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Article | Executive Pay Memo North America

Pay versus performance: Differences and implications for Canadian issuers

By Ming Young and Phil Yores, CPA, CA, MBA | November 21, 2023

We compare how pay for performance is disclosed in Canada versus the U.S. — and look ahead to potential future changes to Canadian disclosure rules. 
Executive Compensation

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.

Regulatory background

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.

Detailed requirements

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:

  • U.S. rules introduce the concept of compensation actually paid (CAP), which is a change in focus from the summary compensation table (SCT) definition of compensation. The new CAP definition of compensation affects the way that long-term incentive and pension values are calculated for pay versus performance.
  • The initial lookback period is three years for the first disclosure, increasing to five years over the subsequent two disclosures, eventually becoming a rolling five-year period. Smaller reporting companies must only disclose two years in the first year, transitioning to a rolling three-year disclosure thereafter.
  • The disclosure addresses performance against relative market and absolute company metrics. GAAP net income and total shareholder return are required measures for all companies. Additionally, full filers (i.e. a filer not eligible for reduced disclosure requirements under the SEC rules) must include total shareholder return for a peer group and a company selected measure, which represents the “most important” financial measure in “linking actual compensation to company performance for the most recently completed fiscal year” that isn’t otherwise reported in the table. The intent of this fulsome disclosure is to provide investors with a more comprehensive and standardized picture of compensation and performance alignment across companies.

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.

Preparing for the future

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:

  • Know where you stand. Review your current pay for performance disclosure and results to identify any obvious issues of concern.
  • Know what to expect. Expand your analysis to review U.S.-style measures and the related issues that come with them (practical and results-focused).
  • Be prepared. It might be a good time to review your current plan design, performance measures, target setting and outcomes considering your findings above.

Associate Director, Executive Compensation (Toronto)
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Senior Director, Executive Compensation & Board Advisory (Toronto)

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