Long-Term Incentive Practices in the TSX Mid-Cap
Executive Compensation Trends in the TSX Mid-Cap
Compensation Governance Partners aims to provide you with up-to-date executive compensation information and trends, via our proprietary compensation database (composed of fully evaluated and sized named executives from publicly-traded organizations).
In this 5-part series, we share our findings on executive compensation trends for companies ranked 100th to 200th within the S&P/TSX Composite Index using key statistics from the 2018 proxy season. As the 2019 proxy season progresses, we will update this series with commentary on year-over-year trends.
Long-term incentives (LTI) are payment for performance over a period of longer than one year, usually granted in the form of equity. Typically, publicly-traded organizations will use share-based awards or option-based awards to deliver LTI to encourage equity ownership among executives and provide greater potential upside than a straightforward cash plan.
In this article, we examine the LTI plans of the top 5 paid executives of 100 TSX mid-cap organizations and discuss the different types of LTI vehicles along with different elements of their design.
The most prevalent LTI vehicles among the TSX mid-cap for executive compensation are stock options (used by 63% of organizations), time-based (“restricted”) share units (65%), and performance-based share units (66%). A small number of organizations use long-term cash or do not provide LTI as a form of incentive pay.
Figure 1: LTI vehicle prevalence in the TSX mid-market
Stock Options
A stock option is the right to buy the underlying stock at a specific price as stated by the option. Options provide a more leveraged payout if the underlying stock overperforms, allowing for higher potential upside than other LTI vehicles. Stock options have historically been tax-advantageous over other LTI vehicles, but new limitations on the preferential tax treatment of options may result in a gradual shift away from options among larger TSX issuers.
Restricted Share Unit
A restricted share unit is a share unit that has a time-based condition, with no performance requirements for the executives.
Performance Share Unit
A performance share unit is a share unit that has a performance condition attached, with the intention that certain targets be achieved by the end of the performance period. The final number of performance share units received will vary based on the achievement of the performance conditions.
Long-Term Cash
Long-term cash awards are awards with a performance condition attached, similar to performance share units, but are settled in cash.
Other conditions can also be added to these LTI vehicles, depending on the desired effect:
1. Term
Stock options have a “term” which refers to the length of time after grant during which the option can be exercised. For example, an option that was awarded in January 2015 and expires in January 2020 has a term of 5 years. Terms typically range from 5 to 10 years in the TSX mid-cap.
2. Vesting Period
The “vesting period” of an LTI award refers to the amount of time that the award must be held for before it can be sold or exercised. An LTI award may vest either on a ratable / gradual basis (e.g. 1/3rd of the award vests on every anniversary of the grant date), or on a cliff basis (e.g. the award completely vests on the third anniversary of the grant date). Vesting periods typically range from 3 to 5 years, with 3 years being the most common due to its tax implications.
95% of stock option plans in the TSX mid-market used ratable vesting, 61% of RSU plans used cliff vesting, and 86% of PSU plans used cliff vesting (corresponding with a multi-year performance target).
3. Performance Conditions
Performance conditions can be attached to LTI awards to tie executive compensation to organizational performance, and to ensure that the incentive award is earned rather than “gifted”. The most commonly-used performance metric is total shareholder return relative to a peer group or index.
Performance conditions are typically seen on performance share units and long-term cash, and can also be attached to stock options. However, performance conditions on stock options are very uncommon in Canada.
Authors
Eddington Ruiz, Associate
→ eruiz@compgovpartners.com
Marlene Georges, Principal
→ mgeorges@compgovpartners.com