U.S. reporting companies have released their first pay versus performance disclosures in their proxy statements in accordance with new rules adopted by the Securities and Exchange Commission (SEC) in 2022. While the requirements set out in the rules do not generally apply to Canadian companies (if they are considered foreign private issuers in the U.S. market or are not listed on a U.S. exchange), let’s reflect on how pay for performance is disclosed in Canada versus the U.S. and what the future might hold for Canadian disclosure rules.
The U.S. pay versus performance disclosure requirements were finalized by the SEC in August 2022. The journey started back in 2015 as part of the Dodd-Frank Act, but the pay versus performance rules were put on the back burner until 2022. The intent behind these regulations is to provide more transparency on the relationship between executive compensation and financial performance.
Canadian rules on disclosure of the relationship between pay and performance date back to 2008 when they became part of the broader refresh of the proxy disclosure rules and not driven by any legislative imperative. U.S. rules often find their way north of the country’s border in some form, so it is worthwhile for Canadian companies to monitor developments in the area.
The U.S. pay versus performance requirements are quite specific in terms of what elements are disclosed (compensation and performance are clearly defined) and the way they are disclosed (using specific tables). Some of the noteworthy requirements include the following:
In the spirit of principles-based regulations, Canadian rules are less prescriptive, requiring a discussion of how the trend in the total return graph compares with the trend in the compensation of the named executive officers over the same period but not specifying any tabular disclosure. The focus is on the relationship between SCT pay and total shareholder return. A simple narrative discussion of a few sentences is what many companies provide in their proxies to address this requirement.
While the Canadian Securities Administrators have not indicated a timeline for changing Canadian proxy disclosure rules, past rule changes have been influenced by U.S. regulations, so it’s not unreasonable to assume regulations such as U.S. pay versus performance requirements may be adopted in whole or in part in Canada in the future. Possible changes include broadening the definition of performance beyond share price/total return in assessing the relationship between executive pay and performance. Compensation used in the comparisons will likely move from an SCT definition (long-term incentive plan values at grant) to a realizable (in-the-money) or actually paid (value-at-vesting) definition. To support comparability across companies, future Canadian regulations may require a more standardized approach to presenting the pay and performance disclosure.
Suggested actions:
