value earned on non-equity incentive plan
compensation during the year. A narrative discussion of all
incentive plan awards must be included.

Termination And Change Of Control Benefits

The New Rules require that disclosure must be made in respect of
all payments or other benefits which an NEO would receive in the
event of his or her termination, resignation or retirement or in
the event of a change of control of the issuer or a change in the
NEO's duties. Where appropriate, the estimated amount of
payments and benefits should be disclosed.

Pension Plan Benefits

The New Rules will require issuers to disclose, in tabular form,
the details of all defined benefit and defined contribution pension
plans. The defined benefit plan table must include disclosure for
each NEO of 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 and at year-end and
compensatory and non-compensatory changes. The defined contribution
plan table must include the accumulated value at the start of the
year and at year-end and the compensatory and non-compensatory
amounts.

Director Compensation

The New Rules require issuers to include a separate table
setting out all compensation provided to each director in the last
fiscal year. The information required in this table is similar to
that required for NEOs in the SCT and will require issuers to
disclose a total dollar value of all cash and non-cash
compensation.

U.S. Reporting Issuers

U.S. issuers who make the necessary disclosure required by Item
402 of Regulation S-K do not need to disclose separately in
accordance with the New Rules.

Additional Information

The above is a general overview of the new regime for executive
compensation disclosure. To access a copy of the New Rules, click
here. We would be pleased to provide further
information or detailed advice on this proposed new regime.

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