Publication
title
Proposed New Rules on Executive Compensation Disclosure
DATE
April 11, 2007
EXPERTISE
The CSA recently published for public comment proposed amendments to National Instrument 51-102 - Continuous Disclosure Obligations (the "Proposed Amendments") and Form 51-102F6 - Statement of Executive Compensation (the "Form"). The Proposed Amendments introduce 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. In formulating the Proposed Amendments, the CSA considered the new rules regarding executive compensation disclosure introduced by the US Securities and Exchange Commission (SEC) last year. Comments on the Proposed Amendments should be received by June 30, 2007. It is anticipated that issuers will be required to comply with the new disclosure requirements for financial years ending on or after December 31, 2007.
HIGHLIGHTS
New requirements introduced in the proposed executive compensation disclosure regime include:
- disclosure in the summary compensation table 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 dollar value of all plan-based compensation
- disclosure of changes in pension value
- 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 Proposed Amendments provide that an issuer must disclose in a management information circular prepared for an annual meeting all compensation payable to its NEOs. Issuers will be required to present such information for each of their last three fiscal years in a summary compensation table. While this general requirement currently exists, the disclosure required in the summary compensation table has been amended. The Proposed Amendments clarify that all compensation, direct or indirect, that a reasonable person would view as compensation must be disclosed. The CSA has used this broad definition of compensation to reflect the fact that methods of compensating officers have evolved, and will continue to evolve, over time.
Currently, information regarding compensation may be fragmented and as a result it may be difficult for readers to determine the total amount of compensation a particular NEO receives. The Proposed Amendments address this concern by requiring that issuers include in the summary compensation table required by the Form a separate column setting out a dollar value for the total compensation paid to each NEO. In order to obtain this number issuers will be required to determine the fair value of each type of compensation awarded to NEOs.
The definition of NEO has not been amended and includes the CEO, CFO and each of the three most highly compensated executive officers whose total compensation exceeds $150,000. For the purpose of determining whether this threshold has been reached, all compensation, other than any change in the value of pension benefits, must be included. The CSA has proposed individual disclosure of the compensation of each NEO as opposed to individual disclosure for the CEO and CFO and aggregate disclosure for the remaining NEOs. Recognizing that readers require information as to the compensation of those officers who are truly directing the affairs of the issuer, the requirement to disclose is restricted to executive officers rather than to the amount of compensation any officer or employee receives. Executive officer is defined as a chair, vice-chair or president, a vice-president in charge of a principal business unit, division or function or an individual who performs a policy-making function in respect of the issuer.
The Proposed Amendments 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
It is proposed that the summary compensation table 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. Like the SEC rules, the Proposed Amendments provide six principles which must be addressed in an issuer's CD&A:
- the objectives of the compensation program;
- what the compensation 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.
In addition, the CD&A must discuss actions taken with respect to executive compensation after the end of the most recently completed fiscal year and must identify target levels for quantitative or qualitative performance-related factors in compensation. Such targets need not be specifically disclosed if they are subjective or if the disclosure would be competitively harmful to the issuer.
The Proposed Amendments do not require the CEO and CFO to certify the CD&A as is required by the US rules.
PERFORMANCE GRAPH
The Proposed Amendments retain the requirement that issuers, other than 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. In order to allow readers to review the amount of executive compensation in light of the issuer's performance in the market, the Proposed Amendments require the issuer to discuss how the trend shown by this graph compares to the trend in executive officer compensation over the same period.
DISCLOSURE OF PLAN-BASED COMPENSATION
The Proposed Amendments require that an issuer disclose in its summary compensation table the dollar value of stock awards, option awards and non-equity incentive plan compensation. This represents a change from the current rule, which requires disclosure of the number of securities granted.
Stock awards are stock-related awards that derive their value from the issuer's equity securities or are settled with equity securities of the issuer and include restricted stock, restricted stock units (RSUs), phantom stock or units and similar instruments. Option awards include options, stock appreciation rights (SARs) and similar equity-based compensation with option-like features. The dollar value of such stock awards and option awards will be the amount recognized for financial statement reporting and must be calculated using the same valuation methodology and assumptions as are used for determining the compensation cost of such awards reported in the issuer's financial statements.
The non-equity incentive plan compensation column of the summary compensation table must show the dollar value of all other amounts earned through non-equity incentive plans. The definition of incentive plan under the Proposed Amendments includes any plan that is intended to serve as an incentive for performance over a specified period. Accordingly, compensation paid under a plan that includes any specific performance objectives will not be considered a bonus. Consequently, some compensation items currently in the bonus column may appear in the new non-equity incentive plan compensation column. Under the Proposed Amendments, only payments of a purely discretionary nature that do not involve any pre-determined performance criteria will be disclosed in the bonus column.
DISCLOSURE OF EQUITY AND NON-EQUITY AWARDS
The existing Canadian rules require disclosure in tabular form of plan-based awards granted, exercised, outstanding and repriced. The US rules require a great deal of detailed disclosure in respect of such plans and awards. Assuming that such details will be less critical to users if the fair value of the cost of such compensation is included in the summary compensation table, the CSA propose to significantly change the requirements regarding disclosure of equity and non-equity awards and to require issuers to focus on the dollar values of such awards, including, in the case of non-equity incentive plan awards, information on estimated future payouts. In addition, in contrast to the SEC's detailed rule-oriented approach, the CSA are proposing to permit greater flexibility in how the details of such awards are disclosed.
DISCLOSURE OF PERQUISITES
Unlike the SEC, the CSA do not propose to change the threshold for disclosure of perquisites and other personal benefits provided to each NEO. Whether or not something will be considered a perquisite will depend on whether it is directly related to the NEO's responsibilities. Issuers must disclose in the summary compensation table perquisites provided to an NEO if the aggregate amount of such compensation is $50,000 or more and represents 10% or more of the NEO's total salary and bonus for the year. Each perquisite exceeding 25% of the NEO's total perquisites must be specifically identified. In contrast, the US rules require disclosure of perquisites unless the aggregate amount of such compensation is less than US$10,000 and require specific identification of perquisites that are valued at more than US$25,000 or 10% of total perquisites. Presumably the CSA believe that the level of detail required by the SEC is not necessary to provide adequate insight into an organization's compensation philosophy. Rather, understanding of the issuer's compensation philosophy should be garnered primarily from the CD&A and not from mandated disclosure of relatively small perks available to an NEO, no matter how interesting such information may be.
Although the perquisite disclosure threshold is not proposed to be reduced, the dollar amount included in the bonus column of the summary compensation table may be reduced as a result of proposed changes in the characterization of bonuses for purposes of the Form. Some compensation that is currently included in the bonus column may be moved to the plan-based compensation columns under the Proposed Amendments (see above under Plan-Based Compensation). Thus, the new form may capture a larger number of perquisites if the total value attributed to bonuses is reduced, given that the perquisite disclosure threshold is tied to a percentage of total salary and bonuses in a year.
DISCLOSURE OF CHANGE IN PENSION VALUE
The Proposed Amendments require disclosure in the summary compensation table of the increase or decrease in the actuarial present value of each NEO's accumulated benefit under all defined benefit and actuarial pension plans over the last financial year.
DISCLOSURE OF TERMINATION AND CHANGE OF CONTROL BENEFITS
The Proposed Amendments enhance the disclosure that must be made in respect of compensation 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. Disclosure must be made of all agreements, whether in writing or not, that provide for any payments or receipt of benefits that are triggered by such events. In addition issuers will be required to estimate the value of future payments and benefits that have been provided for in such circumstances.
DISCLOSURE OF RETIREMENT PLAN BENEFITS
The Proposed Amendments will require issuers to disclose the details of all defined benefit, retirement and deferred compensation plans. In addition, issuers must include in tabular form the present value of each NEO's accumulated benefit under all defined benefit retirement plans.
DIRECTOR COMPENSATION
The Proposed Amendments require issuers to include a 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 summary compensation table and will require issuers to disclose a total dollar value of all cash and non-cash compensation.
VENTURE ISSUERS
Unlike the existing rules, the Proposed Amendments do not provide different disclosure requirements for venture issuers, other than such issuers not being required to include a performance graph as described above. Venture issuers that do not send a management information circular to shareholders will be required to file a completed Form disclosing details of their executive compensation within 140 days of their year-end.
ADDITIONAL INFORMATION
The above is a general overview of the proposed regime for executive compensation disclosure. To access a copy of the Notice and Request for Comments and Proposed Amendments, click here. We would be pleased to provide further information or detailed advice on this proposed new regime.
Tracey Kernahan
Dawn Whittaker
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.
© Ogilvy Renault LLP 2007 - All Rights Reserved
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