CANADA: Let there be light, again, on the value of stock options - The Globe and Mail

Canada's rules for disclosing pay for top executives are sweeping;
all sorts of things must be revealed - even the annual increase in the
value of a CEO's pension earned by working another year on the job.
Nevertheless, given the earnest efforts of regulators to make sure
investors can see all elements of executive pay, it is a mystery why
gains from exercising stock options are no longer required to be
disclosed.

Securities regulators put new compensation disclosure
rules in place last year, and the reforms included a decision to remove a
requirement for companies to disclose profits earned by top executives
from their stock options. The argument was that it is more important for
investors to see the value of the compensation that the board of
directors intended to grant to executives in any given year, and that it
is not relevant for investors to know how much CEOs actually reaped
from their options later. Decisions to exercise the options, the
regulators said, are private investment choices for executives to make.

Another
justifications that was offered for the change was that it would align
Canada's disclosure rules with similar changes previously introduced in
the United States. But while such harmonization may seem logical in an
integrated business climate, the loss of a key disclosure feature has
frustrated major investors and has left a gaping hole in compensation
reporting.

Stock options allow executives to buy shares in the
future, but normally at today's price. The hope is that the share price
will rise over the years, and that options will become more valuable.
This means their fate is tied to volatile and unpredictable movements in
the stock market.

Under the new rules, companies must now
disclose their estimates of what options are believed to be worth at the
time they are granted, based on various assumptions about the future
that are plugged into mathematical formulas. But most options are
exercisable for 10 years, and estimates at the time of granting are
notoriously inaccurate. Some options expire when they have become
worthless, many others soar as the company's share price rises.

At
many companies, options comprise a majority of CEO compensation - often
dwarfing the value of base salaries and even cash bonuses. Because of
this importance, exercises of options are not merely private investments
by executives. How much compensation they ultimately put into an
executive's pocket is information that shareholders want to know when
assessing the total amount a CEO has earned.

The Canadian
Coalition for Good Governance, which represents large investors with
assets totalling $1.4-trillion, wants regulators to close this
disclosure gap. The CCGG says investors want to review compensation over
a CEO's entire tenure to assess whether it has correlated with
long-term performance. Investors are right to point out they can't
measure whether a correlation exists if they don't know how all the
awards paid out. Last year's so-called reform that resulted in the
non-disclosure of gains from options should be reversed.