The Canadian Securities Administrators published proposals for enhanced executive compensation disclosure for Canadian public companies in March 2007. The proposed new requirements seek to improve the quality and transparency of executive compensation disclosure by requiring:

  • The disclosure of all elements of executive compensation for a reporting issuer’s named executive officers. ‘All’ is intended to mean all. The summary compensation table must include an additional column showing the ‘total compensation’, this being the aggregate of all of the elements of compensation. This total is reached after all elements of compensation are reduced to a current dollar value, including the dollar values of cash compensation as well as equity-linked compensation (options or shares), pension accruals, perquisites and anything else. In addition, amounts possibly payable in connection with change of control or severance arrangements must be disclosed. Some unusual valuation methods need to be followed in this disclosure. For example, stock option grants are to be valued on the same basis as they are included in the financial statements and not at their grant-date fair value, and changes in pension values are to show the changes in liability rather than the benefit earned in the year. While some anomalous numbers will accordingly appear, the objectives are clear: to reduce all elements of compensation to numbers, and to reflect all of them in tabular disclosure.
  • The creation of a new ‘compensation disclosure and analysis’ (CD&A) section. This is intended to do for compensation disclosure what the MD&A has done for financial statement disclosure: allow for a comprehensible and comprehensive description of the issuer’s compensation policies and plans. This description must set out the objectives of the compensation program, what it is intended to reward, each element of the program, why each element is paid, how the amount of compensation was determined and how each element fits into the company’s overall compensation objectives. The CD&A is also to include discussion of target compensation levels for the executives and the criteria or measures used to establish compensation in light of performance. The proposed rule permits the exclusion of target information that would disclose competitively sensitive information. The CD&A may well be the most useful and interesting part of the new disclosure, as it must explain why the executives were paid the compensation received.
  • The inclusion of a new performance graph to show how the trend in total shareholder return of the issues over a five-year period compares to the trend in compensation to the company’s executives over that same period. This graph is not required under the U.S. rules.

The new rule does not contain new governance requirements, but does point to those already set out in National Instrument 58-101 Disclosure of Corporate Governance Practices. This instrument already requires disclosure of the processes followed by boards and compensation committees in setting compensation. The comment period ends June 30, 2007.