It’s one of the biggest “ouch” issues in executive compensation. What do the folks in the corner offices have to disclose about their pay packages, and to whom?

As in many matters of this kind, the U.S. Securities and Exchange Commission is way out in front, updating its executive compensation disclosure policy at the beginning of this year. That has created headaches for the 300 or so Canadian companies that also list in the U.S., especially since the Canadian Securities Administrators — as John Hughes, associate partner at Deloitte & Touche LLP in Toronto, says — is “behind the eight ball.” And the CSA is probably a year away from finalizing its policy.

Current Canadian disclosure requirements came into effect in 1994 and the CSA has been in the process of updating them for some time. On March 29, it published for comment proposed changes to its executive compensation disclosure policy 51-102F6. The changes were intended to bring Canadian policy in line with the new SEC rules. They included, among other items: listing equity compensation in dollar terms — not as number of shares, as is the current practice; and providing a compensation discussion and analysis that discloses payments made on termination and changes in control.

During the 90-day comment period, the CSA received more than 40 letters. The responses reflected a broad consensus that the proposed changes were not the best course of action for Canadian issuers or shareholders. The biggest stumbling block was the requirement that the value of options be recorded as a dollar value rather than in number of shares. But having pressed for almost half a year for changes to Canadian disclosure policy that would bring it in line with the U.S., the near unanimous objections by Canadian companies placed regulators “between a rock and a hard place,” says Hughes, “given how much investing is cross-border.”

While the proposal concerning options raised widespread objections, most of the others did not. Shareholders would be well served by “good narrative information,” says Hughes, as with the proposed CD&A or by clearer tables.

Where does this leave the CSA? No one wants to see it make changes piecemeal. “We would be facing policy changes every year for the next three years,” says Lisa Slipp, a worldwide partner of executive remuneration at Mercer Human Resources Consulting in Toronto.

Bill Mackenzie, director of special projects at the Canadian Coalition for Good Governance in Toronto, hopes the harmonization delay will at least help the CSA get it right: “If we do it right, one delay is OK.”

Indeed, in Slipp’s view, the new proposals are a step backward: “[Canadian issuers are] already performing well beyond the requirements.”

Others agree. Bob Levasseur, senior consultant on executive com-pensation at Watson Wyatt Worldwide, says the SEC’s changes “did not provide a lot of direction. Issuers would have liked a clearer direction.”

That is something of an understatement. Many issuers took umbrage at the proposals, particularly at the CD&A required by the SEC; Hughes calls that “a challenge that people didn’t know how to answer.”

While SEC chairman Christopher Cox talked about keeping disclosure principles-based and accessible, says Hughes, the litigious environment and compliance requirements in the U.S. meant that many issuers, rather than embracing the idea of accessibility, just gave it to their lawyers. The resulting documents contained legalistic language and typically expanded to a bloated 30 or 40 pages, upending the central principle of accessibility for shareholders.

Some Canadian issuers are dealing with the harmonization delay by taking the principles of the proposed changes into account, even if the wording has yet to be determined. “The fact that it is coming has people doing the right thing,” says Mackenzie. “The technicalities aren’t there, but the wheels are in motion.”

In their management information circulars for the 2006 fiscal year, Canada’s major banks included separate compensation summary tables and the CD&A, as proposed by the CSA and required by the SEC. Other companies, such as Barrick Gold Corp., list options in both dollar value and number of options.

According to Mackenzie, the ultimate goals around disclosure should include: the connection between executive pay and performance; what the board intends to pay; and what accomplishments the board intends to reward. The CCGG would like to see grant-date valuation replace fiscal yearend valuation, reflecting the effect of the market on a stock price instead of a compensation committee’s intentions.

@page_break@Ken Hugessen, co-founder of Huges-sen Consulting Inc. , which works exclusively for boards of directors, compensation committees and senior management on matters relating to executive compensation, sees a broad consensus in the objections to the proposed CSA policy. “All say exactly the same thing, and the impression is that the SEC screwed up,” he says. Canadian companies are not prepared to disclose their performance targets even if the SEC sets the bar. For Hugessen, this is the biggest philosophical issue. Many U.S. firms did not publish their targets, citing it as a matter of “competitive harm.”

Hugessen suspects, however, that the reliance on legal language in many of these documents will shift the debate from the boardroom to the courtroom. According to Hugessen, the CSA is paying close attention to the ongoing debate in the U.S., looking for a “more kindly, more Canadian” way to introduce the policy north of the border.

While Canadian issuers may not be thrilled with the SEC’s changes, the SEC appears to be standing by them. The division of corporate finance completed its initial review of 350 companies’ compliance with the 2006 executive compensation policy. It calls for “shorter, crisper and clearer” narrative for the CD&A and more readable and larger fonts in summary tables. Instead of backpedalling in areas in which companies showed resistance, the SEC took the opportunity to address the companies that deviated from the spirit of the 2006 policy and fine-tune its own expectations.

If Canadian issuers were waiting to see if the SEC might back away from aspects of the policy that faced resistance, that hope is fading fast. On the upside, the CSA has another year to decide on the best structure for parallel Canadian policies. IE