On September 18, 2008 the Canadian Securities Administrators (“CSA”) adopted an amended Form 51-102F6- Statement of Executive Compensation, which will be effective for financial years ending on or after December 31, 2008. The objective of the amendments is to bring compensation disclosure in line with current compensation practices, which have become considerably more complex since 1994 when the disclosure of executive compensation was first required.
The amended form maintains the requirement to disclose compensation of the issuer’s CEO, CFO and the next three highest paid executives whose total compensation is greater than $150,000 (each an “NEO”); however, the NEO’s total compensation must now be disclosed, rather than merely salary and bonus.
The most significant changes in the amended form are:
- the addition of Compensation Discussion and Analysis (“CD&A”), which requires issuers to provide a detailed description of their compensation practices in narrative form,
- an overhauled Summary Compensation Table (“SCT”), which provides a clearer description of each discrete element of compensation, and
- more detailed requirements with respect to pension compensation and director compensation.
As well as providing a brief summary of the significant changes listed above, this bulletin also highlights a few of the significant differences between the requirements of the amended Form 51- 102F6 and the current executive compensation disclosure regime in the United States applicable to U.S. “domestic issuers”1, which was adopted by the Securities and Exchange Commission (“SEC”) in 2006.
Compensation Discussion and Analysis
CD&A replaces the Report on Executive Compensation.
Under the old form, issuers were required to describe the policies of their compensation committee. The CD&A, on the other hand, is intended to provide investors with a narrative overview of the issuer’s executive compensation practices that will put into perspective the detailed disclosure that follows.
Issuers will now be required to disclose all elements of compensation and provide sufficient detail for each element so that a “reasonable person applying reasonable effort” would understand the information disclosed elsewhere in the form.
The CSA recommend including, as applicable, details such as:
- the objectives of the compensation program and what it is intended to reward,
- how the amount is determined and any formula used to calculate the amount,
- benchmarks against which the executive is measured, including the companies included in the benchmark and their selection criteria,
- performance goals that are based on clearly identifiable measures such as the issuer’s share price or earnings per share, and
- how each element fits into the issuer’s overall compensation objectives.
Issuers are not required to disclose performance goals in connection with specific quantitative or qualitative performance-related factors where to do so would prejudice the issuer’s interests. Issuers that omit such goals must nevertheless disclose the percentage of an NEO’s compensation related to the undisclosed information and the likelihood the undisclosed goal will be achieved.
The U.S. CD&A requirement is substantially similar. One significant difference is that the CD&A mandated by the SEC is subject to CEO and CFO certification under the Sarbanes-Oxley Act of 2002, whereas the Canadian securities commissions have not imposed such a requirement. In addition, under U.S. rules many U.S. “small reporting issuers” with a market capitalization of less than U.S.$75 million are not required to provide CD&A.
Changes to Summary Compensation Table
The new SCT separates each element of executive compensation in an effort to accurately describe issuers’ increasingly complex compensation practices.
The new SCT replaces the “Bonus” column of the old SCT with the column “Non-equity incentive plan compensation”. Like the old column, the new column asks issuers to disclose both discretionary and performance goal-based incentive awards. The difference, however, is that disclosure is now broken down into two sub-columns: annual plans and longterm plans. Compensation related to the reporting year, whether it be discretionary or performance goal-based, is disclosed under the annual subcolumn, while compensation related to longer periods is disclosed under the long-term sub-column. In addition, issuers are now required to include executives’ pension entitlement as an element of compensation. A column setting out the executive’s total compensation has also been added.
The new SCT requires that equity compensation be valued at fair value as of the grant date. This differs from the SEC’s approach, which requires the issuer to disclose the compensation cost of the equity awards over the executive’s relevant service period as recognized for financial reporting purposes. The CSA originally proposed to follow the SEC approach, but concern was expressed that amortizing the fair value amount (so as to obtain the accounting compensation expense) might result in negative compensation amounts in some cases.
The method +of valuing pension benefits (both in the SCT and in the Pension Plan Benefits section discussed below) was also revised. The CSA’s original proposal required issuers to disclose the change in actuarial value of an NEO’s pension benefits, which combines compensatory and noncompensatory amounts. The new SCT, however, requires the inclusion of only compensatory values, which are comprised of the service costs and other compensatory amounts such as benefit enhancements.
Pension Plan Benefits
Pension plan benefits disclosure has undergone significant change. The old form required disclosure regarding the issuer’s plan as a whole and described the entitlement of employees based on tenure. The old approach was criticized because it did not clearly reveal the benefit entitlement of specific NEOs. The amended form requires disclosure regarding each NEO individually and describes his or her entitlement under the plan at the beginning and end of the year, calculated on the basis used for financial statement reporting purposes.
The amended form has also expanded the scope of pension benefits disclosure. While the old form only required disclosure with respect to defined benefit plans, the amended form requires disclosure regarding defined contribution plans as well. Compensatory elements (e.g. service cost for the current year) must be disclosed separately from noncompensatory elements (e.g. changing costs due to changing interest rates). Issuers are also required to provide a narrative explaining any factors necessary to understand the disclosure in the tables.
As discussed above, under the Canadian regime benefits are valued at cost, whereas the U.S. rules require that the benefits be valued at the NEO’s actuarial value of the accumulated benefit. The amended form nevertheless requires disclosure of non-compensatory amounts, but separately from compensatory amounts.
The disclosure standards for director compensation have also been amended. While the old form merely required a narrative describing director compensation, the amended form requires issuers to present both a table (almost identical to the SCT) and a narrative explaining the table.
This reflects the fact that, like executive compensation, director compensation has become increasingly complex in recent years. The amended form elicits all the same information as the old form, but increases transparency by breaking down the compensation into its discrete elements.
Companies Reporting in the United States
The CSA has not changed the exemption available to SEC issuers. SEC issuers may continue to satisfy the requirements of the form by complying with the SEC compensation disclosure regime currently in place.
The amended form applies to disclosure for financial years ending on or after December 31, 2008, and is therefore relevant to the 2009 proxy season. Preparing CD&A for the first time may be difficult and time-consuming, particularly for issuers with complicated compensation structures. In that regard, new information may need to be compiled and narrative descriptions developed. Accordingly, issuers should consult with their accountants, actuaries and legal counsel at an early stage to ensure that their compensation disclosure is responsive to the amended form’s requirements.