New rules shine light on executive pay

U.S. SEC rules apply to some Canadian companies, but home-grown rules will soon follow

A number of Canadian companies may have to go back to the drawing board to rethink how they pay their executives in light of new disclosure rules in the United States that take effect this month.

The new rules, put in place by the Securities Exchange Commission (SEC), will affect some Canadian companies that are traded in stock exchanges on both sides of the border. Those companies that escape the reach of the SEC, however, had better prepare to comply with similar rules as the Canadian securities authorities are expected to follow suit in the new year.

The Canadian Securities Authority, an umbrella group of provincial securities regulators, has been redrafting compensation disclosure rules, and “although they don’t want to be exactly like the Americans, I know they’ll take a lot of what the SEC has published as their rules and Canadianize them,” said Bob Levasseur, a senior consultant at Watson Wyatt who specializes in executive compensation.

In the U.S., the new SEC rules, introduced this summer in a 436-page document, will put an end to the days when companies issued no more than a “boilerplate” statement explaining their executive compensation program, said Levasseur.

“Previously you could just make general statements about your executive compensation,” he said. “You could say it was market competitive but you didn’t have to say what your market comparators were and why you thought it was market competitive.”

With the new requirement for what’s called a “compensation discussion and analysis,” the SEC is expecting companies to discuss, in “plain English,” what their compensation program is expected to reward, what the elements of compensation are, why those elements were chosen and how the amounts for each element were determined.

“That in itself is going to force compensation committees to be much more thorough in terms of developing a compensation strategy,” said Levasseur. “They’ll have to articulate what the compensation strategy is as they’ve never had to before.”

On top of this discussion, companies will now have to disclose the total compensation, which includes not just pay and bonus but also stocks and stock options and their dollar value, non-equity incentives and perks worth more than $10,000.

Companies will also have to report the present value of the accumulated pension benefits, whether they’re registered or not, said Levasseur.

“We think that’s significant because, before, you could report supplementary plans in all sorts of ways and their value often wasn’t transparent,” he said. “Now (the SEC rules) are prescribing a methodology to do that. That too will show things that weren’t shown before.”

The whole exercise will force some companies to “rethink their compensation strategy, because oftentimes compensation plans, especially those with multiple parts, have just evolved over time and things don’t link together very well,” said Levasseur.

This is where the HR professional can step in and help the board of directors’ compensation committee think about, and articulate, compensation programs, he said.

“This is all very new. This is a level of disclosure that wasn’t required before, and it is going to send some organizations back to the drawing board.”

But Bill Mackenzie, policy consultant and director of Institutional Shareholder Services Canada, a Toronto-based company specializing in corporate governance issues, said he thinks that, ultimately, these disclosure rules will only partially address concerns about excessive executive pay.

Until Canada adopts rules to allow shareholders to have a say in executive compensation, as is the practice in the United Kingdom where shareholders can take a non-binding, advisory vote, there’s ultimately little option for shareholders to register their views on executive pay, he said.

Plus, sophisticated companies will know how to justify any level of pay, and eventually, the explanations and discussions now required will “just become a lot of noise,” said Mackenzie.

“Really the problem is the pay packages have gotten too big. I don’t think people would care about the link to performance if they weren’t too big,” he said.

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