On July 22, 2011, the Canadian Securities Administrators (CSA) published amendments to the executive compensation disclosure rules, which will come into force on October 31, 2011. The principal amendments will be made to Form 51-102F6 – Statement of Executive Compensation and consequential amendments will be made to National Instrument 51-102 – Continuous Disclosure Obligations, Form 58-101F1 – Corporate Governance Disclosure and Form 58-101F2 - Corporate Governance Disclosure (Venture Issuers) (collectively, the Amendments).
The Amendments are designed to provide investors with enhanced information about key risks, governance and compensation matters, and take into account executive compensation disclosure developments in the US and other foreign jurisdictions, as adapted for the Canadian marketplace. They follow a CSA staff review of executive compensation disclosure and public comments received on draft amendments published last year. In addition to introducing new disclosure requirements, the Amendments clarify certain existing requirements.
Issuers must comply with such rules for financial years ending on or after October 31, 2011. Hence, they will want to familiarize themselves with the new requirements now to ensure they comply with the new disclosure requirements next proxy season.
New compensation discussion and analysis (CD&A) disclosure
The Amendments include the following new disclosure requirements, which must be part of an issuer’s CD&A:
- Serious Prejudice Exemption. An issuer must explicitly disclose when it is relying on the serious prejudice exemption and explain why disclosing the relevant performance goal or similar condition would seriously prejudice its interests. The CSA is of the view that even if the disclosure of a target level itself may seriously prejudice the issuer’s interests in a particular case, disclosure of the metric itself would typically not.
- Risk Management and Compensation. To address the concern that compensation practices and policies may result in executives taking greater risks than appropriate, the CSA has introduced enhanced disclosure requirements regarding employee compensation policies and practices that create risks reasonably likely to have a material adverse effect on the issuer. An issuer must disclose that the board (or a committee established by the board) considered the risk implications of its compensation practices. The issuer must then disclose (i) the nature and extent of the board’s (or a committee of the board) role in the risk oversight of compensation policies and practices; and (ii) any practices used to identify and mitigate compensation policies and practices that could encourage a named executive officer or individual at a principal business unit or division to take inappropriate or excessive risks.
The Amendments also provide commentary to clarify that, if an issuer used any benchmarking in determining compensation or any element of compensation, the issuer should include the benchmark and describe why the benchmark group and selection criteria are considered relevant by the issuer. The Amendments contain examples of situations that could potentially encourage an executive officer to expose an issuer to inappropriate or excessive risk. Examples of compensation practices and policies the CSA cites as potentially encouraging officers to take inappropriate risks include arrangements at a principal business unit or for certain executive officers that differ from the rest of the compensation arrangements within the issuer, policies where the compensation paid to executive officers is a significant percentage of the issuer’s revenues, performance goal or conditional compensation arrangements that are heavily weighted to short-term objectives, and incentive plan awards that do not provide a maximum benefit or payout limit to executive officers. These examples are not exhaustive and the situations which may be of concern vary depending upon the nature of the issuer’s business and its compensation policies and practices.
- Hedging by Named Executive Officers and Directors. The CSA requires the issuer to disclose if any named executive officer or director is permitted to purchase financial instruments whose purpose is to hedge the risk of a decrease in value of any equity securities held by him or her.
- Compensation Committee and Governance. Issuers should describe any policies and practices adopted by the board of directors to determine the compensation for the issuer’s directors and executive officers. If an issuer has established a compensation committee, such issuer should describe the relevant experience of the committee members and the skills and responsibilities of the committee. The Amendments provide that issuers should also disclose the names of each compensation committee member and whether each member is independent or not. National Policy 58-201 Corporate Governance Guidelines currently provides non-mandatory guidance on governance practices and recommends a fully independent compensation committee.
- Disclosure of Fees Paid to Compensation Advisors. An issuer must disclose which compensation advisors (other than legal, accounting and tax advisors) have been retained by the issuer and describe their mandates and any other work they have performed for the issuer (including a breakdown of all fees paid to the compensation advisor for each service provided). The Amendments require the description of any other non-executive compensation services provided by the compensation advisor to not only the issuer, but also to its affiliated or subsidiary entities or to any of its directors or members of management. Finally, disclosure is required as to whether the board or the compensation committee must pre-approve such services.
- Currencies. Generally, amounts required by the Forms and tables must be in Canadian dollars or the currency used in the issuer’s financial statements. The Amendments provide some flexibility if the issuer’s performance goals and similar conditions disclosed in the CD&A are in a currency different than the currency presented in the prescribed tables, which may be for the purposes of consistency with financial reporting obligations. In addition, the Amendments specifically provide that for the share-based awards and the option-based awards table, if the option was granted in a different currency than that reported in the table, issuers should include a footnote specifying the currency and the exercise or base price.
Summary compensation table
- Format of the Summary Compensation Table (SCT). Issuers must make disclosure in accordance with the form and must not alter the presentation of the SCT by adding columns or other information. However, the CSA reiterates that issuers are allowed to provide additional tables and information, as a supplement to the SCT, if necessary to achieve the objective of executive compensation disclosure.
- Reconciliation of Grant Date Fair Value and Accounting Fair Value for Share-based and Option-based Awards. Issuers must disclose the fair value of the award on the grant date for share-based awards and option-based awards in the appropriate columns of the SCT. The fair value of the award on the grant date for these types of awards must be reported in the SCT in the year of grant irrespective of whether part or all of the award relates to multiple financial years, and payout is subject to performance goals and similar conditions, including vesting, to be applied in future financial years.
- Defined Benefit Plans Table. The Amendments include a new requirement to the effect that, for purposes of calculating the annual lifetime benefit payable at the end of the most recently completed financial year, issuers must assume that the NEO is eligible to receive payments or benefits at year end. The CSA also clarified that issuers may calculate the annual lifetime benefit payable in accordance with a formula included as commentary or in accordance with another formula if the issuer reasonably believes that the other formula produces a more meaningful calculation of the annual lifetime benefit payable at year end.
- Defined Contribution Plans Table. The amendments proposed in 2010 requested public comment on a requirement to disclose the non-compensatory amount for defined contribution plans, including employee contributions and regular investment earnings on employer and employee contributions. In response to public comment, this proposal has not been included in the Amendments.