A look at trends in long-term incentive plans

April 16, 2018

While many employers offer a comparable pension or health benefits plan to all employees, where long-term incentives plans are available they usually vary by employee level.

A recent Willis Towers Watson survey of Canadian publicly traded companies with revenues exceeding $2 billion found 100 per cent of these companies’ chief executive officers and senior executives are eligible to receive long-term incentive plans. This compares to just 30 per cent of eligible salaried employees.

Looking more specifically at the type of plans, the survey found 95 per cent of these companies use performance share units, 85 per cent use stock options, 55 per cent use restricted share units and 15 per cent use other long-term incentive plans, such as performance stock options or deferred share units. 

“Stock options are still widespread but their prevalence within long-term incentive plans and the number of individuals eligible to receive them continues to decrease,” says Ryan Resch, managing director of executive compensation at Willis Towers Watson.

Indeed, performance share units now supersede stock options as the leading long-term equity-related compensation incentive plan among companies in the S&P/TSX 60 index, according to another recent survey by Willis Towers Watson.

David Crawford, a partner at Hugessen Consulting Inc. points to the continuing shift of power to shareholders in Canada by way of developments like individual director elections and say on pay, whereby a company’s shareholders have the right to vote on executive renumeration. “Many shareholders believe that incentives should be performance-based, and that stock options are not,” he says.

Compensation committees are listening. “Sophisticated employers want to align compensation with the interests of the enterprise,” says John Prezioso, an executive compensation and benefits partner at Brown Mills Klinck Prezioso LLP, a Toronto-based law boutique.

Considering long-term incentive plans for all employees, many large companies, including financial institutions and entities like WestJet Airlines Ltd., offer share purchase plans, but these shouldn’t be confused with stock options.

“Purchase plans supported by company contributions are not at all uncommon, but I haven’t seen true stock options or restricted share units as part of rank-and-file compensation packages,” says Elizabeth Boyd, an executive compensation partner at Blake Cassels & Graydon LLP in Toronto.

Resch is careful to point out that Willis Towers Watson’s data is based on broad general industry trends. “For example, in industries like high tech, oil and gas and energy, where cash may be at a premium, especially for smaller companies — the eligibility for equity-related compensation plans is broader and in some cases even covers all employees, albeit at lower salary levels than their public company counterparts.”

While statistics for smaller and private Canadian companies were not readily available, a Willis Towers Watson survey of privately-held U.S. companies found that about 60 percent of participants had long-term incentives, particularly the larger companies.

As well, the long-term incentive programs of private companies were very different from public company practices. Among other things, long-term incentive grant values were about 30 per cent lower; 80 per cent of long-term incentives were performance cash plans; and private companies were much less likely to use real stock or options or to use value-based performance measures.

Major similarities also exist, however, in the sense that both public and private companies tend to make long-term incentive grants annually, new performance cycles start annually and vesting tends to occur over three to four years.

Social Media Auto Publish Powered By : XYZScripts.com