At large companies, options simply may no longer provide enough financial benefit for executives to justify the increasingly poor reputation they have among many big investors and governance advocates.Stock options – for years, the primary way companies tied executive pay to performance – are increasingly out of favour at Canada’s biggest corporations.
In 2018, options made up 33 per cent of the value of stock-based compensation for the typical executive in the Globe survey. That figure fell to 20 per cent in each of 2022 and 2023. It was not always so. Decades ago, salaries and cash bonuses made up the bulk of CEO compensation. Critics said the top dogs were making bank no matter how poorly a company’s shareholders fared.
“It’s a very imperfect vehicle,” said Catherine McCall, CEO of the Canadian Coalition for Good Governance, an alliance of large institutional investors. “The linkage it creates isn’t perfect because there is no downside to options. … It’s less of an alignment than full-value shares. When they go down, you feel the pain like shareholders do.”
That means companies are moving to some kind of mix of stock, not options. One kind is restricted stock, which vests over a period of years so long as the recipient stays employed. Another is performance shares, which an executive only gets if the company hits some financial target, like the stock outperforming those of peers, or increasing revenue or profits by specific amounts.
The Globe’s annual compensation study looks at the 100 most valuable companies in the S&P/TSX Composite Index. Most are mature, their years of big share-price growth in the rear-view mirror – which makes outsized gains from stock options less likely. At the same time, the companies’ size makes them appealing to a wide range of established institutional investors inside and outside Canada – the kind of investors most likely to have a robust governance wish-list.
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