Amendments to rules governing disclosure of executive compensation are now in effect. The Canadian Securities Administrators’ Form 51-102F6 – Statement of Executive Compensation (that we will refer to as the “New Rule”) – makes extensive changes to the prior disclosure requirements.
Accordingly, here are six matters to take into consideration now when preparing the management proxy circular.
Determination of the Highest-Paid Executive Officers
An issuer must continue to disclose all compensation paid to its CEO, CFO and its three other highest-paid executive officers (collectively referred to as “named executive officers” or “NEOs”). The current rule determines the highest-paid NEOs based solely on annual salary and bonus. Under the New Rule, all compensation, including the value of awards of shares, options and grants under other incentive plans, as well as the value of certain perquisites, must be added to salary and bonus to determine total compensation and, therefore, the highest-paid executive officers. Perquisites, including property or other personal benefits which are not made available generally to all employees and which in aggregate total either $50,000 or 10% of a particular executive officer’s salary, will be included in the calculation and must be disclosed. The calculation will exclude pension plan benefits, cost-of-living payments for foreign assignments and amounts paid or payable as a result of the termination of employment. The current $150,000 minimum income threshold has been maintained for determining whether any of the highest-paid officers may be ex¬cluded from the disclosure, but will be applied to total compensation (and not be limited to salary and bonus as under the existing rule).
No Restatement of Prior Compensation Disclosure
The New Rule will not require NEO compensation disclosure for financial years that ended before December 31, 2008. Accordingly, summary compensation disclosure from prior years need not be restated under the New Rule or repeated in the form previously reported under the existing rule. In each subsequent year, however, an additional year of disclosure will be added to the NEO Summary Compensation Table such that, following completion of financial years ending on or after December 31, 2010, three-year comparative information will again be included in the Summary Compensation Table.
Compensation Discussion and Analysis
Each issuer must include compensation discussion and analysis (“CD&A”) in its proxy circular. While the concept of CD&A is similar to that underlying the existing rule’s Report on Executive Compensation, the level of explanation in the CD&A must be significantly more detailed and specific than what has generally been the practice in the past. In the manner that management discussion and analysis is intended to explain the disclosure included in financial statements, CD&A is intended to explain the executive compensation disclosure that appears elsewhere in the proxy circular. CD&A must describe and explain all significant elements of compensation awarded, earned, paid or payable to NEOs. This will include a discussion of the compensation program’s objectives, what the program is designed to reward, a description of each element of compensation and why the issuer chooses to pay each element, how the amount of each element of compensation is determined (including any formula used), and how the decisions made fit within the issuer’s overall compensation objectives. Benchmarks used, including other companies used in the benchmark group and the selection criteria, must be identified. Where targets are based on objective criteria (such as, for example, share price or earnings per share), the targets must be disclosed. However, disclosure of specific quantitative or qualitative performance-related factors need not be disclosed where public disclosure of the criteria has not already occurred and where such disclosure would, in the view of a reasonable person, seriously prejudice the issuer’s interests. The perceived likelihood of achieving any undisclosed goals must be disclosed. Disclosure that describes only the process of determining compensation without explaining the specifics of that actually paid or payable will not be adequate. As in the past, an issuer must include a performance graph reflecting its cumulative shareholder total return for the previous five years as compared to a broad equity market index. In addition, an issuer must now include in the CD&A a discussion of how the trend shown by the performance graph compares to the trend in the level of executive compensation paid over the same period. Certain issuers need not prepare the performance graph, including those listed only on the TSX Venture Exchange, those who have issued only debt securities or non-convertible, non-participating preferred shares, and those that have been reporting issuers in Canada for less than 12 months before the end of their most recently completed fiscal year.
Grant Date Valuation of Share and Option Awards
The New Rule will require disclosure of the dollar value of share-based and option-based awards to NEOs. The dollar value given must be based on the grant date fair value of the award. Frequently, this value may be different from the accounting fair value used for financial statement purposes, since the accounting fair value amount is amortized over the service period and adjusted at year end as required. The amount of, and the reason for, any difference in the fair values must also be disclosed. Issuers must also disclose the methodology (for example, the Black-Scholes-Merton or the binomial lattice model), assumptions and estimates used in the calculation and the reasons for selecting the particular methodology.
Enhanced Disclosure of Termination and Change of Control Payments and Benefits
Enhanced disclosure will be required for any contracts, plans or arrangements that provide for the possibility of an NEO receiving a payment or other benefit upon the termination of employment, retirement or change of control. The New Rule will require disclosure of the circumstances which could trigger a payment obligation, together with an estimate of the amount of incremental payments and benefits resulting from each of the triggering circumstances. For purposes of estimating uncertain amounts, an issuer must assume that the triggering event occurred on the last day of its most recently completed financial year. Disclosure of any conditions in favour of the issuer, such as non-competition, non-solicitation and confidentiality obligations of the recipient, must also be provided.
Director Compensation Disclosure to be Individualized and Expanded
The New Rule will require detailed disclosure of all compensation received by each director, other than those directors who are also NEOs and whose compensation is included in the NEO compensation disclosure. The disclosure must be included in a table similar to the NEO Summary Compensation Table and must include the amount of all fees earned, the value of awards of shares, options and grants under non-equity incentive plans, pension benefit values and the amount and nature of all other compensation earned by the director in any capacity, including as a consultant to, or as an employee of, the issuer or any subsidiary.