Effective for the 2009 proxy season, the Canadian Securities Administrators (CSA) have adopted new requirements for executive compensation disclosure in the form of the revised Form 51-102F6 (the New Disclosure Requirements). The following excerpt from "Executive Compensation After the Boom" reviews the use of compensation consultants.
Benchmarking analysis and information is one of the key services provided by compensation consultants. Given their expertise and access to often proprietary information on industry practices, compensation consultants can also help to structure compensation packages. Under the SEC’s disclosure rules, the Compensation Discussion & Analysis (CD&A) is required to include disclosure on whether a company has relied on compensation consultants in determining what to pay its executives.1 While this requirement was not included by the CSA in the new disclosure requirements, it is required disclosure under National Instrument 58-101 Disclosure of Corporate Governance Practices (NI 58-101).2 This disclosure is proposed to be expanded pursuant to recently proposed amendments to NI 58-101.3 The expanded disclosure is proposed to include a requirement to identify any compensation consultant or other adviser that is used, a summary of their mandate, when they were first retained, whether they have performed any other services for the company (and if so, a description of the nature of that work) and the aggregate fees billed by the consultant or adviser in the last two financial years for professional services relating to executive compensation and for other professional services.
Reliance on compensation consultants has been somewhat of a controversial issue in the United States, given conflicting views on whether conflicts of interest (arising from consultants providing various services to the company and its executives) have influenced increases in executive pay. Much of this debate was brought into the spotlight by a report issued by the United States House of Representatives Committee on Oversight and Governance Reform in December of 2007. That report linked compensation consultants’ conflicts of interest with higher executive pay packages. This report was followed by a contrary highly publicized study done by professors from the Wharton School at the University of Pennsylvania.4 That study focused on the use of compensation consultants by a group of 880 companies included in the S&P 1500 for the year 2006 and found that, while the use of compensation consultants was correlated with higher pay, there was no evidence of less pay-for-performance sensitivity or that the potential for conflicts of interest was a primary driver of increased pay levels.5
Given that opposing views on the subject continue to prevail, the issue of conflicts of interest and more transparency on the extent of services provided by consultants will continue to attract interest. At a minimum, boards and compensation committees should be aware of the extent to which a compensation consultant may have a conflict of interest and be in a position to manage and respond to both the incidence and perception of material conflicts where they exist. In the face of prevailing criticisms and increased interest by institutional investors and shareholder interests groups, some companies are moving towards developing or bolstering internal policies governing the extent to which compensation consultants can provide other services and even voluntary disclosure of conflicts where they exist. The Canadian Coalition for Good Governance (the CCGG) recommends that compensation committees employ external advisers to provide both perspective and expertise, but also recommends that they ensure that such advisors are independent of management. In this regard, the CCGG refers to the rules under the U.S. Sarbanes-Oxley Act applicable to hiring auditors for guidance, including that the chair of the compensation committee should lead the selection and be the client, that the consultant or other advisers should earn their fees largely from their compensation consulting services for the board, that other services should be pre-approved by the chair of the compensation committee, and that all amounts paid should be disclosed in the annual proxy statement together with fees paid for other pre-approved work.6 These requirements are similar to those prescribed under National Instrument 52-110 Audit Committees (NI 52-110) for external auditors, which also requires the audit committee to pre-approve all non-audit services to be provided by the issuer’s external auditor, subject to certain limited exceptions, and requires disclosure of any pre-approval policies and procedures that have been adopted and of the aggregate fees billed for the different types of services provided by the auditor.