Best practices in compensation disclosure 2007

Transcription

1 Best practices in compensation disclosure 2007 Executive compensation is one of the more complex issues dealt with by a board of directors. For shareholders to assess an issuer s compensation regime, we must understand how the compensation program works. To do so, issuers need to bring clarity to their executive compensation disclosure practices. Doug Pearce Chair, CCGG

2 Compiled by: Paul Schneider, Director of Research, Canadian Coalition for Good Governance Acknowledgements The Canadian Coalition for Good Governance would like to acknowledge Catherine Gordon and the team at SimpleLogic Inc. ( for consultation and assistance in the development of this document. Also, we recognize the contribution of Mr. Konstantin Chestopalov for his invaluable assistance in the researching for this document. About the Canadian Coalition for Good Governance The Canadian Coalition for Good Governance is made up of 48 of Canada s leading institutional investors, which, combined, have more than $1 trillion in assets under management. The Canadian Coalition for Good Governance was formed to promote good governance practices in the companies owned by our members. Membership in the CCGG includes a wide range of institutional investors - pension funds, mutual funds and third party money managers - who invest in the Canadian capital market. For more information: Paul Schneider Director of Research Canadian Coalition for Good Governance (416) paul_schneider@ccgg.ca Electronic copies of this document are available at Volume II September 2007 Canadian Coalition for Good Governance Page i

3 Table of Contents Section A Introduction The current status of executive compensation... 1 About this document... 2 Section B Compensation regime disclosure Disclosing executive compensation information within the annual proxy circular... 3 Section B.1 Build an independent compensation committee Best practice examples of Select committee members Best practice examples of Establish a committee work plan Best practice examples of Hold in camera committee meetings... 9 Section B.2 Develop an independent point of view Best practice examples of Retain compensation consultant Best practice examples of Disclose fees paid to compensation consultant Best practice examples of Do not rely just on compensation surveys Section B.3 Test pay to performance linkages Best practice examples of Relate pay to performance Best practice examples of Stress test pay packages Best practice examples of Reward extra compensation when earned Section B.4 Establish share ownership guidelines Best practice examples of Maintain an equity investment Best practice examples of Include hurdles and holds in option plans Best practice examples of Require pre-arranged trading plans Section B.5 Disclose the compensation regime Best practice examples of Disclose what was paid Best practice examples of Disclose contracts and policies Best practice examples of Disclose committee understanding of regime Best practice examples of Disclose future obligations Section C A guide to providing effective director disclosure Purpose of this guide Canadian Coalition for Good Governance Page ii

4 Index of companies with a best practice Ballard Power Systems Inc Bank of Montreal... 15, 30 Bombardier Inc Brookfield Asset Management... 5, 43, 51 Canadian Pacific Railway CIBC... 17, 22 CN... 41, 49 Compton Petroleum Enbridge Inc Fortis Inc Gildan Activewear Manulife Financial Methanex... 31, 44 National Bank... 18, 42 Nexen Inc , 47 Potash Corporation of Saskatchewan Sun Life Financial... 25, 33, 40 Talisman Energy TD Bank Financial Group... 27, 36 TELUS Corporation... 11, 34 TransCanada Corporation... 12, 29 WestJet Canadian Coalition for Good Governance Page iii

5 Canadian Coalition for Good Governance Members Acuity Investment Management Inc. Alberta Investment Management, Alberta Finance Alberta Teachers' Retirement Fund Board AMI Partners Inc. Aurion Capital Management Inc. Barclays Global Investors Canada Limited BMO Harris Investment Management Inc. British Columbia Investment Management Corporation (bcimc) Burgundy Asset Management Ltd. Canada Post Corporation Registered Pension Plan Colleges of Applied Arts and Technology Pension Plan (CAAT) Connor, Clark & Lunn Investment Management CPP Investment Board Ethical Funds Company (The) Fiducie Globale des Régimes de Retraite de la Société de transport de Montréal Fonds commun de placement des Régimes de retraite de l'université Laval Franklin Templeton Investments Corp. Greystone Managed Investments Inc. Heathbridge Capital Management Ltd. Hospitals of Ontario Pension Plan (HOOPP) Jarislowsky Fraser Limited J.P. Morgan Fleming Asset Management (Canada) Inc. KBSH Capital Management Inc. Leith Wheeler Investment Counsel Ltd. Lincluden Investment Management Mackenzie Financial Corporation McLean Budden Limited MD Management Limited MFC Global Investment Management New Brunswick Investment Management Corporation (NBIMC) Ontario Municipal Employees Retirement Board (OMERS) Ontario Pension Board Ontario Teachers' Pension Plan (Teachers') OPSEU Pension Trust Pembroke Management Ltd. Phillips, Hager & North Investment Management Ltd. Public Sector Pension Investment Board (PSP Investments) RBC Asset Management Inc. Scotia Cassels Investment Counsel Limited SEAMARK Asset Management Ltd. Signature Funds (CI Investments) Sionna Investment Managers Inc. Standard Life Investments Inc. State Street Canada TD Asset Management Inc. UBS Global Asset Management (Canada) Co. Workers' Compensation Board - Alberta York University Pension Fund Canadian Coalition for Good Governance Page iv

6 A. Introduction The current status of executive compensation In May 2004, shareholders at the annual meeting of UK pharmaceutical giant GlaxoSmithKline (GSK) voted against the pay package of its senior executives. This was an advisory vote (it was not binding) which the board could have ignored. However, the board heard the dissatisfaction of it owners and, in consultation with the major shareholders, made significant changes to its compensation regime. At issue was the golden parachute provision for CEO Dr. Jean-Pierre Garnier. Had the pay package been approved, Dr. Garnier would have been entitled to receive an amount in excess of $35 million ( 22 million) if his employment with GSK were terminated within the two-year term of his contract. Perhaps the events of the GSK annual meeting will be known as a defining moment for shareholders. Rather than grumbling and complaining about the ever-increasing levels of executive compensation, shareholders took action and succeeded in getting a company to modify its pay policies. Executive compensation has remained in the spotlight since that time. More and more, shareholders are trying to understand this very complex area, to slow down what they see as a runaway train. Recently, the Securities and Exchange Commission in the United States developed new rules to make the disclosure of executive compensation clear and complete. The goal is to improve disclosure so that investors will be able to better understand and assess the compensation regimes of the companies they invest in. The Canadian Securities Administrators recently announced that its own compensation disclosure guidelines that were out for comment will be revised and sent out again for comment. With this delay, it is now expected that the new compensation disclosure rules will not be put into force for year ends after June 28, 2008, at the earliest. Clearly, executive compensation and its disclosure will be a focus for regulators and shareholders for some time to come. Much research and effort has gone into trying to understand executive compensation and to assess its practices and disclosure. Studies conducted or commissioned by organizations such as The Ontario Teachers Pension Plan, The Clarkson Centre for Board Effectiveness and Business Ethics at the Joseph L. Rotman School of Management (University of Toronto) and the Canadian Coalition for Good Governance (CCGG) have tried to answer two fundamental questions: 1. Is there a definite link between pay and performance? 2. Are the current disclosure practices clear and complete? Unfortunately the answer to the above questions is not a resounding yes it is more a faint sometimes. The Canadian Coalition for Good Governance is convinced that shareholders will continue to focus on compensation, will expect issuers to create compensation packages that are linked to performance, and that this relationship, along with all other facets of the compensation regime, will be clearly described in public documents. Canadian Coalition for Good Governance Page 1

7 A. Introduction About this document This document is designed to improve the overall quality of executive compensation disclosure in annual proxy circulars. It is a guide to how and what to disclose in public documents it is not the definitive model of executive compensation disclosure. Section B, Compensation regime disclosure, discusses ideal disclosure based on the five guidelines in Good Governance Guidelines for Principled Executive Compensation. We have included some excellent examples of executive compensation disclosure we discovered during our review of the annual proxy circulars of over 150 issuers, including many best practices (those that meet all of the criteria set out in our five guidelines). The examples show how some companies have chosen to communicate with shareholders. You are encouraged to either adopt or adapt these disclosure practices. All of these examples meet our four criteria for truly effective disclosure: 1. easy to find 2. easy to understand 3. accurate and complete 4. given in context so that the information has meaning. Section C, A guide to providing best practice disclosure, is a checklist you can use to compare your current disclosure practices against the Coalition s best practices when you write your annual proxy circular. Canadian Coalition for Good Governance Page 2

8 B. Compensation regime disclosure Section B Compensation regime disclosure Disclosing executive compensation information within the annual proxy circular Shareholders need thorough disclosure of all aspects of the compensation regime to be able to adequately assess an issuer s compensation practices. In this section, we discuss executive compensation disclosure in five areas, based on the recommendations found in the Canadian Coalition for Good Governance publication Good Governance Guidelines for Principled Executive Compensation (June 2006): B.1. Build an independent compensation committee B.2. Develop an independent point of view B.3. Test pay to performance linkages B.4. Establish share ownership guidelines B.5. Disclose all facets of the compensation regime The examples we have included in each area are from our review of the executive compensation disclosure practices of over 150 companies. When we could not find a best practice example (one that meets all of the criteria set out in our five guidelines), we included an example that has most of the elements needed for best practice status. We hope that, in the next proxy circular, you will adapt your disclosure to address the deficiencies noted. As with our companion document, Best practices in director communication, we encourage companies to improve on the disclosure practices referenced in this document and to develop best practices for items where we could not find a best practice. Canadian Coalition for Good Governance Page 3

9 Section B.1 Build an independent compensation committee B.1 Build an independent compensation committee Observations this year Majority of issuers have appointed a compensation committee of solely independent directors. Many compensation committees have members with diverse backgrounds, however the level of compensation expertise is implied (e.g. by virtue of previous employment as a CEO) and not specifically disclosed. One issuer meet all the Best Practice considerations when describing the committee selection process. Many issuers have in camera meetings at each regularly scheduled Compensation Committee meeting. One issuer has outlined the Compensation Committee s work plan. Improvement opportunities Identify the compensation expertise of Compensation Committee member(s). Disclose the specific policy limiting the number of sitting CEOs on the Compensation Committee to no more than one-third of the total Compensation Committee membership. This section included the following best practice disclosures. 1. Select committee members Brookfield Asset Management (pages 5 and 6) 2. Establish committee work plan Ballard Power (pages 7 and 8) 3. Hold in camera committee meetings Fortis (page 9) Compton Petroleum (page 10) TELUS Corporation (page 11) TransCanada Corporation (page 12) Canadian Coalition for Good Governance Page 4

10 B.1 Build an independent compensation committee Section B.1.1 Select committee members Example 1: Brookfield Asset Management 2007 Proxy Circular, pages 15 and 29 Page 15 Committee completely independent Page 29 Committee members have compensation knowledge No more than one in three members can be a sitting CEO Canadian Coalition for Good Governance Page 5

11 B.1 Build an independent compensation committee Brookfield Asset Management s disclosure is a best practice Section B.1 Build an independent compensation committee Disclosure 1. Selecting committee members Do not have current company CEO on the compensation committee (to keep the committee independent) Choose committee members with diverse professional backgrounds that include specific expertise in executive compensation. Limit committee membership to no more than one-third sitting CEOs. Committee Independence: Many issuers are meeting the best practice criteria in this area. A number of issuers (too many to list in this document) have indicated that their compensation committee is completely independent. In addition, very few firms have included the CEO as a member of the committee. Canadian Coalition for Good Governance Page 6

12 B.1 Build an independent compensation committee Section B.1.2 Establish committee work plan Example 1: Ballard Power Systems Inc Proxy Circular, page II-54 Ballard has combined the committee functions of nomination and compensation into the Management Development, Nominating and Compensation Committee. We have included this committee s work plan below. While this work plan is not as prescriptive as the guidelines call for, it is a good example of an agenda and committee timelines. Continued on next page Canadian Coalition for Good Governance Page 7

13 B.1 Build an independent compensation committee Ballard does a good job identifying the tasks and timeline for the committee work Section B.1 Build an independent compensation committee Disclosure 2. Establish a committee work plan Establish a committee work plan. Partial (see above) Canadian Coalition for Good Governance Page 8

14 Section B.1.3 Hold in camera committee meetings Example 1: Fortis Inc Proxy Circular, page 26 B.1 Build an independent compensation committee In addition to indicating that the committees hold in camera meetings, Fortis is one of a growing number of companies that also discloses the number of in camera meetings held during the most recent fiscal year. In camera meetings held at every meeting. Number of in camera meetings held over the past year. Section B.1 Build an independent compensation committee 3. Hold in camera meetings Disclosure Hold in camera meetings at each committee meeting. Canadian Coalition for Good Governance Page 9

15 B.1 Build an independent compensation committee Example 2: Compton Petroleum 2007 Proxy Circular, page 26 Here is another way to detail the number of in camera meetings held. Section B.1 Build an independent compensation committee 3. Hold in camera meetings Disclosure Hold in camera meetings at each committee meeting. Canadian Coalition for Good Governance Page 10

16 B.1 Build an independent compensation committee Example 3: TELUS Corporation 2007 Proxy Circular, page 9 TELUS disclosure shows that in-camera sessions are held. Section B.1 Build an independent compensation committee 3. Hold in camera meetings Disclosure Hold in camera meetings at each committee meeting. Canadian Coalition for Good Governance Page 11

17 B.1 Build an independent compensation committee Example 4: TransCanada Corporation 2007 Proxy Circular, page 22 TransCanada uses a different format to disclosure the occurrence of in-camera sessions at every Compensation Committee meeting. In-camera meetings are held at the beginning and end of each Compensation Committee meeting Section B.1 Build an independent compensation committee 3. Hold in camera meetings Disclosure Hold in camera meetings at each committee meeting. Note: A large number of issues have identified the existence of in-camera meetings at each board meeting. The above is a sampling of the disclosures used to disclose the existence of incamera meetings. Canadian Coalition for Good Governance Page 12

18 Section B.2 Develop an independent point of view B.2 Develop an independent point of view Observations this year The majority of issuers have retained the services of a compensation consultant. Many companies report the fees paid to the compensation consultant for work performed at the request of the Compensation Committee as well as fees paid to the consultant for other compensation-related work completed. A large number of companies indicate that the Compensation Committee does not solely rely on surveys to determine compensation levels. The compensation consultant is not named in all instances, even though it is a CSA requirement. Not all issuers seek the advice of a compensation consultant. A select number of firms are disclosing the need for the Compensation Committee to pre-approve other work the compensation consultant performs at the request of management. Improvement opportunities Name the compensation consultant (CSA requirement). Seek the advice of a compensation consultant. If a committee chooses not to seek a consultant s advice, there should be an explanation accompanying the disclosure. Include in the committee mandate a provision that the Compensation Committee must pre-approve other work the compensation consultant performs at the request of management and disclose this requirement. This section included the following best practice disclosures. 1. Retain compensation consultant Sun Life Financial Inc. (page 14) Bank of Montreal (pages 15 and 16) Other Companies (page 16) 2. Disclose fees paid to compensation consultant CIBC (page 17) National Bank of Canada (page 18) Nexen Inc. (page 19) 3. Reliance on compensation surveys Enbridge Inc. (page 20) Canadian Coalition for Good Governance Page 13

19 B.2 Develop an independent point of view Section B.2.1 Retain a compensation consultant Example 1: Sun Life Financial Inc Proxy Circular, page 25 Independent compensation consultant named Additional work is to be pre-approved The consultant is independent Section B.2 Develop and independent point of view Disclosure 1. Retain a compensation consultant Retain independent compensation consultants Have the chair of the compensation committee pre-approve additional work by the consultant for the company Disclose the name of consulting firm Canadian Coalition for Good Governance Page 14

20 Section B.2.1 Retain a compensation consultant Example 2: Bank of Montreal 2007 Proxy Circular, pages 23 and 24 B.2 Develop an independent point of view Compensation consultant named Written pre-approval for other work performed by the consultant Full disclosure of the relationship with the consultant will be provided yearly Canadian Coalition for Good Governance Page 15

21 B.2 Develop an independent point of view Section B.2 Develop an independent point of view Disclosure 1. Retain a compensation consultant Retain independent compensation consultants Have the chair of the compensation committee pre-approve additional work by the consultant for the company Disclose the name of consulting firm Other Companies: There are many issuers who meet the best practice good disclosure in this area. They include: Agrium Inc. Cameco Canadian Pacific Railway Canadian Tire Celestica Goldcorp Nexen Inc. Potash Corporation of Saskatchewan Scotiabank Suncor Energy TELUS Corporation TransCanada Corporation Western Oil Sands Canadian Coalition for Good Governance Page 16

22 Section B.2.2 Disclose fees paid to compensation consultant Example 1: CIBC 2007 Proxy Circular, page 22 B.2 Develop an independent point of view CIBC is one of the few issuers who disclose the fees paid to the compensation consultant for work done by the consultant on behalf of both management and the committee. CIBC discloses fees paid for work done on behalf of the committee and management. Section B.2 Develop an independent point of view Disclosure 2. Disclose fees paid to compensation consultant Disclose total fees paid to compensation consultants for advice to the compensation committee Disclose fees paid for other pre-approved work Canadian Coalition for Good Governance Page 17

23 Section B.2.2 Disclose fees paid to compensation consultant Example 2: National Bank 2007 Proxy Circular, page 22 B.2 Develop an independent point of view Fees paid are presented in an easy to read chart. Many issuers reporting the fees paid to independent advisors include them within in the text used to describe the relationship between the Compensation Committee and the consultant. Section B.2 Develop an independent point of view Disclosure 2. Disclose fees paid to compensation consultant Disclose total fees paid to compensation consultants for advice to the compensation committee Disclose fees paid for other pre-approved work Canadian Coalition for Good Governance Page 18

24 Section B.2.2 Disclose fees paid to compensation consultant Example 3: Nexen Inc Proxy Circular, page 41 B.2 Develop an independent point of view Nexen s disclosure includes a parentage breakdown between fees for work done for the committee and fees for work done for management. Section B.2 Develop an independent point of view Disclosure 2. Disclose fees paid to compensation consultant Disclose total fees paid to compensation consultants for advice to the compensation committee Disclose fees paid for other pre-approved work Canadian Coalition for Good Governance Page 19

25 Section B.2.3 Do not rely just on compensation surveys Example 1: Enbridge Inc Proxy, page 23 B.2 Develop an independent point of view The committee does not make its decisions based only on compensation data provided by the consultant Section B.2 Develop an independent point of view Disclosure 3. Do not rely just on compensation surveys Compensation should not depend on surveys alone Other Companies: There are many other issuers reporting at the best practice level for not relying solely on compensation surveys. These companies include: Aber Diamond Abitibi Consolidated Axcan Pharmaceuticals Bombardier Cameco Canadian Pacific Railway Canadian Tire Celestica Inc. Ivanhoe Mines CIBC Enbridge Inc. First Calgary Petroleum IAMGold Kinross Gold Corporation Meridian Gold Methanex Nexen Inc. Sherritt International Suncor Energy Western Oil Sands Canadian Coalition for Good Governance Page 20

26 B.3 Test pay to performance linkages Section B.3 Test pay to performance linkages Observations this year Many companies include a detailed discussion of the various metrics used to link pay to performance. However, there is inconsistent disclosure as to how these performance metrics translate into the compensation amount rewarded. A limited number of companies indicate the compensation packages are stress tested Few companies indicate that bonus compensation is not rewarded if targets are not met. Some companies indicate that compensation levels can increase substantially if results are outstanding. Improvement opportunities Provide a direct link between the performance metrics and the compensations awarded. Indicate compensation packages are stress tested. Include within the compensation regime a provision to not allow bonus compensation if targets are not met. Outline how compensation is affected when company results are outstanding This section included the following best practice disclosures. 1. Relate pay to performance CIBC (pages 22 to 24) Sun Life Financial Inc. (pages 25 and 26) TD Bank Financial Group (pages 27 and 28) TransCanada Corporation (page 29) 2. Stress test pay packages Bank of Montreal (page 30) Methanex (page 31) Other Companies (page 31) 3. Reward extra compensation when earned Canadian Pacific Railway (page 32) Sun Life Financial (page 33) TELUS Corporation (page 34) Canadian Coalition for Good Governance Page 21

27 B.3 Test pay to performance linkages Section B.3.1 Relate pay to performance Example 1: CIBC 2007 Proxy Circular, pages 27 and 28 Performance objectives and results presented in an easy-to-read table Canadian Coalition for Good Governance Page 22

28 B.3 Test pay to performance linkages CIBC is one of a few companies to report the individual goals of the CEO NOTE: CIBC awards CEO bonuses one year in arrears Canadian Coalition for Good Governance Page 23

29 B.3 Test pay to performance linkages Section B.3 Test pay to performance linkages 1. Relate pay to performance Disclosure Relate pay to performance Base pay on performance compared to a peer group of companies Canadian Coalition for Good Governance Page 24

30 B.3 Test pay to performance linkages Section B.3.1 Relate pay to performance Example 2: Sun Life Financial Inc Proxy Circular, page 29 Objectives and achievement against the objectives are displayed in an easy to read chart. Canadian Coalition for Good Governance Page 25

31 B.3 Test pay to performance linkages Section B.3 Test pay to performance linkages 1. Relate pay to performance Disclosure Relate pay to performance Base pay on performance compared to a peer group of companies Canadian Coalition for Good Governance Page 26

32 B.3 Test pay to performance linkages Section B.3.1 Relate pay to performance Example 3: TD Bank Financial Group 2007 Proxy Circular, page 28 Objectives and achievement against the objectives are displayed in an easy to read chart. Canadian Coalition for Good Governance Page 27

33 B.3 Test pay to performance linkages Section B.3 Test pay to performance linkages 1. Relate pay to performance Disclosure Relate pay to performance Base pay on performance compared to a peer group of companies Canadian Coalition for Good Governance Page 28

34 B.3 Test pay to performance linkages Section B.3.1 Relate pay to performance Example 4: TransCanada Corporation 2007 Proxy Circular, page 24 Provides information on the comparator group. Section B.3 Test pay to performance linkages 1. Relate pay to performance Disclosure Relate pay to performance Base pay on performance compared to a peer group of companies Canadian Coalition for Good Governance Page 29

35 B.3 Test pay to performance linkages Section B.3.2 Stress test pay packages Example 1: Bank of Montreal 2007 Proxy Circular, page 26 Compensation models are run against a series of performance scenarios to check that the link between pay and performance is intact. Section B.3 Test pay to performance linkages Disclosure 2. Stress test pay packages Stress-test potential compensation packages Canadian Coalition for Good Governance Page 30

36 B.3 Test pay to performance linkages Section B.3.2 Stress test pay packages Example 2: Methanex 2007 Proxy Circular, page 32 Compensation packages are tested against future outcomes over 3 and 5 year time horizons on the CEO s pay as well as previously reported outstanding share units and options. Section B.3 Test pay to performance linkages Disclosure 2. Stress test pay packages Stress-test potential compensation packages Other Companies: Other companies reporting the stress-testing of compensation packages include: TD Bank Financial Group Manulife Financial TransCanada Corporation Sun Life Financial Brookfield Asset Management CN Canadian Pacific Railway Canadian Coalition for Good Governance Page 31

37 B.3 Test pay to performance linkages Section B.3.3 Reward extra compensation when earned Example 1: Canadian Pacific Railway 2007 Proxy Circular, page 26 No award if minimum performance targets not met Excess awards available if performance is exceptional award is capped Section B.3 Test pay to performance linkages Disclosure 3. Reward extra compensation when earned Stick to your guns do not award extra compensation if targets are missed Make sure the compensation package can reward exceptional performance Canadian Coalition for Good Governance Page 32

38 B.3 Test pay to performance linkages Section B.3.3 Reward extra compensation when earned Example 2: Sun Life Financial 2007 Proxy Circular, page 28 Sun Life s disclosure is similar to Canadian Pacific Railway s no award if targets are missed and the award for exceptional performance is capped Section B.3 Test pay to performance linkages Disclosure 3. Reward extra compensation when earned Stick to your guns do not award extra compensation if targets are missed Make sure the compensation package can reward exceptional performance Canadian Coalition for Good Governance Page 33

39 B.3 Test pay to performance linkages Section B.3.3 Reward extra compensation when earned Example 3: TELUS Corporation 2007 Proxy Circular, page 28 TELUS disclosure is similar to the previous two examples no award if targets are missed and the award for exceptional performance is capped Section B.3 Test pay to performance linkages Disclosure 3. Reward extra compensation when earned Stick to your guns do not award extra compensation if targets are missed Make sure the compensation package can reward exceptional performance Canadian Coalition for Good Governance Page 34

40 B.4 Establish share ownership guidelines Section B.4 Establish share ownership guidelines Observations this year Many companies have established share ownership guidelines for senior executives. Some issuers have option vesting provisions (hurdles) based on a performance measure or measures. However, some issuers retain a portion of options that vest on the passage of time. Few companies require executives to maintain an equity position in the firm after retirement. Some issuers require exercised options to be held for specified period of time (holding periods). A small number of companies have pre-arranged trading plans in place. Improvement opportunities Attach performance targets (hurdles) to all option grants. Prohibit the monetization of equity. Require the after-tax value of exercised options to be held in equity. Require executives to hold an equity position in the company for a time period once the individual leaves the company. Introduce pre-arranged trading plans. This section included the following best practice disclosures. 1. Maintain an equity investment TD Bank Financial Group (page 36) Other Companies (page 36) 2. Include hurdles and holds in option plans Hurdle: Potash Corporation of Saskatchewan (page 38) Prohibition on monetization of equity components, pre-vesting: o Executives: Sun Life Financial (page 40) o Directors: CN (page 41) and WestJet (page 41) o Other Companies (page 41) Hold: National Bank of Canada (page 42) and Brookfield Asset Management (page 43) 3. Require pre-arranged trading plans Methanex (page 44) Other Companies (page 44) Canadian Coalition for Good Governance Page 35

41 B.4 Establish share ownership guidelines Section B.4.1 Maintain an equity investment Example 1: TD Bank Financial Group 2006 Proxy Circular Ownership requirements extend beyond retirement Required ownership multiple Section B.4 Establish share ownership guidelines Disclosure 1. Maintain an equity investment Make the CEO share ownership requirement at least three times annual base salary CEO should maintain a significant equity position for at least a year following retirement Other Companies: The following companies are those that have executive share ownership requirements that extend into retirement. The number of years required to hold the shares after retirement is in brackets. Bank of Montreal (1 year) CIBC (2 years) Manulife Financial (1 year) Petro-Canada (1 year) Scotiabank (1 year) Canadian Coalition for Good Governance Page 36

42 B.4 Establish share ownership guidelines Section B.4.2 Include hurdles and holds in option plans Hurdles: Generally, companies with performance based options provide limited disclosure of the performance criteria or the resulting vesting schedule. Also, in the majority of these plans, a portion (usually not more than half) of all the options granted have performance vesting while the remaining options vest over time. To facilitate this split, companies will grant performance options along with stock options. The disclosure from Potash Corporation of Saskatchewan, below, is the best example we found of details about performance criteria and the formula used to determine the number of options that vest. In providing this example, the Coalition makes no comment as to the appropriateness of the measures used. However, we do believe that this level of detail gives shareholders enough information to assess the vesting provisions based on their own criteria. The most common form of performance vesting criteria found was the appreciation of the stock price. For options to vest, a target stock price appreciation had to be met. Fewer issuers adopted financial performance-related thresholds for performance vesting. Finally, within the group of companies with financially based targets, some also included share price appreciation in the determination. Prohibition on monetizing equity components pre-vesting: Companies have started to disclose a prohibition on monetizing equity components of compensation. The disclosure here is generally a straightforward statement similar to what is provided in the best practice example. Two issuers extended the prohibition of monetization to its directors. Holds: There are some companies that require exercised options to be held. The number of shares to be held is usually based on the after-tax value of the options exercised. Some issuers also allow executives to hold a portion of the options exercised and not 100% of the after-tax value. Holding periods are generally at least one year in length. Similar to the disclosure for the prohibition of monetization of equity, disclosures are straightforward and similar to what is presented in the best practice example. Canadian Coalition for Good Governance Page 37

43 B.4 Establish share ownership guidelines Section B.4.2 Include hurdles and holds in option plans Example of a hurdle: Potash Corporation of Saskatchewan 2007 Proxy Circular, 44 Calculation details Note: The Coalition makes no comment as to the appropriateness of the measures used. However, we do believe that this level of detail gives shareholders enough information to assess the vesting provisions based on their own criteria. Vesting schedule Canadian Coalition for Good Governance Page 38

44 B.4 Establish share ownership guidelines Section B.4 Establish share ownership guidelines Disclosure 2. Include hurdles and holds in options plans Base vesting hurdles for equity components of compensation on performance and not on the passage of time Do not allow equity components to be monetized before vesting Have a holding period for exercised options Canadian Coalition for Good Governance Page 39

45 B.4 Establish share ownership guidelines Section B.4.2 Include hurdles and holds in option plans Example of a Prohibition on Monetization (Executives): Sun Life Financial 2007 Proxy Circular, page 22 Monetization is prohibited for any insider subject to minimum share ownership requirements. Section B.4 Establish share ownership guidelines Disclosure 2. Include hurdles and holds in options plans Base vesting hurdles for equity components of compensation on performance and not on the passage of time Do not allow equity components to be monetized before vesting Have a holding period for exercised options Canadian Coalition for Good Governance Page 40

46 B.4 Establish share ownership guidelines Section B.4.2 Include hurdles and holds in option plans Example 1 of a Prohibition on Monetization (Directors): CN 2007 Proxy Circular, page 22 Directors are forbidden from participating in monetization activities. (Executives are also not permitted to engage in hedging activities.) Example 2 of a Prohibition on Monetization (Directors): WestJet 2007 Proxy Circular, page 34) Directors and employees are forbidden from participating in monetization activities. Other companies with a prohibition of monetization of equity: Brookfield Asset Management Canadian Pacific Railway CN (includes directors see page 42) Nortel Potash Corporation of Saskatchewan ShawCor TELUS Corporation TSX Group WestJet (includes directors see page 42) Canadian Coalition for Good Governance Page 41

47 B.4 Establish share ownership guidelines Section B.4.2 Include hurdles and holds in option plans Example 1 of a hold: National Bank of Canada 2007 Proxy Circular, page 24 Holding period of one year The market must be notified when the option will be exercised Section B.4 Establish share ownership guidelines Disclosure 2. Include hurdles and holds in options plans Base vesting hurdles for equity components of compensation on performance and not on the passage of time Do not allow equity components to be monetized before vesting Have a holding period for exercised options Canadian Coalition for Good Governance Page 42

48 B.4 Establish share ownership guidelines Section B.4.2 Include hurdles and holds in option plans Example 2 of a hold: Brookfield Asset Management 2007 Proxy Circular, page 19 Brookfield s policy includes options exercised upon termination of employment. Section B.4 Establish share ownership guidelines Disclosure 2. Include hurdles and holds in options plans Base vesting hurdles for equity components of compensation on performance and not on the passage of time Do not allow equity components to be monetized before vesting Have a holding period for exercised options Other companies having a holding period for exercised options: Bombardier Inc. Brookfield Properties Corporation Enbridge Inc. Norbord Inc. RONA Royal Bank of Canada ShawCor Ltd. Canadian Coalition for Good Governance Page 43

49 B.4 Establish share ownership guidelines Section B.4.3 Require pre-arranged trading plans Example 1: Methanex 2007 Proxy Circular, page 21 Provides details as to the contents of the press release announcing the sale of shares or the exercise of options. Section B.4 Establish share ownership guidelines Disclosure 3. Require pre-arranged trading plans Require a pre-arranged trading plan Other companies with pre-arranged trading plans: Brookfield Asset Management CIBC Compton Petroleum National Bank Nexen Inc. Sun Life Financial TD Bank Financial Group TELUS Corporation TSX Group Canadian Coalition for Good Governance Page 44

50 B.5 Disclose the compensation regime Section B.5 Disclose the compensation regime Observations this year While disclosure is improving, no company included disclosure that meets all aspects of the guideline. Issuers may be holding off on improving disclosure until the Canadian Securities Administrators (CSA) issues their rules (hopefully late 2007). More companies are moving to one number reporting of executive compensation, along with a three-year table. One example of a look-back, total-take was found (Gildan Activewear). A limited number of companies require repayment of performance-related compensation when there is a restatement. More companies are providing fuller disclosure about the employment contract. Very few compensation committees certify that they fully understand the long-term implications of the contract as well as the limitations that the contract may impose on changing the compensation mix. Few companies state that the compensation committee is required to attend the annual meeting to answer questions. More companies with SERP programs are disclosing details and the estimated annual pension benefit of executives. Overall pension disclosure remains below expectations. Improvement opportunities A significant number of companies need to bring more clarity to all areas of their compensation regime disclosure. This section included the following best practice disclosures. 1. Disclose what was paid Gildan Activewear (page 46) Nexen Inc. (page 47) Talisman Energy (page 48) 2. Disclose contracts and policies CN (pages 49 and 50) Brookfield Asset Management (page 51) Other Companies with Disgorgement Policies (page 51) 3. Disclose committee understanding of the compensation regime Bombardier Inc. (page 52) 4. Disclose future obligations (pensions and SERPs) Manulife Financial (pages 53 and 54) Canadian Coalition for Good Governance Page 45

51 B.5 Disclose the compensation regime Section B.5.1 Disclose what was paid Example 1: Gildan Activewear 2007 Proxy Circular, page 16 A summary of the CEO s pay versus increase in market capitalization since 1998 (example of a Look Back Total Take. Section B.5 Disclose all facets of the compensation regime 1. Disclose what was paid Disclosure Have a three year table showing full annual cost of CEO Include a Look back table showing total actual income of CEO since CEO s appointment Include Pay for performance disclosure that reviews conclusions from look back table to performance Canadian Coalition for Good Governance Page 46

52 B.5 Disclose the compensation regime Section B.5.1 Disclose what was paid Example 2: Nexen Inc Proxy Circular, page 64 Includes the growth in market capitalization which may provide a reference point when analyzing pay to performance. Compensation paid for the most current year and over the past three years is easy to find Section B.5 Disclose all facets of the compensation regime 1. Disclose what was paid Disclosure Have a three year table showing full annual cost of CEO Include a Look back table showing total actual income of CEO since CEO s appointment Include Pay for performance disclosure that reviews conclusions from look back table to performance Canadian Coalition for Good Governance Page 47

53 B.5 Disclose the compensation regime Section B.5.1 Disclose what was paid Example 3: Talisman Energy 2007 Proxy Circular, page 10 Provides performance metrics to assist in the evaluation of pay to performance. Section B.5 Disclose all facets of the compensation regime 1. Disclose what was paid Disclosure Have a three year table showing full annual cost of CEO Include a Look back table showing total actual income of CEO since CEO s appointment Include Pay for performance disclosure that reviews conclusions from look back table to performance Canadian Coalition for Good Governance Page 48

54 B.5 Disclose the compensation regime Section B.5.2 Disclose contracts and policies Example 1: CN (Employment Contract) 2007 Proxy Circular, pages 40 and 41 The employment contract was changed in November of Canadian Coalition for Good Governance Page 49

55 B.5 Disclose the compensation regime Section B.5 Disclose all facets of the compensation regime 1. Disclose what was paid Disclosure Have a policy that requires repayment of performance-related compensation when there is a restatement Disclose complete terms of senior executive employment agreements each time they are entered into or materially changed Fully disclose employment contract Canadian Coalition for Good Governance Page 50

56 B.5 Disclose the compensation regime Example 2: Brookfield Asset Management (Disgorgement) 2007 Proxy Circular, page 19 Reimbursement extends post-employment Provides examples of detrimental conduct. Section B.5 Disclose all facets of the compensation regime Disclosure 2. Disclose contracts and policies Have a policy that requires repayment of performance-related compensation when there is a restatement Disclose complete terms of senior executive employment agreements each time they are entered into or materially changed Fully disclose employment contract Other Companies with Disgorgement Policies: Brookfield Properties CIBC Cognos Inc. Nexen Inc. Nortel Canadian Coalition for Good Governance Page 51

57 B.5 Disclose the compensation regime Section B.5.3 Disclose committee understanding of compensation regime Example 1: Bombardier Inc Proxy Circular, page 26 Compensation committee is confident it understands the compensation regime, including the long-term implications and limitations of employment agreements, and will be available to answer questions at the annual meeting. Section B.5 Disclose all facets of the compensation regime Disclosure 3. Disclose committee understanding of the compensation regime Have the compensation committee certify that it fully understands the long-term implications of the contract and the limitations that the contract may impose on changing the compensation mix. Have the compensation committee available to answer questions at the annual general meeting. Canadian Coalition for Good Governance Page 52

58 B.5 Disclose the compensation regime Section B.5.4 Disclose future obligations The research has found that while disclosure of pensions is improving, there are improvement opportunities available to bring more clarity to the disclosure practices, particularly with regards to all aspects of the Supplemental Executive Retirement Pensions (SERPs). The following disclosure, while not as fulsome as desired, is provided to exemplify the best disclosure practices we have found to date with respect to pensions. The Coalition makes no comment as to the reasonableness of the amounts presented. Example 1: Manulife Financial 2006 Proxy Circular Cap SERP benefits at an absolute level Benefits have been capped as per the above table (Mr. D Alessandro s has been capped as well). Note that the caps came into effect in January Previous pension agreements have been grandfathered which could result in pension benefits exceeding the caps for certain executives enrolled in the plan prior to January Present value of SERP costs Not clear whether this liability includes past employees. Canadian Coalition for Good Governance Page 53

59 B.5 Disclose the compensation regime Changes in accrued SERP liability Manulife did not disclose the year over year change in SERP liability. Estimated annual pension benefit by executive Section B.5 Disclose all facets of the compensation regime 4. Disclose future obligations Disclosure Cap SERP pension benefits at an absolute level. Disclose the present value of total SERP costs (from past and present executives) Disclose changes in accrued SERP liability since last year Disclose estimated annual pension benefit at retirement by executive * * * Disclosure could be more fulsome. Canadian Coalition for Good Governance Page 54

60 C. Guide to providing effective compensation disclosure Section C A guide to providing effective compensation disclosure Purpose of this guide The following pages include a checklist that summarizes the components of best practice disclosure in all five sections. The checklist is designed to help to issuers in develop disclosure that is: 1. easy to find 2. easy to understand 3. accurate and complete 4. given in context so that the information has meaning. Canadian Coalition for Good Governance Page 55

61 C. Guide to providing effective compensation disclosure Section B.1 Build an independent compensation committee Disclosure 1. Selecting committee members Do not have current company CEO on the compensation committee (to keep the committee independent) Choose committee members with diverse professional backgrounds that include specific expertise in executive compensation. Limit committee membership to no more than one-third sitting CEOs. 2. Establish a committee work plan Establish a committee work plan. 3. Hold in camera meetings Hold in camera meetings at each committee meeting. Section B.2 Develop and independent point of view Disclosure 1. Retain a compensation consultant Retain independent compensation consultants. Have the chair of the compensation committee pre-approve additional work by the consultant for the company. Disclose the name of consulting firm. 2. Disclose fees paid to compensation consultant Disclose total fees paid to compensation consultants for advice to the compensation committee Disclose fees paid for other pre-approved work 3. Do not rely just on compensation surveys Compensation should not depend on surveys alone. Canadian Coalition for Good Governance Page 56

62 C. Guide to providing effective compensation disclosure Section B.3 Test pay to performance linkages Disclosure 1. Relate pay to performance Relate pay to performance. Base pay on performance compared to a peer group of companies. 2. Stress test pay packages Stress-test potential compensation packages. 3. Reward extra compensation when earned Stick to your guns do not award extra compensation if targets are missed. Make sure the compensation package can reward exceptional performance. Section B.4 Establish share ownership guidelines Disclosure 1. Maintain an equity investment Make the CEO share ownership requirement at least three times annual base salary. CEO should maintain a significant equity position for at least a year following retirement. 2. Include hurdles and holds in options plans Base vesting hurdles for equity components of compensation on performance and not on the passage of time. Do not allow equity components to be monetized before vesting. Have a holding period for exercised options. 3. Require a pre-arranged trading plan Require a pre-arranged trading plan. Canadian Coalition for Good Governance Page 57