Most Canadian public companies are facing unprecedented financial and market conditions and business challenges, and this has been reflected both in the results of operations in 2008 and in the outcomes under 2008’s compensation plans. Many previous equity grants are underwater, many performance metrics for 2008 cash incentive plans have not been met, and many participants in executive compensation plans are looking more fondly at their base salaries than may have been the case in prior years.

All in all, compensation committees and boards will have reviewed the results of 2008’s compensation plans and will have made their executive compensation plans for 2009 under radically different circumstances than in prior years.

Decisions on 2008 compensation and on plans for 2009 will now largely have been made, in light of the specific challenges facing each company. Reporting issuers have been considering the disclosure implications of each decision made under the new disclosure requirements applicable to reporting issuers in Canada.

We have set out below certain of the issues that our clients have found to be most challenging in preparing their executive compensation disclosures this year.

Disclosure of Changes to Compensation Plans in Light of Current Conditions

Disclosure of executive compensation by a public company is, generally, disclosure of what was paid in the previous year (and why it was paid) to certain executives. Those whose compensation must be disclosed are the Named Executive Officers (NEOs). This disclosure looks backwards, not forward. As a result, shareholders learn what their companies paid their NEOs last year ? and why ? but not what the company proposes to pay them this year. In light of significant changes in business conditions, many companies have looked very critically at how they are compensating all of their employees, including their NEOs, and as a result have made changes to their compensation plans for 2009.

The new Compensation Discussion and Analysis (CD&A) in respect of the previous fiscal year (2008) is required to be included in executive compensation disclosure for the first time this year. Generally, an explanation is required of why each element of compensation was paid to NEOs in 2008. Any change made to compensation plans for 2009 and later is not required to be disclosed in the current CD&A unless the change could affect a reasonable person’s understanding of the compensation paid in 2008. Since certain changes made to compensation plans for 2009 may well fall into this category, each such change needs to be considered from the perspective of whether a reasonable understanding of last year’s compensation could be affected by knowledge of the change.

In addition to this disclosure requirement, public companies may choose to use their CD&A disclosure as an opportunity to communicate with their shareholders just how the company has responded, and is responding, to business challenges and shareholder losses. As a result, reporting companies may want to consider:

  1. whether disclosure is required under the relevant rules (i.e., whether the information is necessary to understand the compensation provided in the prior fiscal year); and
  2. if disclosure is not required, whether it would be beneficial to demonstrate to shareholders the response being taken to the current economic challenges under the company’s compensation plans, or to advise shareholders of future changes.

Salary Freezes/Increases/Decreases

Many companies have frozen or at least moderated increases in base salaries for employees, including for NEOs. These changes may be in the context of more broadly based expense-reduction and cost-containment initiatives. Changes in base salaries have the following disclosure implications:

  • the total salary paid for 2008 must be disclosed;
  • a change to the salary of an NEO for 2009 must be disclosed if it is necessary to understand the compensation paid to the NEO for 2008; and
  • although not required, an issuer may wish to disclose changes to salary compensation for 2009 in order to show shareholders what actions the issuer is taking in response to the economic downturn.

In the CD&A, an issuer must discuss whether benchmarks were used to determine compensation. Specifically, it must disclose:

  • the companies that were selected for comparison (and the rationale for their selection);
  • how the benchmarks were used for setting executive compensation; and
  • why these benchmarks were used in setting compensation.

If benchmarks were used in setting compensation, including base salaries, for 2008, that must be disclosed. If changes have been made for 2009 in light of specific business challenges, the disclosure of the 2008 benchmarking may not reflect the basis upon which compensation for 2009 was set. If this is the case, issuers will need to consider adding an outline of changes made for 2009 to their disclosure of how they used benchmarks in 2008.

Cash Incentive Plans

We have seen a number of changes being made to cash incentive plans in the current downturn, such as:

  • exercises of discretion by compensation committees in scaling back bonuses if 2008 performance metrics were met or, more rarely, awarding bonuses if performance metrics were not met;
  • changes to performance metrics going forward to reflect changed business conditions (i.e., the increased use of qualitative performance metrics, as opposed to quantitative metrics, as the basis for compensation decisions); and
  • executives foregoing bonuses.

Many compensation committees have taken into account current economic conditions when making bonus decisions for 2008. In the CD&A, it should be disclosed whether the compensation committee had any discretion to set the bonus, or whether the NEO’s bonus was a strict entitlement. If discretion was used, issuers will also need to disclose:

  • the decision-making process;
  • the rationale behind the decision;
  • the factors considered; and
  • any differences in treatment between individual NEOs.

Underwater Equity-Based Incentives

In the past few years, equity-based incentives have become a much larger component of total compensation for many NEOs. This has been a response to numerous factors, including efforts to align NEO and shareholder interests. Just as many shareholders have seen their shares decline in value, so too many NEOs have seen the value of their equity-based compensation decline ? in many instances to a level where the current market price is below the exercise price for the securities in question. Before making any changes to equity-based incentives in response, issuers need to consider the objectives of their equity-based plans in the first place; to the extent that retention of NEOs was a major objective, those concerns may, at least temporarily, have lessened.

For a variety of reasons, issuers are considering a number of alternatives in response to underwater equity-based incentives. These include:

  1. repricing (i.e., reducing the exercise price of the options);
  2. exchanging options;
  3. converting existing stock options into other types of incentives;
  4. surrendering options with the possibility of re-granting later or replacing with other types of equity-based compensation (e.g., restricted stock);
  5. changing to performance vesting criteria / hurdles;
  6. changing to grant basis (to reduce numbers, to reduce burn rate, or to impose performance criteria for vesting);
  7. introducing new equity-based incentive plan; and
  8. making no changes.  

Unless necessary to understand the total compensation provided to NEOs in 2008, any changes implemented for 2009 will not require disclosure for 2008. However, issuers should consider that:

  • the TSX may require shareholder approval to amend a plan or outstanding options (including a cancellation and re-grant); and
  • institutional investors may have voting policies that may need to be considered.

An issuer may also wish to outline the difference between the value of the options on the grant date (as captured in the Summary Compensation Table), and the value of the options in the current economic situation. In many situations, this will show shareholders that the compensation the issuer had intended to give the NEOs (before the significant drop in share price) is not the value the NEOs have at the date of the disclosure. As shareholders have seen a significant decline in the value of their investments, this is a way for issuers to show that the incentives given to NEOs similarly reflect this loss.


Say-on-pay proposals have been gaining traction in recent months in Canada. At the recent annual meetings of the National Bank, Royal Bank, CIBC, Bank of Montreal, and Scotiabank, shareholder proposals calling for a non-binding advisory vote by shareholders on executive compensation were advanced, and achieved a majority of votes in favour. While not an issue for disclosure in most issuers’ proxy circulars this year, this is an issue boards of directors proactively need to consider for their 2010 annual meetings. For instance, both TMX Group Inc. and SunLife Financial Inc. have announced they will provide their shareholders with a non-binding advisory vote on executive compensation at their 2010 annual meetings. Executive compensation disclosure this year should be prepared in the expectation that shareholders may well have a say-on-pay vote in future years.

Other Issues

Other actions being considered by issuers include:

  • clawbacks of bonus payments or equity-based compensation;
  • incentive payout delays;
  • implementation of performance conditions on payouts;
  • pension plan changes; and
  • decreased perquisites.

Any of the above compensation changes for 2008 must be clearly outlined in the CD&A. In addition, any changes to compensation that are necessary to understand the total compensation for 2008 must be disclosed. As noted above, issuers may wish to disclose these changes to compensation plans going forward in order to inform their shareholders of the actions they are taking in light of the current financial challenges.

Finally, it should be noted that many of the actions discussed above have employment law consequences that must be considered before making any changes to a compensation plan. For example, if an NEO is entitled to a cash bonus without any discretion for the compensation committee to withhold it, the use of downward discretion could result in a finding of constructive dismissal.

Issuers that are finalizing their executive compensation disclosure may contact any of the authors with regard to these issues. In addition, issuers that are considering expense-reduction initiatives or other cost-containment initiatives may contact any of our firm’s labour and employment lawyers to discuss the employment law implications of those initiatives.