The Canadian Securities Administrators (CSA) have established new rules regarding executive compensation disclosure, which revokes and replaces the old form for executive compensation found in Form 51-102F6 to National Instrument 51-102. The CSA's action follows on the adoption of new executive compensation disclosure rules by the United States Securities and Exchange Commission (SEC) in 2006 and reflects a significantly increased focus by regulators and the investing public on executive compensation. The current economic climate is also expected to result in greater scrutiny on disclosure regarding executive compensation. The new rules apply to financial years ending on or after December 31, 2008.
The overall objective of the new rules is to ensure the disclosure of all compensation paid to Named Executive Officers (NEOs), along with how such compensation relates to the performance of the NEOs. The objective of this disclosure is to communicate the compensation that an issuer's board of directors intends for the issuer to pay, make payable, award, grant, give or otherwise to provide to each NEO for a particular financial year. This disclosure will provide insight into executive compensation as a key aspect of the overall stewardship and governance of the issuer and will help investors understand how decisions about executive compensation are made.
The new rules have replaced the compensation committee report under the old form with a compensation discussion and analysis (CD&A) section, which describes and explains significant elements of compensation payable to NEOs during the most recently completed financial year. This section is intended to provide a contextual discussion similar to the Management Discussion and Analysis for financial statements as well as disclose information regarding how the compensation of an NEO is related to an NEO's performance. The CD&A is intended to be a general guide to all aspects of the issuer's compensation and the process employed in awarding compensation to the NEOs and must include a discussion of:
The CD&A also requires issuers to describe the significant principles underlying their policies and explain their decisions relating to the compensation provided to their NEOs. In addition, any new actions, decisions or policies made since the end of the most recently completed financial year that could affect a reasonable person's understanding of an NEO's compensation are to be disclosed. The CD&A also requires disclosure of performance goals based on objective, identifiable measures (i.e., share price or earnings per share) unless a reasonable person would consider that such disclosure would seriously prejudice the issuer's interests. This represents a change from the old form, under which the test for excluding disclosure of performance goals or conditions was whether such disclosure would adversely affect an issuer's competitive position. Subject to exceptions for certain issuers and/or distributions, an issuer must continue to provide a performance graph demonstrating its cumulative shareholder return during the five most recently completed financial years compared to the cumulative total return of at least one broad equity market index. The new rules contain a new requirement under which the performance graph must also indicate how it relates to compensation paid to executive officers. It is also important to note, particularly in the current economic climate, that any payment made to an NEO that is out of the ordinary or does not fit within the established pay-for-performance process must be explained comprehensively.
An issuer must provide disclosure on its NEOs in the form of a Summary Compensation Table. Determination of the three most highly compensated executive officers is based on total compensation paid to each individual, which represents a change from the old rules, under which determination of the three most highly compensated executive officers was based on salary and bonus. The Summary Compensation Table requires disclosure of all elements of direct and indirect compensation, including base, bonus and equity compensation, as well as contribution to pension plans and perquisites. Like under the old rules, disclosure must be provided for three years, provided that an issuer is not required to restate prior years. In addition, the new rules require that equity incentive awards (grants of shares, stock options or other securities) be valued and that the fair value and the methodology used be disclosed.
A narrative discussion must accompany the Summary Compensation Table explaining any significant factors necessary to understand the information disclosed. Although the narrative discussion is fact-specific, disclosure may include a discussion of significant terms of each NEO's employment agreement and any repricing or significant changes to the terms of any share-based or option-based awards. If any NEOs are directors and are compensated for services as a director, this compensation must be detailed in the Summary Compensation Table, with a footnote explaining which amounts relate to the directorship.
Disclosure of incentive plan awards must be contained in two separate tables. The first table requires disclosure of the value of all outstanding option-based and share-based awards at the end of the most recently completed financial year and is to include awards granted before the most recently completed financial year. The second table discloses the value vested or earned during the year for option-based awards, share-based awards and non-equity incentive plans.
The new rules require disclosure of all defined benefit pension plans and defined contribution plans that provide for payments on retirement. This section is also to include a narrative discussion describing and explaining any significant factors necessary to understand the information disclosed in the tables.
Each contract, agreement, plan or arrangement that provides for payments to an NEO in connection with any termination, resignation, retirement, change in control of the issuer or a change in an NEO's responsibilities must be described and explained. This requirement to disclose all change of control or termination benefits represents a change from the old form, which contains a $100,000 benchmark for disclosure of change of control or termination benefits. Where appropriate, quantified disclosure is required in relation to circumstances that trigger payments or other benefits, the estimated incremental payments that are triggered by each circumstance, how the payment and benefit levels are determined, any conditions for receiving payments and any other significant factors.
Unlike the old rules, which treated director compensation as an afterthought, the new rules require essentially the same Summary Compensation Table to be used to disclose compensation to directors.
SEC issuers may satisfy the requirements under the new rules by providing disclosure required by Item 402 “Executive Compensation” of Regulation S-K under the Securities Exchange Act of 1934. However, this exception is not available for issuers that rely on exemptions for foreign private issuers.
In order to fully comply with the new rules in a timely manner, we recommend that issuers take the following actions well in advance of the completion date for their information circulars: