Pensions & Benefits Law : Canada Pension & Benefits Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm: Post-Employment Benefits & Defined Benefit Plans : Toronto, New York

As described in a recent Osler Update, on July 21, 2010, sweeping financial reform was signed into U.S. law by President Obama. The new law affects more than just Wall Street financial institutions and contains new requirements on corporate governance, federal securities law and executive compensation provisions.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act, there are lots of new goodies on the executive compensation front. While most of the new compensation rules would not seem to apply to Canadian issuers (unless they are voluntarily complying with U.S. compensation disclosure rules instead of Canadian rules), they may indeed set a new standard for best practices because U.S. institutional investors will become accustomed to these requirements:

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One topic that has gripped North American companies since the recession began is the scrutiny of executive compensation. In response to this increased attention on executive compensation arrangements, employers have turned to self-reflection on difficult questions. Are incentive programs causing executives to take undue risks when making business-related decisions? How will an organization’s decisions regarding executive compensation be perceived if reported in the media? How should companies respond to significant decreases in the value of stock options? Should companies be able to re-negotiate executive bonus contracts in certain circumstances (e.g., where there is an impending insolvency)?

In a recent podcast, Osler partner Sandra Cohen of our New York office discusses the changing landscape of executive compensation and the outlook for 2010.

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The Canadian government recently tabled its budget for 2010, which proposes significant changes to the way in which both employees and employers are taxed in Canada on stock options, including:

• elimination of the deferral for public company stock options;
• restrictions on the deduction for the cash out of stock options; and
• special relief for tax deferral elections.

For more information on these changes to the taxation of employee stock option plans, see the Osler Update: Budget Briefing 2010. 

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Many compensation and pension actions require the approval of a company’s board of directors, or a committee of the board, and for good reason. Employers should not skimp on the finalization of corporate approval via signed and dated board or committee resolutions.

U.S. Case in Point: A federal judge in New York recently denied enhanced retirement benefits to the CFO that would have been due to him under the terms of an amended SERP because the board resolutions from seven years before his retirement seem to have never been finalized. The court ruled against the executive seeking benefits, despite the undisputed facts that the board had agreed “in concept” to the SERP enhancements and that two other executives had been paid out under the amended plan terms. The reason? Under the terms of the SERP, only the Board could amend the plan and the Board never formally approved the amendments.

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Executive compensation continues to make headlines in the U.S. To cut through the chaos of a seemingly endless stream of multiple legislative proposals, “Say on Pay” initiatives, and regulatory pronouncements on the topic, here is a brief summary of the two major developments released in the last week alone:

• Following instructions from the G-20 summit, the U.S. Federal Reserve has issued proposed guidelines for incentive compensation (PDF). This applies to banking organizations governed by the Fed, including U.S. operations of foreign banks with a branch, agency or commercial lending subsidiary in the U.S. 
• Special Master Kenneth Feinberg released determinations on 2009 compensation packages for top executives at seven firms, including AIG, Citigroup, Bank of America, Chrysler and Chrysler Financial, that received exceptional governmental assistance from the U.S. government.  As you have no doubt read in the media, he rejected proposals that he thought provided too much cash and he forced executives to take payments in company stock that must be held over the long term.

Even though many employers are not directly affected by these pronouncements, both of these developments will no doubt be of interest to Canadian financial institutions, as well as public companies more generally. In particular, companies that are seeking a framework for analyzing the link between compensation and risk-taking will be studying the principles applied in these announcements:

• Balanced Risk Taking: Sound incentive compensation plans should reward appropriate risk, not excessive risk. Examples of features to make compensation more sensitive to risk are: deferral of payment (and “clawbacks”), longer performance periods, and risk adjustment of awards (i.e., communicate to employees the ways in which awards will be reduced as risk increases).
• Risk Management and Effective Controls: Institute appropriate controls to maintain the integrity of risk management functions; revise arrangements as needed if payments do not appropriately reflect risk.
• Strong Corporate Governance: Provide resources to the board of directors so that it can actively oversee incentive compensation and follow a systematic approach to balanced compensation design.

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