Effective for the 2009 proxy season, the Canadian Securities Administrators (CSA) have adopted new requirements for executive compensation disclosure (the New Disclosure Requirements). Stikeman Elliott's "Executive Compensation After the Boom" highlights current trends in executive compensation and their impact on compensation decisions. The following excerpt reviews the trend towards wealth accumulation analysis.
Wealth Accumulation Analysis
Focussing on the different tools at the disposal of the board or compensation committee in developing pay packages, another emerging trend is the move towards a broad-based and more holistic wealth accumulation analysis.
A wealth accumulation analysis involves looking at what an executive has and will be paid and valuing what this pay accumulation is worth over the long term. This effectively allows a company to have a better picture of not only what is paid on a one, two or three-year basis, but the accumulated wealth that those earnings represent over a longer horizon. This includes factoring in elements such as gains on equity-based incentives as well as the value of accrued pension benefits, severance and other termination or change of control payments.1 A wealth accumulation analysis necessarily involves forecasting reasonable ranges for different elements based on relevant variables. While these may be difficult to predict or pinpoint years in advance, undertaking the exercise allows for an understanding of the total wealth potential that is represented by the pay package. The New Disclosure Requirements include a similar type of estimation of potential payouts by requiring companies to explain and quantify estimated incremental payments that are triggered in connection with termination, resignation, retirement or change of control.2 A wealth accumulation analysis will allow a company to see what potential future proxy disclosure might look like as future payouts become reality, and to analyze how well these might correlate to shareholder returns over similar periods. A wealth accumulation analysis also allows companies to assess whether they are facing diminishing returns from continuing to offer or focus on certain types of compensation components.