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" will review the new disclosure requirements as they affect the principle of benchmarking.
Developing an appropriate compensation package does not stop at pay-for-performance considerations. Once a company has determined the types of performance that it seeks to reward, there remains the challenge of measuring performance to determine if and when rewardable goals have been attained, and when attained, how they should be rewarded. For the purpose of setting performance targets, companies can look to comparable internal or external peer groups (i.e. other similarly situated companies) or forecasted budgets. Analysis based on peer group evaluation, or benchmarking as it is referred to in some circumstances, can be useful to the development of compensation packages in a number of different ways. In relation to performance targets, peer group analysis can be used to determine the appropriate target levels to award. While companies may primarily rely on internal budgets for these numbers, setting targets relative to peer group performance can be useful in circumstances of economic uncertainty and instability, where external market forces might have an unexpected impact on industry performance in general.
The more common use of benchmarking is the use of peer group analysis to determine the appropriate elements of compensation and the levels at which they should be paid out. Under the New Disclosure Requirements, CD&A requires disclosure of any benchmarks used for compensation purposes, explaining the different elements of the benchmark relied upon and identifying both the companies included in the benchmark group and the selection criteria.1 Boards and compensation committees should keep this in mind when undertaking their benchmarking exercises. This may be a good opportunity to revisit the rationale behind past practices and to consider alternatives that may be appropriate, including internal pay equity benchmarking as well as analysis based on both short term and long term comparisons. While benchmarking is useful and common in compensation analysis, some experts are of the view that benchmarks should be viewed as a basis for determining compensation levels and not as the final targets themselves. Factors unique to the business enterprise need to be carefully considered in adjusting and evaluating benchmarks, especially given that current economic conditions and market responses to those conditions represent different challenges for different industries and participants within an industry. The CD&A imposes an increased requirement to make disclosure, but also provides an opportunity to explain how a company has considered factors specific to it in tailoring the benchmark appropriately.