Compensation Committee

Responding to shareholders' demands for pay for performance

Compensation committees are changing. They are becoming much more active in directing and controlling compensation policies and practices. They also face an increasingly challenging environment in which to operate. On one hand, the competition for proven top talented people is tougher than ever before, so compensation practices need to be designed to attract, retain and motive the best people. At the same time, however, regulators and shareholders are demanding greater transparency and pay for performance accountability.

The SEC recently approved new rules regarding executive compensation disclosures. Canada is not far behind. The Canadian Securities Administrators released new rules for the disclosure of compensation practices in July 2011. These new requirements, which are included in amendments to the CSA's Form 51-102F6, Statement of Executive Compensation, come into effect for financial years ending on or after October 31, 2011. The amendments are intended to provide shareholders with greater insight and transparency into the company’s practices for tying managerial compensation to the company’s performance and to highlight any risks that may arise from the compensation plans adopted by the board of directors or compensation committee.

One of the key amendments is the additional requirement to disclose to shareholders whether the board of directors, or compensation committee, adequately considered the implications of the risks associated with the company’s compensation policies and practices. There is a requirement to disclose:

1. the extent and nature of the board of directors’ or compensation committee’s role in risk oversight of the company’s compensation policies and practices;
2. the practices used by the company to identify and mitigate compensation policies and practices that might encourage “inappropriate or excessive risks” by a named executive officer or individual at a principal business unit or division; and
3. any identified risks arising from the company’s compensation policies and practices that might reasonably have a material adverse effect on the company.

In addition to the above, the amendments introduced requirements regarding disclosure of compensation governance, greater details on the fees paid to outside compensation consultants and whether the members of management are permitted to purchase financial instruments designated to hedge or offset a decrease in the market value of securities granted as compensation or held by management.