Canadian Lawyer InHouse

JULY 2017 26 INHOUSE At a time when there is greater scrutiny of these plans by shareholders and the media, it has also resulted in more attention being paid to the message, as well as the actual compensation, by human resources and in- house legal departments of companies. Lynne Lacoursière, counsel at Torys LLP in Toronto, says good governance in - cludes being able to explain clearly the ra- tionale behind any executive compensation plan. "It is about engagement with share- holders," says Lacoursière, who heads the executive compensation practice at the firm. "How are we going to describe the narra- tive" when it comes to total payments for senior executives at a company? she adds. The likelihood of shareholder acceptance of compensation plans may often be more about other factors than the specific financial payouts, suggests Nadine Cote, founder of CSuite Law in Toronto. "It is not the amount per se; it is some perceived inequity," she says. "If the company has performed well and employees are treated well with no major layoffs, executive compensation will barely make the news," says Cote. In the case of Bombardier, the disclosure of the proposed bonuses for senior management followed layoffs and government assistance, she notes. Overall, though, Cote agrees there is now significantly more information about executive compensation included in a circular than ever before. "Compensation disclosure is extensive. There are much greater attempts to explain it," she says. The most likely circumstance for a company to receive bad publicity and criticism from shareholders is if there is significant compensation despite what appears to be a poor financial performance, says Scott Sweatman, a partner at Dentons LLP in Vancouver. "You want to avoid the risk of pay for failure," states Sweatman, who specializes in pension, benefits and executive compensation law. The potential for negative publicity is even greater if a publicly traded company has received some form of financial assistance from government, he points out. "You will be under the microscope," says Sweatman. Winning over shareholders is easier if not only there is transparency about the compensation but if it can objectively be shown to link pay to performance beyond that of short-term increases in share price, says Christina Medland, a lawyer and partner in the Toronto office of Meridian Compensation Partners LLC. "It is about providing shareholders with the information they need and told in a complete and coherent way," she says. The Canadian Securities Administrators enacted new rules around executive compensation disclosure five years ago. Since that time, most large publicly traded companies in Canada have provided more disclosure than what is required in these rules, states Medland. As well, she says there have been increased efforts to try to develop more "metrics" for assessing performance. "Lots of companies have multi metric plans," she explains. In the mining sector, for example, she says there might be bonuses for a good safety record or strengthening its environmental performance. "What is on the rise is a much more strategic focus on whether the incentive plans are aligned with the company's strategy. Do the payouts make sense for the business," says Medland. According to Lacoursière, there is a push toward trying to devise compensation that matches performance over a longer term, such as three years, rather than quarterly results. "You may also look at other operational metrics, such as cash flow," she says. A report issued last year by Lacoursière and two colleagues at Torys found that while "total shareholder return" is still the most significant factor for executive performance among S&P/TSX 60 index issuers, its weighting against other performance metrics is expected to decline in future years. Percentage bonuses must also be explicitly linked to performance. "You want to be sure there are not any guaranteed amounts," says Lacoursière. One of the difficulties, though, says Cote, is being able to come up with indicators that accurately and fairly measure the results of the most senior employees. "There is a lot that is not within the control of the executives," such as an unexpected downturn in a sector, she says. The added disclosure requirements, increased scrutiny and complexity of these plans have clearly added more responsibilities to human resources and legal departments within publicly traded companies. "If you are going to make changes [to compensation], you need to ask what are the disclosure requirements," says Lacoursière. This task is something that might need to be overseen not just before preparing the annual circular but throughout a fiscal year, she adds. The amount of disclosure that is required and the resources it may require can appear extensive, but it is always good corporate governance, says Sweatman. "Once it is started, it is actually not so onerous," he adds, suggesting that circumstances that ultimately result in bad publicity are usually a result of poor governance. If the company has performed well and employees are treated well with no major layoffs, executive compensation will barely make the news. NADINE COTE, CSuite Law

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