Canada: Executive Compensation Disclosure Update

The Canadian Securities Administrators published a request for comments on a proposed replacement for Form 51-102F6 Statement of Executive Compensation (the Proposed Form). The Proposed Form would expand disclosure of executive compensation in key areas. The stated purpose of the changes is to improve the quality and transparency of executive compensation disclosure, and to present executive compensation information in a more meaningful way. The current Form 51-102F6 has been in place in substantially the same form since 1994. In the fall of 2006, the U.S. Securities and Exchange Commission adopted new rules for executive compensation disclosure, and the Proposed Form largely follows the SEC rules, although there are notable differences. The following will discuss some of the more significant changes being proposed.

The Proposed Form includes some changes to definitions and general provisions. The definition of "incentive plan" will be revised to include any plan that provides compensation intended to serve as an incentive for performance over a specified period. As a result, some items, such as bonuses based on pre-determined criteria, that previously would have been included in the bonus column will now belong in the non-equity incentive plan column. Items included in the bonus column will be limited to discretionary items that do not involve any predetermined performance criteria.

The definition of "NEO" or "named executive officer" will essentially remain the same, and will include the chief executive officer, chief financial officer and up to three other executive officers whose total compensation is greater than $150,000 per annum. Note, however, that this measurement will now be determined based on total compensation, rather than on salary and bonus alone.

One of the key changes in the Proposed Form is the introduction of a compensation discussion and analysis section, or CD&A, which will disclose the rationale for specific compensation programs for executives. The CD&A requires a discussion and analysis of executive compensation provided to NEOs in the most recently completed financial year. The Proposed Form lists six key principles that companies must discuss and also includes examples of the types of issues that companies should consider addressing. The intention is that the CD&A will provide meaningful analysis of factors relevant to actual compensation decisions, and therefore boilerplate language is to be avoided.

A performance graph is to be included in the CD&A for non-venture issuers . The performance graph requirement is similar to the current requirement for performance graphs and must show cumulative total shareholder return over the last five fiscal years compared to cumulative total return of at least one broad equity market index. However, the Proposed Form requires an additional level of analysis to explain how the trend shown in the graph compares to the trend in the company’s compensation of executives over the same period.

Companies will also be required to disclose specific quantitative and qualitative performance- related factors or targets for NEOs, unless this would result in competitive harm to the company. The example provided is that a target based on an objective measure such as stock price should be disclosed, but if the target is more subjective, then the company can provide a narrative description of the target rather than a specific figure.

The CD&A must also disclose practices related to the granting of options and whether executives are involved in determining who is awarded options.

There are a number of key changes in the summary compensation table which must now include all equity compensation on the basis of compensation costs of the awards as reflected in the company’s financial statements.

The summary compensation table includes compensation of NEOs for the last three completed fiscal years. It is to be accompanied by a narrative description of any material factors necessary to understand the information in the table. In addition to columns for salary and bonus, the table will include columns for stock awards, option awards and non-equity incentive plan compensation. These columns relate to equity and other plan-based awards, and capture the dollar value of each award recognized for financial statement reporting purposes on the date earned, instead of the number of securities granted as currently required. The stock awards column includes instruments such as restricted stock, restricted stock units, phantom stock or units and similar stock-related awards that derive their value from equity securities or are settled by the issuance of equity securities. The option awards column includes options, stock appreciation rights and equity-based compensation instruments that have option-like features. The value disclosed is the compensation cost of option awards as they vest over the requisite service period.

The next column in the summary compensation table is for non-equity incentive plans, which will provide disclosure of the dollar value of all other amounts earned through non-equity incentive plans.

Another new column proposed for the summary compensation table is for changes in pension values. Companies will be required to disclose the increase in the actuarial present value of the NEO’s accumulated benefit under all defined benefit and actuarial pension plans, including supplemental plans. Amounts in this column are included in the total compensation number, but are excluded from the calculation of total compensation for purposes of determining the company’s highest paid executive officers.

The "all other compensation" column discloses perquisites and other personal benefits and all items that do not fit under any other column, including amounts paid to a NEO at or following termination. The threshold for disclosure of these items has not changed: disclosure is required unless the aggregate of all perks and personal benefits is less than $50,000 and 10% of total annual salary and bonus, and each perk or personal benefit exceeding 25% of the total must be identified. Note that this is an area where the Proposed Form differs from the SEC approach, as the SEC lowered its disclosure threshold for perquisites to $10,000.

Another significant change to the summary compensation table is the inclusion of a total compensation column. This column discloses the aggregate of the total dollar value of each item quantified in the other columns. Companies will be required to determine the fair value of all non-cash forms of compensation in order to complete the column.

Immediately following the summary compensation table, companies will be required to disclose the value of all stock and options awarded to each NEO during the last fiscal year. The value to be disclosed is the dollar value of each award on the date of grant.

The Proposed Form introduces two new tables. The first table deals with equity awards and provides information on outstanding options, the value of unexercised inthe- money options and information on outstanding stock awards. The second new table will show any amounts a NEO realized during the year from exercising options and from the vesting of stock and similar awards. The approach differs from the SEC approach, in that the SEC tables require the inclusion of greater detail.

Companies will be required to explain, in narrative form, the material terms of all awards, both equity and non-equity. Information about terms of options and awards will be disclosed in the tables. In addition, companies must also disclose information about non-equity incentive plan awards, including information on estimated future payouts under equity awards. This approach again differs from the SEC approach, which requires the inclusion of greater detail.

The Proposed Form will also require the disclosure of details of all defined benefit retirement plans, including the present value of accumulated benefits. The SEC requires new disclosure of deferred compensation and defined contribution plans in a table. The Proposed Form does not contemplate requiring disclosure in a table form, but companies will be required to describe the material terms of these plans in narrative form.

Companies will be required to provide detailed disclosure of payments made to NEOs that are related to their termination or a change of control of the company. The company is to provide estimated annual payments and benefits that NEOs would receive under various termination scenarios. These estimates are to be based on assumptions that the triggering event took place on the last business day of the company’s last completed financial year, and that the price per share was the closing market price on that day.

Another significant addition is the requirement for companies to prepare a table for director compensation disclosure, similar to the summary compensation table for executives. The same disclosure concerning equity-based and plan-based awards as required for NEOs will be required for directors.

The Proposed Form provides that SEC companies will be permitted to satisfy the requirements of the SEC form. Venture issuers will generally be subject to the same requirements as non-venture issuers, other than with respect to the performance graph.

The intention is that the Proposed Form will be in effect for financial years ending on or after December 31, 2007.

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